Coworking spaces offer fantastic flexibility for start-ups to major international corporations alike.
Such spaces provide professional work areas for those dipping their toes into the office market for the first time. Through to swing-space for larger organisations that have outgrown their main offices or who need temporary quarters during a refurbishment.
However, government-imposed closures during the pandemic hit the coworking sector hard. It shone a light on one particular risk with such arrangements, namely the potential insolvency of the shared office provider.
Chhavie Kapoor considers six key points in-house legal teams should bear in mind when signing-up to a coworking agreement.
1. It is a licence not a lease
It is important to understand that the right to use premises under a coworking or other office sharing agreement is ordinarily in the form of a licence, not a lease.
The distinction is significant:
- A lease grants a right to exclusive possession for a period of time. A tenant can therefore exclude the landlord and third parties from the property.
- A licence, on the other hand, is a personal right or permission from the owner (the licensor) to use the space. The licensee does not have exclusive possession.
In fact, coworking agreements (or the scheme rules where it is a membership-type arrangement) usually contain provisions that are clearly and deliberately inconsistent with the grant of exclusive possession, such as a right for the licensor to move you to a different desk or office.
Being a personal right, the basis on which the licensee occupies is inherently precarious. For example, if the licensor sells the property, the personal permission will fall away, and the licence will end.
2. Risk of the coworking provider’s insolvency
If the coworking provider is a company, and it gets into financial difficulty, it may go into administration or liquidation.
If the company owns the building outright, the licence will not terminate automatically. The administrator or liquidator will act as its agent. They may ask you to pay future licence fees to them.
In administration, it is possible that the coworking provider could be rescued or continue to operate until a buyer is found. If the building is sold, however, the licence will terminate. There is no guarantee that the new owner will be prepared to enter into a new agreement.
If the coworking provider cannot be saved, and it goes into liquidation, the liquidator may determine (disclaim) the company’s obligations under the licence very quickly. It may do so on the basis that the obligations on the company to provide services to its licensees are onerous in nature (and therefore liable to disclaimer under the relevant insolvency legislation). It might even change the locks or otherwise prevent access without prior warning.
If licence fees have been paid in advance, a debt claim can be made in the administration or liquidation but often with little prospect of recovering much if anything.
If, rather than owning the building itself, the coworking provider has a lease, then as well as the risk of insolvency it is possible that its landlord could forfeit its lease. The forfeiture might, depending on the terms of the lease, be based upon the event of insolvency itself in addition to or instead of any breaches on the tenant’s part of its obligations, such as the obligation to pay rent. Forfeiture will result in the immediate termination of your licence. You might try contacting the ultimate owner or superior landlord to see if they will enter into a fresh licence with you directly. But they may not agree to this (and will be under no obligation to do so).
3. Check and monitor the coworking provider’s financial strength
A licensor cannot prevent the insolvency of its coworking provider. It can, however, carry out due diligence.
It will usually be sensible to carry out some background financial checks before signing a coworking agreement. This might be as simple as looking at filed accounts at Companies House and running a company credit check. But it could include commissioning a more in-depth financial report. Where the provider has set up a special purpose vehicle for a particular office it may be necessary to look at the health of both the subsidiary and its parent company.
You can carry out further checks at regular intervals as the arrangement continues.
If the coworking provider’s financial position declines, you can consider moving to alternative space at the next opportunity.
4. Review the terms of the coworking agreement
There may be limited scope to negotiate the terms of your coworking agreement. You should, however, carefully review the terms and raise any concerns you have with the provider.
Two of the key provisions to look at are the payment and termination clauses.
So far as payment terms are concerned, coworking providers might offer daily, weekly, monthly or longer arrangements. The price will change depending on:
- how long you wish to commit to
- the number of people
- whether you are looking for a hot-desk dedicated desk or private area.
The key is to be comfortable in how much you pay in advance, including in relation to any deposit requested by the licensor. The more you pay upfront, the greater your financial risk if the office provider becomes insolvent.
As for termination, check the circumstances in which both you and the coworking provider can end the agreement, including whether you can terminate before the end of any fixed licence period.
5. Protect your belongings in a coworking space
Working in a coworking environment gives rise to obvious security and confidentiality considerations. However, you should take additional precautions of the sudden closure of the premises in the event of the office provider’s insolvency.
It would, for example, be sensible to ensure that any items left in shared offices for any period are clearly labelled so that they can be easily described, identified and distinguished from other occupiers’ belongings. This should enable you to quickly recover your belongings from whoever takes control of the premises if they are closed without notice.
6. Prepare a contingency plan
Hopefully you will not need it. But you should have an emergency plan in place in case of a sudden forced closure.
Consider, for example, identifying one or more alternative coworking spaces nearby that you could move to at short-notice. Have a written procedure that can be followed to ensure you can get up and running quickly with minimal disruption, should the need arise.
Coworking spaces offer flexibility for businesses. But it’s crucial for in-house legal teams to be aware of the inherent risks, especially concerning the provider’s financial stability. By conducting due diligence, understanding the terms of your agreement, and having contingency plans in place, in-house legal teams can mitigate these risks and ensure business continuity. Remember, a proactive approach to risk management is key to a successful coworking experience.
This article is written by Chhavie Kapoor, Property Litigation Partner, Mishcon de Reya.
Crafty Counsel is the UK’s most dynamic and fast-growing legal Community. With members from across the globe, the Community is a hub for sharing experiences, learning together, and forming invaluable connections. Join for free to access the Community Hub App.