Finance for Short Term Leasehold Property in the UK
his usually, but not exclusively, relates to shops, public houses, restaurants, take-aways and similar, mainly retail type businesses. The underlying leases are short term and generally operate from just a year to 25 or perhaps 30 years with five to ten years being the most common.
The purchase of a leasehold business has always posed a problem for banks as there is no inherent value in the lease itself. If the lessee fails to pay the rent then title will revert back to the freeholder and thus in the event of default there is no value for the bank. Despite this, there is of course ‘value’ for the purchaser but in effect it is within the ‘goodwill’ of the business being acquired. Goodwill is an intangible asset of a trading business. The buyer of a business is often willing to pay for the “good name” of the business in addition to the value of its assets. Clearly, if the lessee has not paid the rent, then being in default at the bank is also likely. The good name of the business will also have been lost and thus of no real value. It is for this reason thank banks are reluctant to lend against a ‘goodwill’ value.
Consequently, the bank will consider this type of lending to be unsecured and thus rather than commercial mortgage finance it will be treated as a Business Loan.
Lenders are unlikely to provide any significant funding on an unsecured basis and thus in the absence of any alternative security, they will look for a very high deposit. Although there is no hard and fast rule most banks will be uncomfortable with lending more than £25-30,000 unsecured and many will do far less than this. Read more