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How can the ownership rights of my commercial property impact a business sale?

Posted on 11 March, 2021 by Editor in Chief

Owning the freehold on business premises means that you own the property and the land it occupies. If you’re a leaseholder, however, you only have the right to use the premises for the period of time specified in the lease.

When selling a business, ownership rights of a commercial property are a key area of focus, and can have an impact on the sale. If you’ve purchased the freehold of your own commercial property, you’ve already made a considerable investment and benefit from the autonomy of full ownership.

So what does owning the freehold, or operating under leasehold arrangements with a commercial landlord, mean for the sale of your business?

How do commercial property ownership rights affect a business sale?

If you own the freehold for your commercial premises it means you’re the legal owner of that property, and there are no restrictions on whether or when you can sell it as part of a business sale. You can also sub-let one or more areas of the property if you need to generate additional income.

Operating your business from a leasehold property, on the other hand, means you need the approval of your landlord before the lease can be transferred to the new owner when the business is sold.

So is it better to operate under a leasehold arrangement when selling a business, or own the freehold of your commercial property? Here are some considerations.

Freehold vs leasehold when selling a business – which is better?

Pros and cons of owning the freehold of a commercial property

• Owing the freehold could provide a substantial increase in investment potential if the building and land appreciate in value, and also offers long-term security for an incoming business owner.

• Fixed mortgage repayments offer financial predictability over rents, which could be changed at relatively short notice if the new owner has only a leasehold interest in the commercial property. The interest element of commercial mortgage payments can also be set off against tax.

• A commercial property mortgage typically requires a deposit of between 25% and 40% – a significant capital outlay.

• The business may be financially attainable for a wider group of potential buyers without the inclusion of a freehold property in the transaction

Pros and cons of leasehold commercial property in a business sale

• Depending on their circumstances, a prospective purchaser may be looking for flexibility with regard to commercial property, and the ability to move premises at some point. With this in mind they may prefer a short-term lease, or a longer lease with a break clause included.

• A leasehold commercial property means the incoming owner won’t need to find the funds for a mortgage deposit.

• A potential downside could arise if the leaseholder has to take on responsibility for maintenance and upkeep – if the premises are run-down, for example, they could require significant investment in the short-term.

• The landlord will need to agree the transfer of the lease to a new business owner.

Accessing advice when selling your business and business premises

When selling your business, seek tailored advice on your own situation and on how the ownership rights of your commercial property could impact a business sale. Professional business sales brokers with extensive experience of facilitating successful business sales can support you throughout the sale of your business.

Read our in-depth guides on commercial properties, from selling your property to finding the right property to buy.

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