Commercial Leasehold vs Freehold Property

Introduction: Freehold vs Leasehold Commercial Property: Which Is Better for Your Business?

Choosing between commercial leasehold vs freehold property is one of the most important decisions a business owner can make. In simple terms, freehold means you own the land and building, while leasehold means you control the premises under a lease for a fixed term.

The right answer depends on your capital, growth plans, control requirements, and long-term exit strategy. For some owners, leasehold offers flexibility and lower upfront costs. For others, freehold offers greater control, capital growth, and retirement options.

In this guide, I explain freehold vs leasehold in practical terms for Australian business owners, including when leasehold makes sense, when freehold is stronger, and how to think about the choice strategically.

Should I buy my premises freehold or keep leasing? This is one of the most common questions I hear from current and prospective business owners across Australia and overseas. It's one of the most important decisions you'll make for your commercial property.

Whether you're operating a café, retail store, hotel, restaurant, or industrial facility, the choice between freehold and leasehold ownership affects everything from your day-to-day operations to your long-term wealth and retirement plans. What has surprised me is that many owners make this decision by default rather than strategy. The sad part is that they often realise years later that a different approach would have served them better.

To give a simple exploration of the difference between them. Freehold means you own both the land and the building outright—it's yours until you decide to sell it, subject only to council regulations and zoning laws. Leasehold means you have the right to occupy and operate from premises under a commercial lease agreement, typically for a fixed term with options to renew. Still, you don't own the property itself, and unless you can negotiate a new lease with a landlord, you may have to move elsewhere.

I've spent over 40 years working in commercial and hospitality property and businesses throughout Australia. I've helped local and overseas owners reposition, redevelop, sell or acquire hotels, motels, cafés, retail premises, and industrial facilities. I've seen both freehold and leasehold strategies work brilliantly, and I've also witnessed both approaches create problems when they didn't match the owner's actual goals and circumstances.

I found that many business and property owners are unclear and don't fully understand the difference between the two. The purpose of this article is to help you understand the real differences between these two options and, more importantly, to think through which approach fits your specific goals, timeframe, and financial situation. There's no universal right answer—but there is a right answer for you, and finding it requires honest assessment and strategic thinking.

Freehold vs Leasehold Comparison Table

Key Takeaways

Before we dive into the details, here are the essential points to understand:

Freehold ownership means you own the property outright, giving you maximum control, the potential for long-term wealth accumulation through capital growth, and attractive, flexible retirement options, such as selling the business while keeping the building for rental income.

The advantage of leasehold arrangements is that they require lower upfront capital, allowing you to preserve funds for your business operations. They offer greater flexibility to relocate or pivot if your business needs change, making them particularly suitable for testing concepts or for rapid expansion.

It's important to remember that there's no one-size-fits-all solution. The right choice depends entirely on your personal and business goals, your financial capacity, your age and timeline, and how you plan to build wealth over time. Many successful owners start with a leasehold and transition to freehold later. This staged approach allows you to prove your business concept and build equity first, then purchase property when you're in a stronger financial position and have greater certainty about your long-term direction. On the other hand, many large companies regularly operate solely under leasehold agreements.

What Is Commercial Leasehold and Freehold Property?

This is where freehold and leasehold start to differ in practical terms. Freehold means you own the land and building, while leasehold gives you the right to occupy and operate from the premises under a lease for a fixed term. Understanding that distinction is essential before comparing value, control, flexibility, and long-term strategy.

Freehold Property – What It Is

When you own freehold commercial property, you own both the land and any buildings on it indefinitely. This is the same type of ownership most Australians have with their family home—you hold title to the property outright until you decide to sell.

As a freehold owner, you control how the property is used, subject to council regulations, zoning requirements, and any registered encumbrances. You decide on renovations, extensions, repositioning, and ultimately who occupies the premises—whether that's you operating your own business, or a tenant if you choose to lease it out. In a nutshell, you control your own destiny.

The huge advantage is that freehold property represents a wealth-building asset that's separate from your business operations. While your business may fluctuate with market conditions and competition, the property itself can appreciate independently, adding a second dimension to your wealth-creation strategy.

An obvious example could be property rezoning. I have worked with clients who have repositioned, redeveloped, or submitted redevelopment plans for approval, achieving spectacular capital gains. Then, if they wanted to continue their business, they could look for a cheaper place to buy and continue, or sell the business.

Leasehold Property – What It Is

Leasehold property gives a business owner the right to occupy and operate from the premises under a lease for a fixed term, but not to own the underlying land or building.

In commercial property, the value of a leasehold interest is often tied to the strength of the lease itself. That includes the remaining lease term, options to renew, rent levels, rent reviews, outgoings, make-good obligations, and the ability to assign the lease to another operator.

Leasehold leases can be either under a gross lease (which includes outgoings in each payment) or a net lease (in which outgoings are usually paid separately, as the property owner is billed). 

Read further for a detailed explanation of gross vs. net leases.

For many business owners, leasehold can be attractive because it usually requires less upfront capital than buying the freehold. That can free up more money for stock, staff, fitout, marketing, and working capital. It can also enable businesses to expand more quickly through additional outlets, as many major franchises do. However, the trade-off is that the owner has less long-term control and does not benefit from owning the underlying real estate.

I have found in my own negotiations when selling businesses that the length and quality of the lease can have a major bearing on the business's value when it comes time to sell.

Leasehold can still be a very strong option where flexibility, lower entry cost, and preserving business capital matter more than owning the property itself. The key is to assess the lease carefully, because the lease terms will often have a major effect on value, risk, and future saleability.

Freehold vs Leasehold at a Glance

Understanding these fundamental differences is the first step. The next question is determining which approach actually serves your specific goals and circumstances—and that requires a deeper analysis of your situation.

Advantages of Freehold Property

Control is the standout benefit.

The standout benefit is the freedom and control it offers. You have the freedom and control to make decisions about modifications, signage, operating hours, and future use, subject to council approval, without seeking landlord approval. If you want to renovate the display area of a retail shop, the serving area or kitchen, expand the dining area of a restaurant or café, or completely reposition the business, you can do so subject only to council requirements. This control can be invaluable in hospitality and retail, where your physical presentation directly impacts customer experience.

You avoid ground rent and service charges

Ground rent and service charges can erode profitability in some leasehold arrangements. Every dollar that would have gone to rent instead builds equity in an asset you control. Eroding quickly as the term of the lease progresses, and rent increases start eating into your profits.

Capital growth potential

Owning freehold property offers a significant wealth-building opportunity. In the right locations, commercial property can appreciate substantially over time. Whilst most commercial properties have increased slightly less than residential properties, I've seen many commercial properties increase significantly over the years, especially with good planning and guidance through repositioning, rezoning and redevelopment. This is independent of the business performance.

At CST Properties, we'd like to do a highest and best use analysis with our clients to look at opportunities to enhance and improve the property towards higher income and greater capital appreciation.

Retirement and Exit Planning Options

Ultimately, we all like to retire with a nice nest egg. Having the option to own the freehold property can give you more retirement and legacy options. The classic strategy is to sell your business when you're ready to step back, but keep the building, turning your buyer into your tenant. This creates a passive income stream for retirement while also providing an asset you can eventually pass to your children or sell when it suits you.

For examples of how we achieve this for some of our clients, they are outlined in our Amazon top-selling book, "Commercial Real Estate Investing for the Residential Investor."

Disadvantages of Freehold Property

Higher upfront capital requirements

Having to outlay a large amount of money when starting and establishing a business is an obvious barrier. Purchasing commercial property typically requires a deposit of 30–40% of the purchase price, plus legal costs, stamp duty, and other acquisition expenses. For many operators, particularly those starting, this isn't feasible without exhausting their borrowing capacity.

Most businesses cannot afford it and could put a great strain on their business, especially if there's a change in the economy.

You carry all costs and responsibilities

When you own the property, you are responsible for maintenance, capital works, building compliance, and insurance. A new roof, fire system upgrades, or structural repairs come out of your pocket. I have found that many property owners do not plan for their property to perform enough preventive maintenance, which can make these costs substantial and unpredictable, impacting your cash flow when you least expect it.

Even worse, this could place a tremendous strain on the business and force them to sell in a compromising position and accept less than they would in a normal situation.

Reduced flexibility

Owning the freehold can become a problem if your business strategy changes. If customer preferences shift, competition intensifies, or you want to trial a different location, you're dealing with the complexity of selling a property at the same time.

Strategic moves such as this can be easier when you've got a lease in place. With a lease, you know that you've got one or two years left, and you can plan to move to a new location, buy a new premises, or whatever at that particular time if you don't want to renew the lease at the current premises.

Properties can take months or even years to sell at the right price, particularly in smaller regional markets.

Freehold vs Leasehold Commercial Property FAQ

Freehold vs Leasehold – Which Is Best for You?

The right choice depends on seven critical factors. Use this as your personal checklist when evaluating your situation.

1. Your Long-Term Goals

Have a business plan. Start by getting clear on what you're actually building. Are you focused solely on maximising business profits, or are you also looking to create a property portfolio that generates retirement income?

Unless you have access to investors with a large pool of funds, it is challenging to expand rapidly by buying the freehold. Many chain operators deliberately choose leasehold arrangements because they prioritise flexibility and rapid expansion. They'd rather deploy capital to open new locations than tie it up in real estate. On the other hand, single-site owner-operators who plan to stay in one location for decades often find that owning the freehold delivers superior long-term wealth outcomes.

Plan for at least the next 3 to 5 to 10 years. Especially if you are nearing retirement, your property strategy should align with that vision. Over the last 40+ years, I have seen the advantages of careful retirement planning and the consequences of not having any retirement plan with your property and business.

The difference could be many hundreds of thousands of dollars or over a million dollars.

2. Your Financial Capacity

This is the most practical consideration. How much equity and borrowing capacity do you actually have available? More importantly, can you purchase the freehold without starving your business of the working capital it needs to thrive?

There's no point owning a building if your business struggles because you can't afford to stock inventory, maintain equipment, or market effectively. Many successful operators start with a leasehold arrangement, build up their business and equity position, then purchase a freehold property later when they're in a stronger financial position.

I have found that most banks are stringent in their borrowing criteria. Unless you've been operating successfully for several years and have a good track record, it can be difficult to borrow money at an attractive rate from a bank, especially if you don't own any other property with substantial equity.

The key is being honest about your current capacity and timing the move strategically.

3. Control vs Flexibility

Freehold ownership gives you maximum control. Subject to council approval, you decide on signage, layout changes, operating hours, and future use of the property. You can renovate without seeking landlord approval, and you control any redevelopment potential. This control can be invaluable, especially in hospitality and retail, where your fit-out and presentation directly impact customer experience.

However, this control comes at the cost of flexibility. If market conditions change, customer preferences shift, or a better location becomes available, you're locked into a significant asset that may take months or years to sell.

Leasehold arrangements change this equation. You have less control—your landlord may restrict modifications, limit operating hours, or impose conditions you don't love. Even more critical, as is often the case, the landlord may decide not to renew your lease.

But you gain flexibility. If you need to pivot, relocate, or exit the business, you're not dealing with the added complexity of selling a property at the same time.

Think about your personality and business model. Which matters more to you right now?

4. Capital Growth and Asset Building

One of the most compelling arguments for freehold ownership is capital growth. When you own the property, you benefit from market uplift, zoning changes, and redevelopment potential. In strong property markets, this capital appreciation can rival or exceed your business profits.

Having success in both areas can lead to a very lucrative retirement package.

You're also building equity that can be borrowed against for future investments or business needs. This creates a wealth-building asset separate from your business operations.

With a leasehold, your asset is essentially the business itself plus the remaining lease term. You don't benefit from property market growth. Your exit value is primarily determined by your business profit multiplied by a factor that reflects the security and length of your remaining lease.

That said, not tying up capital in property means you might achieve higher returns by investing that money elsewhere—in growing the business, diversifying investments, or acquiring additional locations.

Continually look at all the scenarios. AI can make it much easier for you.

5. Lease Terms (If Considering Leasehold)

If you're going down the leasehold path, the quality of your lease terms can make or break your investment. Pay close attention to these critical elements:

Length and options

A 5-year lease with two 5-year options is very different from a 3-year lease with no options. Longer secure terms generally translate to higher business values when you eventually sell.

Rent and review mechanisms

How is rent determined, and how is it increased? Fixed percentage increases offer certainty, CPI increases track with inflation, and market reviews can work for or against you depending on local conditions.

Outgoings

In most commercial leases, the tenant pays all or most of the outgoings. Who pays rates, insurance, maintenance, and building repairs? Commercial leases vary enormously on these points.

Outgoings are treated differently between gross and net leases. Under a gross lease, a tenant pays a single lump-sum rent. This includes an estimate of outgoings. On the other hand, a net lease is a fixed rental plus an actual percentage of outgoings payable at an agreed period.

Assignment conditions

When you want to sell your business, how easy is it to transfer the lease to a buyer? Some landlords make this process unnecessarily difficult, which can kill deals or reduce your sale price.

Demolition and redevelopment clauses

Does your landlord have the right to terminate your lease for redevelopment? This can be devastating if you've just invested in a major fit-out.

Make-good obligations

What condition must you return the premises to at lease end? Make-good costs can be surprisingly expensive if not clearly understood upfront.

Make sure you inspect the property thoroughly before taking a lease, and note any faults or maintenance issues. Ensure they are recorded so that when you terminate the lease, you can refer back to them to avoid it becoming too expensive. At the same time, you should have a maintenance program to ensure everything remains at a similar level. Neglecting to do so can cost you dearly.

These details matter enormously. Have your solicitor review any lease carefully before you commit.

6. Lifestyle and Flexibility Needs

Your personal situation and lifestyle goals should influence this decision too. Are you planning to stay in this business long-term, potentially for decades? Or are you testing a concept, planning to grow quickly, or thinking you might want to exit in 5–7 years?

You should have a business plan, especially if you are approaching retirement age. You don't want to be in a situation where a personal financial problem arises, forcing you to sell quickly, compromise on the selling price, and jeopardise your retirement plans.

Freehold ownership suits operators who want a long-term, stable base. It's ideal if you're building something you plan to operate for many years, potentially transitioning to your children or selling the business while retaining the property for rental income.

Leasehold can be smarter if you're trialling a new concept, testing a location, expanding rapidly, or don't want all your capital tied up in bricks and mortar. It gives you room to pivot without the complexity of property ownership.

Your age matters too. If you're in your 30s or 40s with decades ahead of you, the wealth-building potential of freehold ownership is more compelling. If you're in your late 50s or 60s, you might prioritise flexibility and liquidity over long-term property appreciation.

Professional Advice

This decision has significant tax, legal, and financial implications. Before making your choice, talk to the right professionals:

Your accountant can advise on tax structures, whether purchasing through a self-managed super fund makes sense, depreciation benefits, and how the decision impacts your overall financial position.

Your solicitor or conveyancer should review all lease or purchase agreements to ensure you understand all obligations and rights.

A commercial property and business expert or adviser who understands both freehold and leasehold arrangements can provide market-specific insights and help you see options you might not have considered.

Remember, this article provides general information only. Your specific circumstances require personalised advice from qualified professionals who understand your complete financial picture.

"I've Paid Rent All My Life…" – A Common Story

I've had this conversation more times than I can count. "With the rent I've paid over the years, I could have purchased the freehold property at least once or twice."

It's always a sad story, but it's true, especially with clients who are approaching retirement age or, due to personal or financial reasons, have to get out quickly.

That's why I always recommend to my clients that they consider selling when they purchase a leasehold or start a business.

They've built a profitable business, supported their family, employed local people, and created something they're proud of.

Then they calculate what they've paid in rent over those decades. The number is staggering—often equivalent to purchasing their building two or three times over. They realize that all that rent has built equity for their landlord, not for themselves.

The regret in these conversations is palpable. "If only I'd known earlier. If only I'd bought when I had the chance."

But here's the flip side—I've also worked with owners who deliberately started with a leasehold arrangement. They used their capital to build a strong business first, then once they were generating consistent profits, they purchased their premises or invested in commercial property elsewhere. They ended up with both a successful business and valuable real estate.

One of my clients owned a franchise business and leased the premises for around $5,000 a week. When I spoke to him, I told him that, at the time, for that money, you could buy a building for around $4–5 million.

I found a building for him for just over half that amount. When he moved his business a few years later, the head franchisor decided to buy the business from him. As a result, they became the tenant and he became the landlord.

Around 4–5 years later, the building (after deducting the sale price of the business, which he had recovered) had appreciated to about double its value and provided a nice little income for him, ready for retirement.

On the other hand, I've seen the other side: people leasing premises and operating successful businesses for many years. Only for the site to be rezoned for redevelopment. As a result, the landlord refuses to renew the lease, leaving the business owner with a worthless business or the need to spend money to relocate to another premises, risking local clientele and business.

The lesson? It's not that one approach is always right or wrong. It's about timing, strategy, and being intentional with your decisions rather than just drifting along in the same arrangement year after year.

How Do You Value Leaseholds?

Understanding how leasehold businesses are valued is crucial, especially if you're planning to sell eventually.

Unlike freehold properties, where land value provides a solid baseline, leasehold business values depend heavily on several interconnected factors:

Adjusted net profit

Net profit forms the foundation. This is usually the number after all the costs have been deducted including rent and management. So if you were to buy it and run it the same way under management, what is the bottom line you will receive?

Buyers apply a multiple to your profit to determine value, but that multiple varies dramatically based on lease security.

Remaining secure lease term

The remaining time left on the lease is perhaps the most critical factor. A business generating $200,000 annual profit might sell for 2 times profit (around $400,000) if it only has 6 years remaining on the lease. That same business with a 10-year lease and further options could command 3 times profit (around $600,000) or more.

This multiple would vary from industry to industry.

Why such a difference? Buyers need confidence they'll have sufficient time to recoup their investment and generate returns. A shorter lease creates uncertainty—what happens when it expires? Will the landlord increase rent dramatically? Will they even renew?

Rent relative to market

One of the first questions buyers ask when considering buying a business is "What is the rent?" It is a critical aspect. If you're paying above-market rent, buyers will factor in reduced future profitability. If you're paying below-market rent, buyers will worry that a rent increase is coming at the next review.

The exception might be if it is a low market rent with a long period of lease and low annual increases.

Lease conditions

The terms and conditions of the lease also affect saleability. Landlords who make assignment difficult, impose onerous conditions, or require their approval of every detail can deter buyers or drag out the sales process, sometimes causing deals to collapse.

Over the last 40 years or so, I've negotiated and seen thousands of leases. Most of these leases have had annual CPI increases or a fixed percentage. The exceptions have been mainly the large shopping centres, which are known to charge CPI + 1–2%. This can escalate the rent in a very short time, which turns off a lot of business buyers. They are very keen to be at that location and strongly believe it can increase revenue quickly.

The other emotional issue with leases, which turns most of the buyers off, is demolition clauses. I found some owners who are very gun-ho with demolition clauses and apply them without thinking of the consequences.

I suggest that if you come across a business with a demolition clause, you should utilise the services of an experienced property and business specialist who is familiar with demolition clauses. They can work with your lawyers to negotiate a deal to suit both parties.

If you are very keen on the business and location and believe it has great potential, there are ways of negotiating demolition clauses to suit both parties.

Here's the strategic takeaway: the decisions you make about your lease now—the length you negotiate, the options you secure, the terms you agree to—directly impact what your business will be worth when you eventually sell.

If you're currently on a short lease with limited options, now is the time to approach your landlord about extending or restructuring. Don't wait until you're planning to sell in 12 months—by then it may be too late to optimise your position.

I have seen many business owners who have had a good relationship with landlords for many years suddenly change due to new zoning in the area. Many years of goodwill were thrown out the window in an instant. You don't want to be in that situation.

Conclusion: Using Freehold and Leasehold Strategically

The fundamental insight here is simple but powerful: over 20 or 25 years, the rent you pay often equals or exceeds what it would have cost to purchase the property outright. That reality should inform your thinking, even if it doesn't automatically mean buying is always the right move.

I've spent my career helping business and property owners navigate exactly these decisions. I've seen owners successfully transition from renting to owning, and I've seen others maintain strategic leasehold arrangements that served their goals perfectly. Both approaches can work—what matters is making the choice deliberately rather than by default.

One of the most appealing strategies I help clients execute is this: build the business under a freehold arrangement, then when you're ready to retire, sell the business but keep the building. Your buyer becomes your tenant, creating a reliable retirement income stream. You've essentially built two assets—a business and a property—and you can choose to monetise them separately.

But I'm equally supportive of leasehold arrangements when they make strategic sense. If you're expanding rapidly, testing new markets, or prioritising flexibility over wealth accumulation in property, leasing may be the smarter path.

The key is matching your property structure to your goals, age, financial capacity, risk appetite, and timeframe. Think strategically, not just about what's cheapest in the short term. Utilising various AI techniques can greatly enhance your strategy.

If you're planning to transition or retire in the next 2–5 years, or even beyond, this decision becomes even more critical. The property structure you have in place now will directly impact the options available to you when that time comes.

Need to Discuss Freeholds and Leaseholds for Your Commercial Property?

If you're weighing up these options for your own situation, I'd welcome a confidential, no-obligation discussion about what might work best for you.

I work extensively with owners in hospitality, retail, and industrial sectors who are thinking about their next chapter—whether that's growth, transition, or retirement. If you're planning for the next 2–5 years or beyond, and want to ensure your property structure supports your goals rather than limiting them, let's talk.

The conversation costs nothing, and it might clarify options you haven't considered. Reach out through our contact page, give us a call, or send an email. Let's make sure your property strategy is working as hard as you are.

More importantly, you don't want to leave any money on the table when it comes to your ultimate payday and your transition to retirement.

Need to discuss how freeholds and leaseholds can work for your commercial investment property? Feel free to contact Con Tastzidis at CST Properties for a no-obligation free chat

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Written by Con Tastzidis
Con is Managing Director of multi award-winning Commercial Real Estate brokerage and consulting company CST Properties since 2001.
With over 40 years of hands-on experience, Con Tastzidis has etched an indelible mark in the Hotel, Tourism and leisure commercial property and business sectors. Having engaged with national and international hotel and property companies/owners, Con possesses a profound understanding of the intricate dynamics that drive success in this arena.

Con is the author of several books, including Amazon top-selling book “Real Estate Investing For The Residential Investor-The- The 7 Myths of Commercial Real Estate Explained”. In this book, Con outlines many of the successful outcomes he has achieved in both good and adverse economic conditions for his clients. More importantly, how working with Con can work for you. Con has been featured in many national and international media outlets, including FOX, CBS, NBC, ABC, CNN, and BLOOMBERG.
If you would want to work with Con, he can be contacted through this link Feel free to contact Con Tastzidis at CST Properties.