Thinking of co-working spaces to move your business to the next level? Helen Lucas offers some helpful tips.
So you’ve been through the initial start-up phase, put in the hours, emotional investment and you have now found yourself in a position of needing somewhere to house your fledgling operation. But where to start? The world of commercial leases and property can be a minefield to the un-initiated fraught with pitfalls and potential for huge financial and legal exposure.
We recognise this can be a crucial time in the life of a start-up; delay the process or go too small and risk inhibiting the potential for growth, go to quickly or go too big and risk a financial commitment that could become a burden restricting your ability to move quickly or invest finances in future growth due to onerous lease commitments.
One option many of our clients look to are co-working spaces offered by entities such as WeWork, Spaces, The Office Group, Work Space and many more. These options can be an excellent starting point for a start-up often providing high-end facilities and fit out, meeting rooms and shared communal areas of a specification that a start-up is unlikely to be able to afford in its own leased office. However, whilst presented as a very flexible user friendly offering to start-up and smaller entities the ‘standard form’ contracts provided to occupiers for signing are often nowhere near as occupier friendly as the occupiers expect them to be. Worse is that most do not take legal advice on entering into the contracts believing them to be ‘standard form’ or ‘non-negotiable’ which in reality is rarely the case.
Back in April 2020 at the start of the pandemic we were inundated with enquiries from clients who had entered into ‘licences’ to use co-working spaces without advice and were now desperate for advice on how to deal with the co-working office space provider. Many of these were continuing to charge full rents and service charges for offices that could not be used and some even charging increased service charge for enhanced cleaning and other covid secure measures.
Our top tips when considering a co-working space?
- Take legal advice – we recommend that you take legal advice (not just because we are lawyers!) but because we have seen our early stage clients come unstuck too many times with obligations they were often unaware of in co-working licences. This can often lead to significant time and energy being expended in disputes which could largely have been avoided with a quick read through by one of our property team prior to agreeing to the terms of occupation.
- Legal protections – co-working spaces are normally occupied under licences rather than leases, meaning that certain legal protections afforded to business tenants such as the rights of security of tenure under the Landlord and Tenant Act 1954 and the protections of the forfeiture suspension under the Coronavirus Act 2020 do not apply.
- Break Rights/length of term – it is important to consider carefully how you anticipate the company will grow and operate and what likely timeframe you would ideally occupy the property for. Many mistakenly believe due to the way many co-working space operators appear to deport themselves that they will be offered flexibility as to the length of their occupation and termination date once the licence has been dated.
- Lack of exclusive occupation – a key feature of a lease (rather than a licence) is the right to exclusive occupation. Co-working licence agreements often contain very widely drafted rights for the Licensor (operator) to move occupiers to different spaces within the building or even to another building not necessarily even nearby. We have seen examples of occupiers being forced to move to spaces which do not meet their requirements and that are very different to the space they initially signed up to occupy, with no recourse to the Licensor nor ability to terminate their licence. We can help you to draft amended wording to protect you here.
- Right to suspend all services – often the Licensor has very wide rights to suspend the services which may well have been the main reason you chose to take the space in the first place. Linked to this the occupiers will often find they have unwittingly signed up to accept certain services only from the Licensor’s preferred providers sometimes at non-competitive rates. On the flip side, the right to unilaterally increase the number of services provided and the rates of service charge.
- Termination – the Licences often include wording that automatically commits the occupier to further licence terms if they do not correctly terminate their licence at the end of the initial term. Occupier clients are often caught out believing the term will automatically end at the end of the stated ‘term’ and as a result missing their opportunities to exercise actual break rights in their licence. Worst the ‘licence fee’ will often also automatically increase at the end of the initial ‘term’.
- Late payment fees – often licences include harsh late payment fees and even obligations to pay the licence fee for the entire term even if the Licensor were to bring the licence to an end early for example for non-payment or breach of the terms of the licence.
All of this is certainly not meant to put occupiers off from considering co-working spaces, they are a great option for many start-up clients – Ignition started in a WeWork office ourselves and it served us very well – but merely to highlight some of the pitfalls that can catch occupiers out.
It is also true to say that unfortunately, even if you have taken steps to protect your business and taken advice on the way in, circumstances can rapidly change as we have all learnt since March 2020. But if a dispute arises or circumstances change it is always best to have considered your options carefully at the outset and limit the opportunity for Licensors to enforce unfavourable terms.
There is a lot to think about, but successfully navigating through this, with a little help from us along the way, will allow your business to move into its new premises and onto the next exciting phase of the start-up journey!
Please contact Helen Lucas to discuss any of the issues outlined above.
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