For London scale-ups, an office lease or agreement is no longer just about space and monthly outgoings. Since IFRS 16 came into effect, the length of a lease directly shapes how investors and lenders judge start-ups and scale-ups’ financial health.
What used to sit quietly under ‘operating costs’ now shows up as debt on the balance sheet. It raises questions about credit ratios, fundraising potential, and long-term flexibility. In today’s tighter funding climate, that shift has turned lease decisions into financial strategy.
Why does IFRS 16 matter for office leases?
For scale-ups, an office lease now carries more weight than just rent payments. Since the introduction of IFRS 16 in 2019, long-term leases are treated as financial liabilities, not simply operating expenses.
This shift inflates reported debt and can immediately impact how investors and lenders view a company. For high-growth firms with unpredictable paths, that weight is costly.
The accounting change was designed to improve transparency. All leases longer than 12 months now sit on the balance sheet as liabilities, with a right-of-use asset on the other side.
While this gives investors a clearer picture of commitments, it also damages credit ratios and makes fundraising harder at a time when capital is already scarce.
In practice, scale-ups see what was once a neutral operational decision turn into a strategic risk. A 36-month commitment to a London office at £10,000 per month is no longer just an overhead.
Under IFRS 16 rules, that lease appears as a £360,000 debt load, changing the optics of balance sheet health overnight. For CFOs, that can slow funding rounds or limit borrowing.
What are the office space costs investors look at?
- Reported debt climbs – All leases above 12 months are recognised as liabilities.
- Credit ratings weaken – Higher debt ratios can reduce borrowing ability.
- Cash flow reporting shifts – Lease payments are spread differently, affecting perceptions of profitability.
- Comparisons get tougher – Investors find it harder to benchmark firms that carry highly variable lease obligations.
- Funding risk rises – In tighter markets, inflated debt figures can deter backers.
With scale-ups already facing tighter funding conditions and rising pressure for profitability, adding avoidable debt to the balance sheet through a long office lease locks up flexibility at the worst possible moment. For many, this makes short leases not just an operational preference but a financial safeguard.
How do 12-month leases reduce IFRS 16 exposure while preserving quality?
Shorter lease terms give scale-ups a clear accounting advantage. IFRS 16 requires any lease over 12 months to be booked as a liability, which inflates debt metrics.
But agreements at or below 12 months are exempt. That exemption allows firms to secure the right workspace without burdening their balance sheet with long-dated obligations.
The adjustment is more than technical. The Techspace Scaleup Culture Report 2024 shows 79% of UK tech professionals now work in flexible spaces, with firms purposefully moving away from rigid multi-year contracts.
This shift allows CFOs to select Grade A buildings that support team culture and collaboration, while avoiding debt optics that can stall funding rounds or weaken valuations.
Market data suggests this flexibility does not require a downgrade in quality. Demand for sustainable, amenity-rich Grade A offices in Central London has risen sharply, with occupiers choosing shorter leases to keep costs under control.
With vacancy levels still allowing room for negotiable terms, scale-ups can blend financial prudence with access to premium environments that help attract talent and clients.
As a result, 12-month leases are functioning as both a compliance tool and a growth strategy. They reduce reported liabilities, align with hybrid working needs, and give CFOs the option to opt into premium space without the drag of three- or five-year contracts.
What should scale-ups watch for when looking at 12-month office leases?
Short, flexible leases and agreements deliver agility, but only if companies scrutinise the fine print. A 12-month deal that quietly includes automatic renewals could be reclassified as a longer commitment, defeating the purpose under IFRS 16.
CFOs need to ensure contracts are truly short term and avoid clauses that lock them into multi-year liabilities hidden in the wording.
The other priority is alignment with workspace strategy. Teams still need stability and a productive environment, even with shorter contracts.
Evidence shows many companies are opting for high-quality Grade A offices on shorter terms rather than compromising on location, amenities, or design just to secure longer leases.
Quality space has become a requirement, not a luxury, even for leaner scale-ups.
Recent workforce volatility makes this approach practical. The Techspace Scaleup Culture Report 2024 found 37% of tech workers have experienced reductions in the past 18 months.
This uncertainty means that committing to excess space for several years is increasingly risky. A shorter lease matched to headcount planning helps protect against expensive mismatches between office capacity and actual use.
- Scrutinising lease clauses to avoid hidden long-term obligations
- Prioritising high-quality, collaborative spaces on short terms
- Matching square footage to projected workforce needs, not legacy patterns
- Preserving contract flexibility to scale up or down with minimal penalty
Handled correctly, these agreements allow scale-ups to get the best of both worlds – combining balance sheet efficiency with a workplace that supports growth.
Why flexibility is now a financial strategy
What once looked like a routine operational choice – signing an office lease – now drives real balance sheet risk under IFRS 16.
Multi-year commitments inflate reported debt, undermine credit ratios, and can slow fundraising rounds when momentum matters most. The solution emerging across London and beyond is clear: shorter, more flexible leases with zero hidden commitments.
This is exactly where ADAPT steps in. With deep experience in office search and a unique 360° approach, we help scale-ups secure Grade A spaces on 12-month terms that keep them agile while shielding their financial optics.
From uncovering off-market options, flexi and managed space, to stress-testing clauses for hidden liabilities, ADAPT ensures each agreement truly delivers the accounting relief and cultural fit teams need.
Over two decades, we’ve seen the same pattern: companies who treat office space as a strategic lever – rather than a sunk cost – gain faster access to capital, stronger team engagement, and a more resilient growth path.
That’s the role we play: translating evolving market pressures into smart, future-proof workspace choices.
Scale-ups shouldn’t have to sacrifice credibility with investors just to access quality offices for the future. At ADAPT, we make sure your rental flexibility is a financial advantage for your future growth, not a liability to regret.
Chris Meredith, ADAPT CEO & Founder
What can you do to get ahead of IFRS 16 risk?
If you’re preparing for a funding round, balancing headcount volatility in the age of AI, or working to protect valuations in a cautious market – now is the moment to reassess your lease strategy. A long contract no longer just ties up cash; it can actively weaken your financial story with VCs.
ADAPT can help you sidestep those issues by sourcing high-quality, flexible office space that fits your culture, scales with your growth, and avoids unnecessary IFRS 16 exposure. That’s what we call the ADAPT difference: smarter offices, built for growth, that support both your team and your balance sheet. You can start with ADAPT here.
