Securing space: real estate

Posted: 27/03/2025

When your company reaches a certain size, it will need a dedicated space in which to do business. There are a number of different options available, depending on the business’s needs and your flexibility with location and costs.

Popular models for commercial premises

The four main models of commercial space available to a start-up are:

long-term locations (freehold or long-term leasehold spaces);
serviced office locations (usually short-term leasehold spaces);
co-working spaces (usually licences to occupy); and
in-house at accelerators or incubators (usually licences to occupy).

The rights that your company acquires will depend on the model of commercial space adopted. The four main models are freehold, leasehold, short-term leasehold and licences to occupy.

Freehold spaces

The freehold owner of a property owns the premises outright forever and will be responsible for maintaining all the property and the associated land. It will therefore be necessary to factor these costs into your budget.
Acquiring a freehold title can be time-consuming and could take a number of months. It will be necessary to instruct a number of industry professionals such as property agents and lawyers to assist. Because of the cost and timing implications, it is therefore unlikely that this will be the first space into which a start-up moves. It may be more appropriate once the business is established and looking for a permanent home.
Freehold property is routinely accepted as security by banks, with the bank taking a mortgage over the land and buildings.

Long-term leasehold spaces

A long-term leasehold title in property is for a limited period of time, subject to the terms of the lease which is granted by the freehold title owner. It is common in England for freehold owners to grant leasehold titles on property for 99 years or more.
An upfront ‘premium’ or purchase price is usually payable for the acquisition of a long-term leasehold interest, but with the benefit of having a much lower rental price. Often the rent is known as a ‘peppercorn’ rent, meaning no ongoing rent is actually paid.
It is advisable to seek assistance from specialists when entering into a long-term lease to assist in negotiations and registration with the Land Registry.
As with freehold land, long-term leasehold interests are commonly accepted as security by banks.

Short-term leasehold spaces

While most companies run their businesses from premises under a lease of between 5-25 years, there is no maximum or minimum length of lease, and short-term leases (of sometimes as little as one year) are becoming increasingly common. The benefit of these shorter-term leases is that they allow start-ups the flexibility to relocate as they expand.
Premiums are not usually payable for the acquisition of a short-term leasehold interest. However, the rent is usually more expensive than with long-term leases, and is commonly subject to review at the current open market rate every five years.
Many landlords may seek a security deposit of between three and six months’ rent when the company acquiring the lease is a start-up.
Under a short-term lease, rent is usually payable quarterly in advance, and the title cannot be transferred without the landlord’s consent.
Companies who need to adapt space to their own needs (for example, to include their own labs or manufacturing plant within a shell space) will need to agree any alterations with their landlord in advance. This can be time-consuming, and a landlord will expect all of its costs in approving alterations to be paid by the start-up.

Licences to occupy

Licences are usually used for the co-working and inhouse accelerator/incubator models of office space.
Unlike a leasehold or freehold interest, a licence does not grant an interest in property, but it does grant contractual permission to occupy the property.
Unlike a lease, the occupier of a property under a licence does not have exclusive possession of the property (meaning it has a lesser degree of security) and it cannot transfer the licence to a third party. The period of occupation under a licence does not have to be fixed.
A start-up is very unlikely to be permitted to make any alterations to a licensed space. The space is usually provided with furniture and fittings already in place.

Issues to consider when taking leasehold premises for the first time

What are the key issues you should be considering when thinking about agreeing terms for a lease of new premises for your company?

Lease length
How are you funded? Are you relying on seed funding from annual grants? If so, and the award is not renewed, you may need to be able to scale down your operations quickly. So, a fixed five or 10 year lease can leave you potentially exposed.

However, a short fixed term can mean potentially distracting upheaval if you are forced to move out of a property whilst business is thriving.

Two potential solutions to this dilemma are:

agree a longer lease term with regular break rights (eg five years with a rolling break right on three months’ notice after 18 months); or
agree a shorter lease term with an embedded right to renew the lease on similar terms.

The first option is generally more popular in the R&D market and is more likely to be accepted by a landlord.

Cost certainty
Coping on a tight budget makes it important for new businesses to plan for overheads. You will ideally be looking for fixed rents without review. Make sure you are aware of the cost of business rates at a property and whether or not they are included in the rents quoted. Usually they are not, but landlords at more science and technology focused centres may be willing to offer inclusive rents.

If leasing part of a larger building, or one building on an estate, you will be expected to contribute towards the costs of maintaining the building structure or the estate common areas by way of a service charge. There are various options for negotiating with the landlord here, including an all-inclusive rent, a fixed service charge or a capped service charge (which allows for increase up to a maximum parameter).

Building repairs
You should also take into account the cost of a building survey, as the costs of unexpected repairs can quickly derail a budget. Where you are taking a lease of a whole property, it is likely to make you liable for all repairs required. It is therefore essential for a surveyor to assess the state of the building at the outset so you know what costs might materialise.

If there are areas of concern at the property, you may ask your landlord for clauses to soften the repair burden, such as an exclusion of fair wear and tear, tying the repair obligation to a schedule of condition, or excluding a particular item from the repair obligation altogether.

If moving into a new build property, you may want to exclude your repair liability (or obligation to contribute to the costs of repair) for damage arising from inherent defects in design or construction. Landlords may offer, instead, a collateral warranty allowing you to sue the architect or building contractor for those defects. This is not generally an attractive option for a start-up as it involves delay, dispute and legal costs, without relief from the repair costs in the meanwhile.

Fitting out the property
Start-ups often take premises that will need adaptation to suit their business. Technical and scientific companies may need to fit out a lab with specialist, expensive equipment with implications for the building’s common services and energy performance. It is tempting (but a bad idea) to rush into completing a lease without also agreeing up front the terms on which the landlord will permit these works to proceed.

Start-ups sometimes believe that the goodwill generated during lease negotiations means the landlord will agree the licence for alterations quickly, post-completion, once the company is able to produce fit-out plans and specification. This is a dangerous assumption. It is the ‘carrot’ of lease completion that usually encourages a landlord to agree fit-out works and issue the licence to alter (often without charging extra costs). Once in occupation, and reliant on the alterations clause in your lease, you may have less room for manoeuvre on what to propose, you cannot easily influence the speed of consent, and you will most likely have to pay the landlord’s legal and surveying costs.

You also need to think ahead about the cost of reinstatement of your alterations. Your landlord will want to ensure that, at the end of the lease, the property is left in a state that will not put replacement tenants off (or that you pay compensation for dilapidations so that the landlord can fund the necessary re-fit). The landlord’s focus on this will be more pronounced if you want to do bespoke alterations (such as conversion to a lab).

It is always a good idea to take advice on lease terms from a commercial property agent before signing heads of terms. Whilst heads of terms are not generally legally binding, it can be difficult to renegotiate points which were agreed in them once it comes to drafting the lease.

This article is an edited summary from Penningtons Manches Cooper’s guide on ‘Navigating the journey of growth: key legal considerations for scaling up’. For a copy of our guide, please click the banner below or get in touch with your usual contact.