Arm's Length, On the Record: Governing Premises the Company Rents from Its Own Director

For a great many UK owner-managed businesses, the premises and the people who run the company are not separate subjects. The building sits in a director's name, or in a spouse's, or inside a family trust, or in a separate property company that the same individuals control. The company pays rent, occupies the space, and everyone gets on with the trading year.

The arrangement is lawful, common and often sensible. It is also the point at which property management and board governance quietly part company. A third-party landlord negotiates at arm's length because it has to; a director-landlord has to choose to. That choice — and the paper that evidences it — is what a lender, an auditor, a buyer or a tax inspector will eventually ask to see.

Two Questions Behind One Arrangement

There are always two questions sitting underneath a related-party lease, and they need separate answers.

The first is a property question: is this the right building, on sensible terms, for the trading needs of the business over the next five years? The second is a governance question: can the board demonstrate that the terms were arrived at in the company's interest rather than simply in the interest of the person on the other side of the table?

Most SMEs answer the first question well and the second one implicitly. Implicit answers do not survive diligence. The purpose of a routine is to make the second answer explicit, documentary and repeatable — without turning every repair invoice into a board resolution.

Evidencing the Rent

Market rent is the anchor of the whole arrangement. If the rent cannot be shown to be a market rent, everything downstream — the company's cost base, the director's personal income, the value of the property in a sale — becomes harder to defend.

At inception, obtain a written valuation from an RICS-registered surveyor covering the demised area, the lease term, the review pattern, and the comparables used. A short letter of advice is sufficient for a modest building; a full report is not always proportionate. Set out any incentive or rent-free period in the lease itself rather than in a side letter.

At review, refresh the evidence. Where a rent has sat unchanged for several years, commission a retrospective benchmark so that the position can be explained rather than merely asserted. Then pay the rent the way any tenant would: by standing order, against an invoice, from the company's bank account, with the payments recorded in the same ledger as any other property cost. Round-sum rents with no supporting paper are the single most common weak point in these files.

Where the property is jointly owned, held through a trust, or owned by a company with other shareholders, the valuation should reflect the whole of the landlord's interest and the identity of every party to the lease should be checked against the title.

Allocating Repair, Insurance and Outgoings

A lease between strangers would contain a clear division of responsibility. A lease between a company and its own director frequently does not, and the gap is filled by habit: the company pays for whatever the building needs, because it is easier than arguing with oneself.

Attach a schedule to the lease that states, in plain terms, who is responsible for structural and external repairs, internal repair and decoration, insurance of the building, insurance of the company's own contents and business interruption, utilities, and statutory compliance items such as the fire risk assessment, asbestos register, EPC and gas safety records. If the company insures the building, note the landlord's interest on the policy. If the landlord insures, set out how the insurance rent is calculated and recharged.

Add a modest authorisation threshold for small works — a figure the finance director or managing director can approve without convening the board — so that routine maintenance does not become a governance bottleneck.

Declaring the Interest, Every Time

The directors' duties under the Companies Act 2006, including the duty to declare an interest in a proposed transaction, apply to a lease with a director-owned landlord just as they apply to any other contract. The company's articles may add their own procedure, and many SMEs have adopted express authorisation for conflicts of this kind.

In practice, that means three things. First, a standing entry in the register of interests recording the director's ownership of the property and any connected-party involvement. Second, a declaration minuted at the point any new lease, renewal, variation or significant capital contribution is considered, with the conflicted director withdrawing from the vote where the articles require it. Third, disclosure in the related-party note to the accounts, prepared on the assumption that someone outside the business will read it.

Where every director is connected to the landlord, the conflict cannot be cured by abstention alone. Independent advice — a valuation, a solicitor's opinion, benchmarking against alternative premises — becomes the substitute for an independent voice.

Before the Renewal, Not After

Related-party leases tend to roll over because neither side has an incentive to reopen them. Diary the renewal twelve months ahead and treat it as a genuine decision: compare the current building against realistic alternatives, revisit whether occupation is still the right model, check break options and flexibility, and minute the reasoning. A board that can show it considered the market and chose to stay is in a far stronger position than one that simply continued.

Planning for Succession and Sale

Two events expose weak arrangements faster than anything else: the landlord's death or retirement, and the sale of the company.

On the personal side, check that the will, any lasting power of attorney and the ownership structure are consistent with the lease continuing undisturbed. On the corporate side, expect a buyer's advisers to examine the lease in detail, and a short term, a rent above market or an undocumented repairing obligation to become a price conversation. Where the terms need correcting, a deed of variation completed before the company is marketed is usually cheaper than a renegotiation conducted under pressure.

If the building itself is to be sold, remember that a business tenancy carries security of tenure under the Landlord and Tenant Act 1954 unless the correct procedure has been followed, and that a purchaser will take the property subject to the lease. Neither point is a reason to avoid the arrangement; both are reasons to have the paperwork in order.

A Board-Minute Checklist

• The director's interest in the landlord entity was declared and recorded in the register of interests.
• The conflicted director withdrew from the discussion and the vote, in accordance with the articles.
• An independent valuation or benchmarking exercise was tabled and is filed with the minute.
• The rent, review pattern, term and break rights were compared with at least two realistic alternatives.
• Repair, insurance and compliance responsibilities are set out in a schedule attached to the lease.
• Authority to sign was confirmed and the executed document is held in the company's minute book.
• The next review date and renewal diary entry were agreed and assigned to a named person.

Red Flags Worth Watching

• A rent that has never been benchmarked, or that sits conspicuously below or above the local market.
• No written lease, an expired lease, or occupation on a tenancy at will.
• The company funding capital improvements to a building it does not own, with no written agreement on treatment at lease end.
• No register of interests, or a register that has not been updated since the lease was signed.
• A landlord's mortgage or charge that requires consent to the lease, never obtained.
• Insurance arranged by one party with no record of the other's interest.

Keeping It Ordinary

None of this requires an SME to treat its own director as an adversary. The objective is the opposite: to make a perfectly normal arrangement look as ordinary on paper as it is in practice. A valuation on file, a schedule of responsibilities, a minuted declaration and a diary entry for the next review will answer most of the questions that ever get asked — and they take an afternoon to put in place.

This article is general guidance for UK SMEs and is not a substitute for legal, valuation or tax advice on a specific arrangement.