Coworking - opportunities for landlords

As the market for flexible office space and coworking solutions continues to grow, new shared workspaces and operators are emerging across the UK. These include, Clockwise, WeWork, and Spaces, alongside independent hubs and platforms to help companies find flexible space, such as Hubble. 

Coworking and flexible office space is having an impact on the office property landscape. Rather than signing 10 or even 5 year leases, occupants can sign up to a short term licence agreement. These provide all-inclusive fees, for access to space, within a fully serviced building.

In this article, we outline different ways that building owners looking to capitalise on the trend can approach building conversions.

Three approaches to converting an existing building:

1 - DIY conversion

Landlords could adapt buildings they own (or floors within a building) into coworking spaces and run a coworking business themselves. This can be challenging for landlords with no direct experience of this market. So, getting good advice is of fundamental importance. It also requires significant upfront speculative capital investment to convert and fit out premises. The upsides to this approach are greater control and less management costs.

2 - Sole Occupancy

Rather than run a coworking space themselves, landlords could grant a lease to an operator. For example, for a term of 15 years.

For those landlords relying on bank financing this may be favourable. Lenders generally view this model as having a more stable and predictable source of income.

The downside to this approach is that landlords remain exposed to the fluctuations of the property market. They have a tenant with fixed rent overheads, whose income is based on short-term contracts. Those contracts can fluctuate with the market leaving them potentially vulnerable to cash-flow pressures. At the extreme, the landlord may have to deal with forfeiture issues if an operator is unable to pay its rent.

The landlord also gains no benefit from market upturns. Unless there is a turnover rent or rent reviews, income remains fixed while the operator raises prices and grows its revenue.

3 - Operator model

Taking into account the downsides of the sole occupancy approach, a joint-venture style arrangement is emerging.

In the operator model, rather than grant a lease from the property owner to the operator, the parties enter into a management or profit-sharing arrangement. The property owner provides the space and the operator provides the brand, management and know-how to run a coworking business.

Instead of paying rent, the parties share the profits. The building owner and the operator are in it together.

The model is designed to offer both parties benefits. Landlords get a profit-sharing arrangement that compensates them for the business risk they are taking on. Whilst operators avoids the liabilities of a long term lease.

Other considerations for landlords or investors to take into account when introducing coworking space to buildings:

Service charge

Typical service charge provisions do not suit a building with flexible arrangements and a high turnover of tenants.

Occupants expect an all-inclusive fee to cover everything from rent to insurance, business rates, utilities, repair and upkeep of communal areas etc. They may also expect enhanced services, such as super-fast broadband, office supplies, printing and mail handling or reception services.

The key is to pitch the all-inclusive fee at a level which is attractive, and sufficient to cover the anticipated cost of the services provided.

Repairs

A short term licence to occupy a flexible office environment, with a likely high turnover of occupiers, does not lend itself to dilapidations negotiations.

Occupants would typically expect the coworking operator or building owner to be responsible for repairs and cleaning. The occupant will only want to be liable for damage they cause, that goes beyond fair wear and tear.

Third-party consents

If the building is charged, landlords should check if the proposed arrangement is permitted under the terms of the legal charge or facility agreement. Most legal charges restrict the borrower's ability to grant leases. There may also be restrictions on parting with possession or sharing occupation (as would occur with a hot-desking arrangement).

If the building is held under a lease, the covenants should be checked and the ability to share occupation confirmed.

Recap

Coworking offers landlords and building owners new opportunities to generate income. However, careful consideration needs to be given to the conversion model and aspects such as repairs, consents and service charges.

Attention to detail is also required when documenting the coworking arrangement. Will it be a lease or a licence? We will be exploring the issue of whether an arrangement is a lease or a licence in our next legal insight.

Find out more about our national Real Estate team and how we can help you achieve the best strategy for managing your asset.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2019. Specific advice should be sought for specific cases. For more information see our terms and conditions.