If you’re opening a coworking space and don’t already own an office building, then you'll likely be entering into a commercial lease with the building owner. The commercial lease agreement is a significant commitment and are typically for periods of between 3 and 15 years. As such, the commitments you sign up to now will remain for a long period of time, hence the need to focus on the details before signing and while there is still room for negotiation.
The issues for serviced office and coworking space providers that will arise include:-
1. User Permission
All commercial leases will be specific on what the occupier can use the building for. Coworking and serviced office use is not the same as conventional office use so you should include a broad user clause that covers specifically what you will be doing in the space, for example, events, meet ups, subletting and so on. Also, do consider if you anticipate any future uses for the space for example a café or restaurant as an additional amenity. (You should also check that the planning consents are in line with your user intentions)
2. Rent Free Period
For longer leases (from 5 years to 25 years) many landlords will agree to provide an initial rent free period as an incentive to get a tenant in. This is crucial particularly if you are starting with zero occupancy. It can also ease the cost of your initial fit out, furnishings and other initial capital expenses.
Should your coworking space develop or change you may need to carry out alterations and permission for this should be contained in the lease before it is signed. Essential permissions would include partitioning, installation of IT network and any structural alterations that you need to make the space work. Also consider whether you need the landlords permission to install a common room, kitchen, bike rack and showers for your coworkers. Try to get your landlord to agree to pay a share the costs of these changes or provide a rent free period instead.
4. Access Hours
Some buildings, particularly those that are multi-tenanted, may have restrictions on the hours of access. Ask for these straight away as you will only be able to operate your business and sell to your clients within these confines. Flexibility for you as a serviced office provider is crucial so negotiate a 24/7 access in your lease.
If there is other space in the building and if so will you have 1st option to take it if it comes up?
6. Rent Review Rent
Rent reviews usually take place every five years. You should pay attention to the legal assumptions to be taken into account in a rent review clause, for example does the review take into account any improvements made to the property by you as the tenant ? For example, partitioning of your coworking space or installation of your cable and comms room. Will the valuation be based on the property being vacant or based on a value that reflects that you are in the space being in place ?
Many leases will have what's called a dilapidations clause which essentially says that the tenant must return the space to the landlord in the same condition in which it was at the beginning of the lease. Be careful here particularly if you are installing fixtures and fittings that will be expensive to remove and reverse once you move out of the space.
8. Service Charge
As well as the rent, a coworking space tenant will also be liable for additional charges associated with the operation and management of the building. These are comprised in what is called a service charge. Find out exactly what it comprises (Electricity, Light and heat, Concierge, Air conditioning, Security, Access Cards, common area cleaning etc) and get a copy of the last three years charges that were levied against your space. Assess whether the charges are fair and find out how they are apportioned between you, the common area with other occupiers of the building.
In addition to rent and the service charge what other financial responsibilities is the landlord seeking that you assume. For example, who is to be liable for repairs and rates? Are there any unusual charges?
What is your liability here. Internal only or is the landlord seeking that your liability extends to building maintenance and external work or even underfloor conduits, roof and building foundations.
If needs require (for example if you go out of business or need to change location) will you be allowed to assign the lease to a third party or other Serviced office provider?
12. Break Clause
Are you in a position to negotiate a break clause ? At what point should this take place, will it be for the benefit of both parties, will the landlord seek to impose a penalty or issue a schedule of dilapidations. What will your exit costs be?
Normally the landlord will insure however the tenant’s interest must be noted on the policy. What proportion of the insurance premium will be for the tenant and what level of indemnity will arise for the tenant. Will your activity as a coworking space or serviced office provider present a greater insurance risk than conventional office use? Will you as tenant be responsible for any increase in premium arising?
What extent will the tenant be required to indemnify the Landlord for any breaches of the lease? (Whether intentional or not)
Is there a guarantor required ? This is usually the case if the tenant is a limited company and will apply if you are a start up coworking space. What form will the guarantee take and what is the extend of the guarantors liability.
The apportionment of rates should be agreed before signing as well as a payment mechanism to facilitate your cash flow. Particularly if you are starting with empty offices.
A well drafted lease will be an asset to the business and can be proposed as security for bank borrowings etc. As such, it is vital that it is prepared carefully and professionally and with the assistance of legal advisors. The remit of your legal advisors should be broad and include the examination of the lease agreement and advice on its contents, the conditions that have been included and legal and financial significance of those conditions. Note that Lease agreements are typically drafted by the Landlord’s solicitor and, as such, its default format usually favours the Landlord. Hence, negotiation is required.
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