Five Questions Before the Keys: A Galico Lease Stress Test for UK SMEs

An office lease is one of the largest commitments a UK SME can make, and hybrid working has made the decision less obvious than it once was. A smaller footprint may be right, but a short-term saving can be outweighed by a long-term liability. The Galico Test is a five-question stress test for owners who are close to signing. It does not replace legal or surveyor advice. It does help a management team decide whether a lease is an opportunity or a trap.

Question 1: What are you committing to over the full term?

Start with the whole obligation, not the headline rent. Add rent, service charge, insurance rent, business rates, utilities, fit-out and any guarantor or rent deposit. Multiply by the term, including any period after a break where the lease continues. Ask whether the lease is inside the Landlord and Tenant Act 1954 and whether security of tenure is excluded. For many SMEs, the difference between a three-year commitment and a ten-year commitment is the difference between flexibility and a balance-sheet problem.

Question 2: Can you leave, and on what terms?

A break clause is only useful if it can be operated. Check the notice period, the date by which notice must be served and the conditions attached. Common conditions include no arrears, material compliance with the lease and vacant possession. Some leases impose a break penalty, which can be a material sum. If there is no break, ask about assignment and subletting. A lease that cannot be exited or shared is a lease that assumes your business will not change.

Question 3: What will the service charge and insurance really add?

Service charges can move. Ask for the last three years of service charge accounts, the current budget and any sinking fund. Check what is included, what is capped and how the landlord recovers insurance. Business rates and utilities should be modelled separately. A rent that looks competitive can become expensive once the full occupancy cost is known. If the building is older, ask about planned works and whether tenants will contribute through the service charge.

Question 4: How much will the space cost to make usable?

A lease is not just a rent deal; it is a capital project. Confirm whether the space is CAT A or CAT B, what the landlord will contribute and whether any rent-free period is available. Fit-out costs, furniture, IT, security, accessibility and compliance all need to be in the budget. In a hybrid market, desk ratios matter: paying for more space than the team uses is a slow leak. If the lease is short, expensive fit-out may not be recoverable.

Question 5: What is your exit liability?

Exit liability is where leases surprise otherwise careful businesses. Dilapidations can require reinstatement, repair or decoration. A schedule of condition at the start can limit the baseline, but only if it is properly prepared and attached. Check whether the landlord can require removal of alterations, whether a guarantor remains liable after assignment and whether an authorised guarantee agreement is required. Ask what the repairing obligation actually means in practice, not just what the clause says.

Scoring the Galico Test

If any of the five questions cannot be answered in writing, the lease is not ready to sign. If two or more answers depend on optimistic assumptions about growth, headcount or landlord flexibility, treat the deal as a red flag. The strongest position is usually a shorter term, a workable break, a capped service charge and a clear schedule of condition.

The Galico Test is deliberately simple because lease decisions often become complicated by detail. A UK SME does not need to become a property expert. It does need to know what it is signing, what it will cost and how it can leave. Before the keys are handed over, those five questions should have clear, documented answers.