A consistent pattern: What actually causes business failure in a downturn?
Liquidity - not profitability - determines survival.
“Turnover is vanity, profit is sanity, but cash is king” - Shaik Omer
When businesses experience a downturn, declining demand is rarely what causes failure. More often, organisations fail because they exhaust their available liquidity before they have time to adapt, because revenue generally softens over months while cash pressure builds far more quickly. A structural ingredient of this unwanted circumstance is that fixed costs continue regardless of declining trading performance, eroding once healthy cash reserves at a rate that is difficult to manage. The fact is that occupancy costs are often among the largest obligations that cannot easily be reduced as the ‘ink is dry’ on a lease which, more often than not, provides no potential for rent abatement or similar when times are tough. The pandemic made this real for almost all commercial tenants as lockdowns impaired turnover and profit whilst lease obligations were uninterrupted, depleting cash reserves and contributing to increased insolvencies. As cash reserves diminish, lessee negotiating leverage weakens, strategic choices narrow, and lease restructure becomes progressively more difficult.
For boards, this changes the way property should be viewed. Occupancy cost is not simply another operating expense - it is a strategic lever that directly influences liquidity, resilience and optionality.
Why lease rigidity is a key consideration when assessing a lease proposal
“Assess a lease proposal not just for what it allows today, but for how rigidly if binds you tomorrow” - Anonymous
Across restructuring scenarios, one pattern appears repeatedly: businesses are often constrained less by declining demand than by inflexible lease commitments. Labour costs can often be adjusted. Inventory can usually be reduced. Capital expenditure can frequently be deferred, but lease obligations are inherently inflexible. They are contractual, long-term and typically difficult to renegotiate, particularly when either the market favours the supply side or when the lessee covenant is impaired. When market conditions change, this structural rigidity in the lease limits an organisation's ability to respond.
Businesses unable to reshape their lease portfolios will typically experience accelerating cash burn, delayed network optimisation, and increasingly constrained restructuring options. In tough times commercial lessees often come to regret how little attention was paid to evaluating flexibility provisions in the original assessment of alternatives, with judgement limited by an over-focus on commencing rental and initial incentives.
LPC perspective on lease flexibility
“Flexibility is the key to stability” - John Wooden
At LPC, we only serve commercial occupiers and our advice to occupiers emphases the importance of considering ‘business before space’ when determining what location, premises, and commercial terms are optimally aligned with business requirements and risks. Whilst lease flexibility is valuable to all commercial tenants, the form of the flexibility requirement will differ from one tenant to another, and the criticality of lease flexibility will also vary. For example, early surrender without penalty will be vital for an enterprising start-up whose outlook has numerous uncertainties, while locational goodwill may be of primary importance to a suburban childcare operator which points to the primary importance of lease tenure and alignment of annual increases with revenue and cost movement. In all cases, lease flexibility requires strategic thinking to determine the importance thereof and the form of flexibility best suited to that particular tenant.
Scale only creates strength when it is flexible
"Lease flexibility is not an optimisation strategy - it is a survival requirement." - Chris Marrable, LPC Property Strategy
Growth inevitably requires scale as large networks improve market reach, operational efficiency, and purchasing power. During a downturn, however, the equation changes. When revenue falls but occupancy costs remain fixed, scale can amplify financial pressure rather than reduce it.
This is why contractions are often rapid and value destructive. Organisations are forced to respond under pressure rather than executing deliberate, strategic change. This supports the view that Boards should therefore focus less on maximising footprint and more on maintaining a footprint that can evolve with changing market conditions. Characteristics commonly found in resilient portfolios include:
shorter WALE profiles
meaningful break rights
turnover-linked or hybrid rental structures
established landlord engagement pathways before market conditions deteriorate.
LPC perspective on accommodation strategy and lease flexibility
"In real estate, lease rigidity is not just a legal detail; it is a fundamental risk. A proposal's inflexibility can quickly turn a strategic advantage into a financial anchor." - Julian Kurath, LPC Occupier Advisory
Future resilience is created long before market conditions deteriorate. Embedding flexibility into lease structures while organisations still possess negotiating strength preserves options that may no longer exist once financial pressure emerges.
In reality, lease commitments influence far more than occupancy costs. They shape liquidity, capital allocation, financial resilience and an organisation's capacity to respond to uncertainty. For this reason, occupancy strategy should be considered alongside broader balance sheet and capital management decisions rather than being viewed solely through an operational lens.
The organisations best positioned to navigate volatility are typically those that treat property as a strategic asset rather than a transactional requirement. Boards reviewing the resilience of their property strategy should consider five fundamental questions:
Is our property portfolio supporting liquidity or constraining it?
How much flexibility exists within our current lease commitments?
Could our network adapt if market conditions changed materially?
Have we preserved sufficient optionality before it is needed?
Are property decisions being considered as part of broader capital strategy?
LPC advocates an occupier should think ‘futureproof today’
Lease portfolios that appear efficient during periods of growth can quickly become constraints when markets become uncertain. By the time those constraints are fully visible, many strategic options have already disappeared. The organisations that consistently outperform are not those that simply react faster. They are those that prepare earlier.
At LPC, we believe futureproofing means building lease portfolios that remain effective across multiple future scenarios - not just today's market. By embedding flexibility before it is required, organisations preserve liquidity, maintain strategic control and protect long-term enterprise value.
Frequently asked questions
What is the biggest leasing risk during a downturn?
Long-term lease rigidity. Inflexible commitments reduce an organisation's ability to lower occupancy costs, reshape networks and execute successful restructuring strategies.
Why do businesses fail before profitability declines?
Because liquidity deteriorates much faster than accounting profitability. Cash flow - not reported earnings - ultimately determines how long a business can continue operating.
How can boards reduce lease-related risk?
By proactively incorporating flexibility into lease portfolios through shorter lease terms, break rights, turnover-linked rent structures and regular scenario planning.
Are larger property portfolios inherently riskier?
No. Scale becomes a risk only when portfolios lack sufficient flexibility to respond to changing market conditions.
What is an asset-light property strategy?
An operating model that maintains market presence while reducing direct lease liability exposure through franchise, partner-operated or hybrid structures.
