Nineteenth century British towns and cities were either developed by landowners selling land freehold or via ground leases of varying lengths of time. In some cities, freehold prevailed and in others leaseholds of varying lengths. Explanation for the freehold/leasehold distinction has been controversial for almost 100 years and has spawned a large literature. The consensus seems to be that market power is the main determinant and that the reversionary value of the lease is the main objective of landlords when requiring leases. This paper takes a different view. Market power is a vague concept and, at any reasonable discount rate, the present value of a long 80-100 year lease at its end is small. Any such difference between leasing and freehold should anyway have been priced into the initial cost of the land and, therefore, buyer and seller should be generally indifferent between them. Existing explanations for the prevalence of leasehold, consequently, are found to be insufficient. Instead, it is argued here that landlords had three incentives to utilise leasehold: because of differences in time preferences between landowner and developer; to minimise transactions costs; and to take an option on future returns to development. These characteristics were at their greatest in areas of high land values and/or significant long-term development uncertainty, like London. This paper forms part of Chapter 8 of Michael Ball's 'Economic History of London 1800 - 1914'which was published by Routledge in 2001.

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