Leasehold Business

[P&J]

Hi

We are considering looking to buy a guesthouse preferably freehold but will seriously consider leasehold.
I know most of the pitfalls with Leasehold businesses but I have one question that I do not seem to be able to find a straightforward answer to:

If the landlord decides that they no longer want to have the building as a guest house and maybe even want to sell the building, where do we stand and what do we do? If we bought a leasehold for say up to £180,000, will lose all of that investment?

Thanks​

 

[WaveJumper]

The simple answer is once your lease is up if you have not renegotiated a further term he can do what he likes. But why would you want to take on a business like this with a very short leasehold period left.

Are you considering buying a guest house with a short leasehold period left if so how long ?

 

[P&J]

We would be looking for a 10 to 15 year leasehold period

 

[WaveJumper]

Hi P&J my immediate thoughts then are, bearing in mind I am no means an expert on guest houses, to pay circa 180k for a business which in essence has only a life of 10 / 15 years are you ever going to make any money. On 15 years that’s 1k a month worse on 10 years £1,500 a month.

As I said I am no expert on guest houses but how much do you think you will be bringing in every month. If you are looking at an existing business please don’t rely on their numbers make sure you get a professional in an check this out for you.

Paying someone to properly look at the numbers now will save you a heap of heart ache down the road.

 

[P&J]

Thanks wavejumper

In reality we would look at freehold but if freehold maybe something up to 60 or 70k but heavily dependent on the accounts,potential and sound financial advice

 

[Clinton]

If we bought a leasehold for say up to £180,000, will lose all of that investment?

There seems to be a common misunderstanding when it comes to buying businesses.

When you buy a leasehold business it's not like buying a leasehold flat. When you buy a flat you pay your £180K and you get a lease of, say, 110 years.

When you buy a leasehold business that has, say, 8 years on the lease, you're not actually buying the lease as you would with the flat. The £180K is paying for the going concern (the assets or shares of the business), not the lease!

You're buying a leasehold business, not a lease, there's a difference!

If you buy the shares of the business then effectively you're taking on the lease as a liability, not an asset ie. you (or, to be precise, the business) have an obligation to continue paying the monthly rent for the remaining 8 years. And the landlord can't arbitrarily change his mind about use of the building.

If you're buying the assets of the business you do not even get that liability and you have to go the landlord and see if he'd be willing to grant you a new lease! If he doesn't, you've paid £180K for a business that you now can't continue running at the same premises!

I've written about asset purchase vs share purchase here. Yes, there's a lot of content on that page, but it's not even a fraction of what you need to know if you want to buy a business.

The earlier you get that sound advice mentioned above, the better!

 

[Mark T Jones]

For most operators the key benefit in a B & B business is the capital gain, which won't happen with a leasehold.

In some areas, the real profit comes in getting change of use to residential - which might apply to the freeholder. Whilst they can't impose this during your tenure it might be a long term objective.

 

[ComPropSolicitor]

The length of the Lease when buying the business is irrelevant really - the 180k (as mentioned above) is effectively for the business and its assets. The Lease may have some value but not very much. What you need to do is assess the Lease and your requirements. At the level you are buying in at there is some risk and you will need to trade for a relatively long time to ensure the return of all of your monies. Therefore, I would recommend saying to the Landlord we are buying the business from your existing Tenant - we want the existing Tenant to surrender its Lease on completion and then for ourselves to be granted a new Lease of X years on completion.

It is then up to you to negotiate terms.