Freehold vs leasehold in hospitality, and what it means for your finance
Freehold or leasehold is the first thing that decides how a hospitality property is financed. This guide explains the difference, the trade-offs, and why lease length can make or break a loan.
Freehold means you own the property and the land outright, with no time limit; leasehold means you own the right to occupy it for a fixed term under a lease, paying rent to the freeholder. In hospitality the choice shapes the finance: a freehold trading asset is funded with a commercial mortgage against the going-concern value, builds equity and is the most financeable, while a leasehold is funded more on the trade and the lease, and its financeability depends heavily on the unexpired term. A short lease is hard to lend against, because it is a wasting asset; a long lease or a freehold is not. Scotland uses different terms but a similar distinction. We arrange finance on both; we do not lend.
At a glance
- FreeholdOwn the property outright, no time limit
- LeaseholdOwn the right to occupy for a fixed term
- Freehold financeCommercial mortgage, builds equity
- Leasehold financeFunded on the trade and the lease
- Lease lengthShort leases are hard to fund
- ScotlandDifferent terms, similar distinction
What freehold and leasehold mean
Freehold means you own the property and the land it stands on outright, indefinitely, with no rent to a landlord. Leasehold means you own a lease, the right to occupy the property for a fixed number of years, after which it reverts to the freeholder, and in the meantime you usually pay ground rent and are bound by the lease covenants. A third form, commonhold, exists for some shared buildings but is rare in trading hospitality. Scotland uses heritable ownership rather than freehold and has largely abolished the old feudal tenures, but the practical freehold-versus-lease distinction still applies.
For a hospitality business this is not a technicality, it is the thing that decides how you finance the property. The commercial finance we arrange on both is unregulated business lending, and Hospitality Property Finance is not authorised by the FCA. Rate and deposit figures vary by lender and trading history and are indicative only.
The trade-offs for a hospitality operator
Freehold gives control, security of tenure and an asset that builds equity and can be refinanced, but it needs the most capital and ties it up in the property. Leasehold needs far less capital to enter, keeps cash free for the trade, and suits operators who want to run a business rather than own real estate, but you pay rent, the lease has covenants and an end date, and you are exposed to rent reviews and the terms of any renewal. Most restaurants are leasehold for exactly this reason, while pubs and hotels are more often bought freehold.
| Aspect | Freehold | Leasehold |
|---|---|---|
| Ownership | Outright, indefinite | Fixed term under a lease |
| Capital needed | More, tied up in the asset | Less to enter |
| Builds equity | Yes, in the property | In the business, not the property |
| Ongoing | No rent, own upkeep | Rent, ground rent, lease covenants |
| Financeability | Highest | Depends on the unexpired term |
Why lease length decides financeability
The single biggest financing point about leasehold is the unexpired term. A lease is a wasting asset: the fewer years left, the less it is worth and the harder it is to fund, because a lender needs the lease to comfortably outlast the loan with room to spare. A long lease, with many decades unexpired and sensible terms, can be financed almost like a freehold; a short lease, with only a handful of years left, is very hard to borrow against and may only be fundable with a business loan on the trade rather than a mortgage.
A lender will usually want the lease to run well beyond the end of the mortgage term, often by a decade or more, so a 15-year loan needs a lease with comfortably more than 15 years left. If the lease is too short, the options are to extend or renew it before borrowing, fund on the trade instead, or buy the freehold. Establish the unexpired term early, because it can quietly rule out a mortgage before anything else does.
How each is funded
A freehold hospitality asset is funded with a commercial mortgage against the going-concern value, usually with a deposit of 25 to 40 percent, building equity in the property. A long leasehold can often be mortgaged too, subject to the unexpired term and the lease terms. A short leasehold, or a trade with little property value, is funded on the business instead: a business loan for the lease premium and working capital, and asset finance for the fixtures and equipment.
- Freehold: commercial mortgage against the going-concern value at /services/commercial-mortgages/
- Long leasehold: often mortgageable, subject to the unexpired term
- Short leasehold: business loan on the trade at /services/business-loans/
- Fixtures and equipment either way: asset finance at /services/asset-finance/
- Buying the freehold of a leasehold you hold: refinancing at /services/refinancing/
How we structure around tenure
We establish the tenure and, for a leasehold, the unexpired term at the very start, because it decides the whole route. We then structure a freehold as a mortgage against the going-concern value, or a leasehold on the trade and the lease, and we flag early where a short lease needs extending before it can be funded. We are an arranger, not a lender, and Matt Lenzie takes every case to market personally. See the buying guides at /guides/how-to-buy-a-pub/ and /guides/how-to-finance-a-restaurant/.
Freehold vs leasehold in hospitality, and what it means for your finance: common questions
Is it better to buy freehold or leasehold?
Neither is universally better; it depends on your capital and plans. Freehold gives control, builds equity and is the most financeable, but ties up the most capital. Leasehold is cheaper to enter and keeps cash free for the trade, but you pay rent, the lease has an end date, and its financeability depends on the unexpired term. For hospitality, pubs and hotels are often freehold, restaurants often leasehold.
How does lease length affect getting a mortgage?
Heavily. A lender needs the lease to outlast the loan comfortably, often by a decade or more, because a lease is a wasting asset. A long lease can be financed almost like a freehold; a short lease is very hard to mortgage and may only be fundable on the trade with a business loan. Always establish the unexpired term before assuming a leasehold can be mortgaged.
Are there downsides to freehold?
Mainly cost and flexibility. Freehold ties up the most capital in the property, which could otherwise fund the trade or another site, and you carry full responsibility for the building and its upkeep. For an operator who wants to run a business rather than own real estate, leasehold can free up cash and reduce commitment, at the price of rent and a lease end date.
Can I get a commercial mortgage on a leasehold hospitality property?
Yes, if the lease is long enough. A long leasehold with a strong unexpired term and sensible covenants can usually be mortgaged, subject to the lease running comfortably beyond the loan term. A short leasehold generally cannot be mortgaged and is funded on the trade instead. The unexpired term is the deciding factor, so check it first.
What is the difference between freehold and leasehold in Scotland?
Scotland does not use the terms freehold and leasehold in the same way; outright ownership is heritable ownership, and the old feudal tenures were largely abolished. Commercial leases still exist and work similarly to leasehold elsewhere. The practical distinction between owning outright and holding under a lease, and its effect on finance, is much the same.
Should a restaurant be freehold or leasehold?
Most restaurants are leasehold, because it needs far less capital and keeps cash free for the fit-out and working capital that a restaurant lives or dies by. A freehold restaurant is financeable with a commercial mortgage and builds equity, but ties up capital many operators would rather deploy in the trade. See /guides/how-to-finance-a-restaurant/.
Does freehold or leasehold affect the deposit?
Yes. A freehold is mortgaged against the going-concern value with a deposit of usually 25 to 40 percent. A leasehold is funded more on the trade, so the cash needed is structured differently: a lease premium and working capital rather than a property deposit. A short lease can rule out a mortgage entirely, changing the whole funding shape.
Ready to take a deal to market?
Send us the scheme and the numbers and we will come back with a view on fundability and likely terms within one working day.