Freehold and Leasehold Restaurant. What’s the difference?

Freeholder is person who owns the complete ownership of the property and building, and they are also the landlord. A landlord could be an individual or a company. So, a freehold restaurant is a restaurant which is run and operated by the landlord or freeholder by themselves.

Leaseholder is a person who secures the right to occupy (through leasehold tenancy) and operate a restaurant business in a property for a fixed term of years (generally 10-15 years). Leaseholders are subject to many conditions set out by the landlord or the freeholder and in return for the payment of rent and other terms. Hence, a leasehold restaurant is a restaurant which is operated by a tenant on a fixed term agreed through leasehold tenancy agreement with the landlord.

Leaseholders can sell their existing business in open market (subject to terms agreed with the landlord) also known as lease assignment or lease transfer. When a lease is assigned, the purchaser secures the rights included in the business but not on the property or the building. Note: almost all the lease transfers are subject to landlord’s approval. You cannot sell a leasehold business without landlord’s consent.

What’s included in a Leasehold Restaurant?

Based upon an agreement with the seller, a leasehold purchaser gets the following:

1. Right to operate a business in the premises for a fixed term
2. Fixtures and fittings of the restaurant (subject to seller’s term)
3. Goodwill (subject to seller’s term)
4. Stock on valuation (normally asking price does not include stock)
5. Original lease terms and rights

Types of Leasehold Transactions:

There are two types of possible leasehold transactions:

1. Assignment or transfer or sale of an existing lease
2. The grant of a new lease by a landlord.

• Assignment or Transfer or Sale of an existing lease

Leasehold restaurant is sold as an ongoing business and include fixtures & fittings and goodwill. The new leaseholder secures the right to hold the property for a fixed term of years in accordance with the conditions of a lease. Most of the leasehold transfers involves a “premium” (agreed sale price of the existing business and its brand value). So, you pay a “premium” to the current leaseholder and rent, insurance etc to the landlord and is obliged to comply with all the same terms and conditions as the original lessee for the remainder of the term.

• Grant of a new lease by a landlord

New leases are offered mostly “without premium” and generally applies on closed premises. This means that the new leaseholder does not make any payment for trade goodwill or “premium” for the lease. The new leaseholder secures the right to operate a restaurant business for fixed term and is usually required to pay a security deposit (equivalent up to three months’ rent) along with other approval checks conducted by landlords or their solicitors.

When an existing lease comes to the end of the term it is usually renewable due to the protection of the Landlord and Tenant Act 1954. Thus, renewal is without cost, other than legal fees.

Are you looking to purchase a freehold or leasehold restaurant in London? If yes, browse some of the restaurants we have for sale HERE.