Board decision on a head office lease break

A United Kingdom board decides whether to renew, relocate, release or sublet its head office at a lease break with a hard notice date. The log shows measured occupancy used as a decision criterion, th...

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1. node: Context. The organisation is a United Kingdom engineering and technical consultancy of 191 employees, with annual turnover of about 40 million pounds, reporting under IFRS and financed in part by a revolving credit facility that carries a leverage covenant. It has a single head office occupying four floors of a city-centre building. Attendance has run at an average of 78 people a day across the two most recent quarters against 220 desks. The lease is the organisation's largest non-payroll commitment.
2. node: The head office lease contains a break in September 2027. Should the board renew the existing lease, relocate to smaller premises, release the space entirely, or renew and sublet the unused floors?
3. node: Lease terms. The lease permits the subletting of whole floors with the landlord's consent, which the retained agent advised would be likely to be granted.
4. node: Agent advice. The landlord's terms of 2 July 2026 propose a five-year renewal at a rent uplift of 4 per cent and no break, which the retained agent advised is below the level expected for comparable space in the area.
5. node: Market evidence. Three buildings were shortlisted at 110 desks, averaging 430,000 pounds a year for rent, service charge and rates. Against renewal at 780,000 pounds, the annual saving of 350,000 pounds pays back the one-off cost of 620,000 pounds in approximately 21 months, or in about 11 months if the dilapidations, which renewal defers rather than avoids, are left out.
6. node: Estimate. Meeting-space hire at current market rates on the last two quarters' booking pattern, plus a registered office service, gives approximately 95,000 pounds a year. The figure moves with how often teams choose to meet, and the organisation would carry no lease liability and no commitment of any length.
7. node: Decision-maker. The board of directors, to whom this paper is put at the meeting of 16 September 2026. Authority to serve break notice rests with the board and has not been delegated. The Chief Financial Officer prepared the option set and makes the recommendation; one director has indicated in advance a preference for renewal, on the grounds of the one-off cost falling alongside the enterprise system programme.
8. node: Scope. The decision covers the head office property commitment only. Working patterns, headcount plans and the separately approved enterprise system replacement are outside it, although the last of these competes for the same capital and is treated as a constraint.
9. node: Rationale. The option retains a physical workplace for apprentices, graduates and staff who prefer to attend, which the survey indicated a majority value, while removing space that measurement shows is not used.
10. node: Section 172 material. To assist the board in having regard to the interests of employees, this paper sets out the staff survey of 3 August 2026 and draws attention to the 14 respondents reporting a materially worsened commute, of whom nine work in the operations team. The board is asked to note that the option to release the space entirely was not covered by the consultation and that the training arrangements for apprentices and graduates assume a workplace, which together are the grounds on which it is not carried forward. Serving notice keeps it available should the board direct a consultation on it. On long-term consequences, the board is asked to weigh the five-year commitment and balance sheet liability carried by both renewal options against the shorter commitment available on relocation. The minute of the board's consideration of these matters should record the conclusions the board itself reaches.
11. node: Risk. Renewal commits approximately 3.9 million pounds of rent, service charge and rates over five years for space measured at 2.82 desks per daily attendee, with no break clause through which the decision could be corrected if attendance falls further.
12. node: Risk. An average of 78 people attend by choice each day. Removing the workplace entirely is a larger change to their working conditions than any other option, and the consultation did not test it. Proceeding without asking would leave the section 172 assessment incomplete on the option with the greatest employee effect.
13. node: Risk. The sublet income is an agent's estimate against a market with vacancy at 14 per cent and no identified tenant. If the floors remain empty the option is renewal with a further 85,000 pounds spent, which is the worst outcome available from this decision.
14. node: Condition precedent. The Chief Financial Officer is to confirm in writing, before break notice is served, that the one-off cost together with the enterprise system programme leaves adequate covenant headroom. Notice is not to be served until that confirmation is minuted.
15. node: Constraint. The break clause requires twelve months' written notice. Any option other than renewal must therefore be resolved by 30 September 2026. If no notice is served, the lease continues for a further five years to September 2032 with no further break and the rent is reviewed at the break date; renewal in this paper means that continuation on the landlord's proposed terms. After 30 September 2026 the other options are unavailable for those five years.
16. node: Risk. It places the largest lease liability of the four options, shared with subletting, on the balance sheet at the point the enterprise system replacement is also drawing on capital.
17. node: Risk. The one-off cost of approximately 620,000 pounds falls in a single financial year in which the enterprise system replacement is also drawing on capital. The combined effect on covenant headroom has not been tested.
18. node: Risk. Apprentices and graduate entrants have no supervised setting. The training arrangements the organisation has entered into assume a workplace, and the alternative has not been designed.
19. node: Risk. It carries the full commitment and full balance sheet liability of renewal while making the cost outcome dependent on a letting market the organisation does not operate in and cannot influence.
20. node: Action. Serve break notice by 30 September 2026, subject to the condition precedent. Missing that date removes the option for a further five years.
21. node: Constraint. Dilapidations of approximately 310,000 pounds are payable on exit under the existing schedule of condition. They fall due in 2027 on relocation or release, and are deferred, not avoided, under renewal or subletting, where a comparable liability arises at the end of the renewed term.
22. node: Risk. Fourteen employees report that the move would materially worsen their commute, concentrated in a team that attends more often than average. Building selection could mitigate this but cannot remove it.
23. node: Action. Weight proximity to public transport in building selection, and consult the nine operations team members among those reporting a materially worsened commute before the building is chosen.
24. node: Constraint. Directors owe a duty under section 172 of the Companies Act 2006 to act in the way they consider, in good faith, most likely to promote the success of the company, having regard among other matters to the interests of the company's employees and to the likely long-term consequences of the decision. Each option is therefore assessed on staff impact as well as cost, and that assessment is recorded.
25. node: Legislation. Section 172 of the Companies Act 2006 requires a director to act in the way he or she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, having regard to a non-exhaustive list of factors including the likely consequences of any decision in the long term, the interests of the company's employees, and the company's business relationships with suppliers and customers.
26. node: Review trigger. If the condition precedent is not satisfied by 25 September 2026, the board should reconvene before the notice deadline. Allowing the deadline to pass by inaction would settle the matter in favour of renewal without a resolution to that effect, which is the outcome this paper most seeks to avoid.
27. node: Official guidance. Guidance from the Chartered Governance Institute on directors' general duties under the Companies Act 2006 sets out that the section 172 factors must be considered in making decisions and setting strategy. A company that qualifies as large must include a section 172(1) statement in its strategic report. The separate statement on engagement with employees applies to companies with more than 250 employees and so does not apply at 191. The company secretary is to confirm whether the company qualifies as large; if it does, this decision would be a principal decision to be described in that statement.
28. node: Review trigger. If average daily attendance moves outside the range of 70 to 90 for two consecutive quarters before the lease is signed, the sizing of the shortlisted buildings is to be reconsidered. Every option was sized against that band.
29. node: Accounting standard. IFRS 16 requires a lessee to recognise a right-of-use asset and a lease liability for its leases, subject to optional exemptions for short-term leases of twelve months or less and leases of low-value assets, with the liability measured initially at the present value of the lease payments not yet paid. The distinction between operating and finance leases no longer applies to lessees. The length of commitment each option carries is therefore a balance sheet consequence and not only a cash one.
30. node: Internal measurement. Building access records for the two most recent quarters show an average of 78 people on site per working day, against 191 employees and 220 desks. The measurement covers badge entries only and does not distinguish full from partial days, so it understates the number of individuals who attend at some point in a week. Peak-day attendance, typically midweek, has not been extracted from the records, and the shortlisted buildings are to be checked against it before a lease is signed.
31. node: Stakeholder consultation. A staff survey issued on 3 August 2026 received 143 responses from 191 employees. Of these, 106 indicated they would accept relocation within the city, 23 were neutral, and 14 reported that it would materially worsen their commute. Nine of the 14 work in the operations team, which attends more frequently than the average.
32. node: Assumption. Average daily attendance remains within a range of 70 to 90 for the period of the commitment. Every option is sized against that band. A sustained return to pre-2020 attendance would make the smaller premises inadequate and is not provided for.
33. node: Assumption. The lease liability figures are indicative, calculated by the finance function on the current incremental borrowing rate and the terms presently offered, on rent and service charge only, excluding business rates. They have not been reviewed by the auditor and would change with the discount rate and the final terms.
34. node: Renew the existing lease for a further five years
35. node: Relocate to smaller premises within the same city
36. node: Release the space entirely and operate without a head office
37. node: Renew and sublet the two unused floors
38. node: Recommendation. That the board resolve to serve break notice and relocate to smaller premises within the city, subject to the condition precedent set out below. Renewal is not recommended: it commits approximately 3.9 million pounds of rent, service charge and rates over five years and the largest balance sheet liability of the four options, shared with subletting, for space measured at 2.82 desks per daily attendee, with no break through which the commitment could be corrected. Serving notice preserves both relocation and release. Release is not carried forward because the training arrangements for apprentices and graduates assume a workplace and a majority of survey respondents value one, which makes it unlikely to survive consultation; it has not been consulted on, and its cost case is not the reason. The board may instead direct a consultation on release before a building is contracted. Subletting is not recommended because it carries the full commitment and liability of renewal while making the cost outcome depend on a letting market the organisation cannot influence.