Startups as future anchor tenants 

The commercial property market is facing a genuine reckoning. Office demand has fragmented in the wake of hybrid working. Retailers have restructured, surrendered space and in some cases disappeared entirely. Household names that once anchored buildings and business parks have downsized, entered CVAs or vacated without warning. The lesson of recent years is that covenant strength, that long-cherished proxy for tenant quality, is no longer the reliable predictor.

Against that backdrop, the instinct to dismiss startups as too risky, too small and too unpredictable to be worth serious attention looks increasingly difficult to justify. High-growth startups are one of the few occupier groups actively seeking additional space. They are taking on new premises, building teams and investing in their working environments at precisely the moment when more established occupiers are retreating. Landlords who continue to filter them out on covenant grounds alone are not managing risk. They are compounding it by pursuing a shrinking pool of tenants while ignoring a growing one.

The more useful question is not whether startups are risky, which in many cases they are, but whether today’s commercial landlords have the frameworks to work with them intelligently. Most do not, and that gap represents both a problem and an opportunity.

The pipeline that landlords are ignoring

It is important to consider what the startup occupier market represents over a longer term horizon. The businesses that will anchor major commercial buildings in ten or fifteen years are not all established today. Many of them are currently negotiating their first leases, in modest spaces, on flexible terms, with landlords who may not be paying them much attention.

Consider how many of today’s significant office occupiers began life in serviced offices, incubator spaces or small suites taken on short terms. The journey from a handful of desks to a substantial, multi-floor occupier is not unusual in technology, life sciences, professional services and the creative industries, all of which are disproportionately represented among high-growth startups. A landlord’s most valuable long-term occupier relationship may well begin with a 1,500 square foot letting rather than a 50,000 square foot lease.

This is not a romantic observation. It is a strategic one. Landlords who engage with startups early, who structure their offer intelligently and build genuine relationships with growing businesses, are creating a pipeline of future demand within their own portfolios. Those who wait until a business has ten years of audited accounts and an established covenant before taking them seriously are, by definition, competing for occupiers that every other landlord also wants.

What startups need, and why it matters

The most common mismatch between startups and commercial property is structural rather than financial. Traditional leases are designed around occupiers who know what they need, where they need it and for how long. Startups, almost by definition, do not. A business that employs twelve people today may need space for forty in eighteen months or may pivot entirely and need different premises altogether. Lease structures built around five or ten year terms with upward-only rent reviews and limited alienation rights are a poor fit for that reality.

What startups typically need is flexibility above all else. The ability to expand or contract their footprint without triggering disproportionate legal and financial consequences, break rights at meaningful intervals, clarity around service charge exposure and a degree of fit-out freedom that allows them to create environments capable of attracting talent. None of that is incompatible with a landlord’s legitimate interests. It does, however, require a willingness to move away from the standard form lease as the default starting point.

Landlords who are serious about this market are also increasingly thinking beyond individual lease terms to asset management strategy. Fitted space, rather than CAT A accommodation, reduces the barriers to entry for early-stage businesses that cannot absorb a lengthy fit-out programme. Creating expansion pathways within a building or portfolio, so that a growing business can move from a small suite to a larger floor without changing address, reduces churn and deepens the occupier relationship. These are not concessions to difficult tenants. They are deliberate choices about how to position an asset in a changing market.

Lease structuring for early-stage occupiers

The fundamental challenge in structuring leases for startups is achieving sufficient flexibility for the tenant without undermining the landlord’s investment position. These are not necessarily competing objectives, but they require careful drafting.

Shorter initial terms with options to renew give a business the runway it needs without locking either party into a relationship that has outlasted its usefulness. Alternatively, a longer lease with more frequent and more meaningful break rights can achieve a similar outcome while preserving the term length that some funders and valuers prefer. Break conditions require particular attention: a break right that is unavailable in practice because it is conditional on full compliance with lease obligations, and the tenant is in technical breach, is not the flexible mechanism either party intended.

Rent-free periods and reduced rent in the early years serve an additional purpose beyond attracting tenants into difficult space. They reduce cash pressure at the stage when a business is most fragile. A landlord who loses a tenant to insolvency in year one recovers nothing and faces re-letting costs into a void. A landlord who accepts a below-market rent for the first twelve months in exchange for market rent thereafter may secure a tenant who grows steadily into the building.

Personal guarantees from founder directors are a common response to weak covenant strength and are often reasonable. Their value depends entirely on the personal financial position of the guarantor, however, and a guarantee from a director with no meaningful assets is not security in any practical sense. Rent deposits are frequently a more reliable alternative, providing a liquid fund the landlord can draw on without the cost and delay of pursuing an individual.

Turnover rents are worth considering for certain occupier types. They align the landlord’s income with the tenant’s commercial performance and reduce the risk of a struggling business defaulting on a fixed obligation it can no longer meet.

Rethinking the risk equation

The risk discussion around startup tenants tends to be one-sided, and it is worth challenging that directly. Established occupiers are not inherently low risk. Recent years have demonstrated with some force that large corporates downsize, retailers restructure through CVAs, and businesses with decades of trading history can vacate space at short notice or become insolvent without warning. Covenant strength is a backward-looking measure. It tells a landlord something about where a business has been. It tells them rather less about where it is going.

A well-funded technology startup backed by institutional investors, operating in a sector with strong structural growth, may in some circumstances present a more attractive long-term proposition than an established occupier in a sector under sustained pressure. That is not an argument for ignoring financial due diligence. It is an argument for conducting it properly and looking at the right things.

Due diligence on a startup tenant should be adapted to the nature of the business. Audited accounts may not exist, but investor decks, management accounts, details of funding rounds and information about the founders’ track records are all relevant and available. References from co-working spaces or previous landlords, even for short periods, are worth obtaining. The absence of a trading history is not the same as the absence of useful information, and landlords who treat it as such are making a category error.

The legal framework around assignment and subletting

One of the less examined aspects of startup tenancies is what happens when a business’s circumstances change in ways that affect its space requirements. A startup that is acquired, or that secures significant investment and needs larger premises, must be able to exit or restructure its property obligations without the lease becoming an obstacle to its own success.

The Landlord and Tenant Act 1988 imposes a statutory duty on landlords not to unreasonably withhold or delay consent to an assignment where the lease requires consent to be obtained. A blanket policy of refusing consent to proposed assignees on covenant grounds alone, without proper investigation, carries genuine legal risk. Taking advice before refusing consent, and doing so promptly, remains essential.

Landlords who want to attract growing companies need to think about the full lifecycle of an occupier relationship. If the lease is structured in a way that makes growth or exit difficult, the landlord is competing against serviced offices and co-working arrangements that offer genuine flexibility.

The longer view

The commercial property market will not be anchored by the same businesses in 2040 that anchor it today. Some of those future occupiers are negotiating their first leases now. The landlords best placed to benefit from their growth are those who engage with them early, structure their offer intelligently and build relationships that develop alongside the businesses themselves.

That requires a shift in how landlords think about startup occupiers: not as a compromise when better tenants are unavailable, but as a pipeline that sophisticated asset management can actively cultivate. The legal and commercial framework for doing this well exists. The question is whether landlords are willing to use it, or whether they will continue to compete for a shrinking pool of established covenants while the next generation of major occupiers finds its feet elsewhere.