Acquiring a right in land is one of the most important transactions a person (or a business) will ever become involved in. As well as being notoriously expensive, these transactions have major business and lifestyle implications. It is therefore essential that the right decision, whether to buy or rent, is made. This article will provide some guidance by highlighting some of the key advantages and disadvantages of renting and owning property.
One of the main, and for many decisive, differences between owning and renting, is the price. Buying property is obviously considerably more expensive than renting in the short run, and whilst the ability to obtain a loan in the form of a mortgage (payable in pre-determined instalments) in theory makes funding the purchase of a property easier, even those able to get a mortgage are still likely to pay more than those who rent.
Furthermore, landowners are likely to incur other costs that those renting are unlikely to face, including the cost of ensuring that the land is well maintained. Most leases will contain clauses providing that the tenant will have to take “reasonable” steps to keep the premises in the same condition as it was in when they entered the lease, but tenants will rarely be obliged to incur the cost of major structural repairs (such as repairing a collapsed roof). This does of course depend on the terms of the lease, and some commercial leases do contain clauses which impose more onerous repairing obligations on tenants. Landowners, however, are responsible for all such costs, and whilst they are usually under no obligation to carry out such repairs, (meaning that in theory they could choose not to incur the costs) in practice such costs are often unavoidable.
Whilst buying land is generally more expensive than renting, landowners have the chance to recover the price when they sell the property. Comparing this to renting property, tenants cannot claim the rent they have paid back when they terminate the lease. This leads to, for many, the key “pro” of owning as opposed to renting. Purchasing land is widely considered to be a prudent investment strategy, as the natural course of inflation implies that the price of property will increase with the passage of time. Therefore, property is bought with the belief that it will be sold for a profit in the future. There is a risk that the market, as it has done in the past to devastating effect, could collapse, resulting in the owner selling for less than they paid for, at a loss. However, this risk can be mitigated against by waiting for the market to rise again before selling the property.
Landowners also usually have much greater freedom to do what they wish with the property. Whilst major external developments such as building extensions and planting trees require planning permission, owners are effectively free to make whatever internal changes they want. Tenants’ rights to make such changes are often heavily curtailed, with even minor changes such as repainting a room requiring consent from the landlord.
However, one of main attractions of renting property is that it is only a short-term commitment (depending on the terms of the lease). With residential leases typically expiring within a year or two, renting allows for people to quickly move if, for example, they get offered a new job in a different location. Furthermore, when the lease terminates, there is no obligation on the tenant to go through the arduous process of finding the next occupier of the property for the landlord.
Compare this with owning property, which is much more of a long-term commitment, and therefore much riskier. If a landowner gets offered a better job elsewhere, the fact that they own the property could make accepting the new job impractical, therefore potentially restricting the owner’s options in terms of career and other walks of life. Whilst landowners theoretically have more freedom to terminate their interest in the property whenever they choose (through selling), the process takes a long time. Given that buying another property usually requires the sale of the former property in order to free up the necessary funds, the lengthy and uncertain sale process can often become a problem.
Landowners, however, benefit from not being subject to landlords’ terms. In Scotland, there is a trend developing of landlords exploiting the shortage of suitable housing in the country. Landlords are not just able to increase the price of the rent, but are also in a stronger position to include more non-negotiable onerous clauses on tenants, making renting increasingly less desirable.
One term that appears in most leases lasting seven or more years is a “rent review” clause, which gives the landlord the right to increase the rent price every few years in accordance with the market value. It is important to understand that the rent to be paid will never decrease as a result of such reviews, even if the market price for rent has fallen. This is one of the most common clauses in , and can therefore be problematic for businesses choosing to rent rather than own.
One final potential issue of renting land in Scotland is the risk caused by the principle of “tacit relocation”. In order for leases to be terminated, notice of such of termination must be given within a pre-determined timeframe. If notice is not given, tacit relocation implies that the lease will be continued under the same conditions. As there is no obligation on the landlord to remind the tenant of this notice period, tenants could find themselves with obligations to continue to pay rent to the landlord, and to continue to maintain the property, long after the agreed expiry date of the lease.
This article has considered some of the major advantages and disadvantages of renting and owning land, although there are many more, such as the benefits of being able to secure a charge over owned land, and tax implications. Whilst the article does reflect the opinions of most commentators by suggesting that overall there are more advantages to owning property than renting, this conclusion entirely depends on factors such as the terms of the lease and the state of the housing market. However, this article has highlighted some of the key factors that those considering owning or renting property should be aware of.
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