freehold or leasehold

Freehold or leasehold: The Dentist

4th February 2017 | Knowledge Centre, Press Cuttings

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Freehold or leasehold – that is the big question

Buying a dental practice requires a great deal of consideration, particularly when it comes to choosing how you would like to own the business. There are, after all, two ways in which a dental professional can enter property ownership, and that is by having either a leasehold or freehold contract.

What is a freehold?

Buying a freehold property means that it is owned outright, including the land that it’s built on. As such, this can be a good long-term investment, particularly as owners don’t have to pay ground rent, service charges and any other landlord costs. Conversely, investing capital into a freehold ties up money and debt capacity, which can be somewhat of a hindrance for those looking to purchase multiple practices. When deciding between freehold and leasehold, you should therefore consider how it could affect your future plans.

Things to consider

It may sound obvious, but purchasing a freehold property is a lot more ‘final’ than a leasehold, so unless you are prepared to take the risk that you could lose money when it comes to selling it, owning the practice outright may not be for you. Like any other investment, it is always wise to weigh up the risk versus reward.

The benefit of a freehold is that it affords the owner a great deal of flexibility with making changes to the practice. So if you are looking to redesign or do up a property, this could well be the deciding factor when weighing up the options.

As for the finality of the contract, it can be either a blessing or a curse – blessing for those that want long-lasting security and financial certainty, and a curse for those that feel restricted by the size of the practice. Thus, if the plan is to expand the business in a relatively short period of time, then a freehold probably isn’t the ideal choice for you. You will also have to consider the value and desirability of the building for alternative use and the likely chances of planning consent.

If it is, then there are a few things you should know. Firstly, be sure to check whether the property is subject to any ‘restrictive covenants’, as these can limit its use. It would also be prudent to check if any planning restrictions are in place, as this could hinder your plans to complete building work or renovations.

What is a leasehold?

Unlike a freehold, taking out a lease on a practice means you only own the property and the land for a stipulated amount of time. Leasehold is therefore ideal for those that want to invest money into the business rather than the property itself – and this, in turn, affords the owner more flexibility with accessing funds.

The other benefit of taking out a lease is the flexibility it provides in terms of investing in other properties, being able to move once the contract is up and having the opportunity to expand to a bigger property. Such a set up can be advantageous for both new businesses and experienced practice owners.

The implications of taking out a lease

However, finding the right length of lease to suit your needs can be easier said than done, so if you are looking to purchase a leasehold contract, there are a few things to watch out for to avoid pitfalls later on down the line.

One common problem that can occur is being ‘contracted out’ of a lease, which is when the tenant has no automatic right to a continuation of a tenancy at the end of the lease. This happens when the contract contains a clause excluding sections 24 to 28 of the Landlord Tenant Act (1954). If, when purchasing a lease, you want to have the option of renewing the contract, you must make sure that it is not ‘contracted out’ during negotiations – seeking legal advice is always advisable at this stage.

Equally, you don’t want to become trapped in a contract that you can’t get out of, especially as flexibility is one of the main advantages of owning a leasehold property.

Weighing up the options

Altogether, there are a number of factors to take into account, whichever option you choose. But as long as you employ the right legal representation and work with a reputable sales and acquisitions agency like Dental Elite, you are sure to find a property that is right for you.