One of coworking space’s most notable features is the simplicity of its contracts, especially in comparison to traditional leases. More a service agreement than the complex and lengthy commercial real estate contracts most are accustomed to, operators and tenants alike appreciate the straightforward approach that the majority of the industry has embraced.
Since many are just now discovering the many benefits that coworking provides, both operators and enterprises are looking for information on the industry and coworking agreements themselves. For that reason, we’re providing a membership agreement template to save operators money and time and, just importantly, familiarize tenants with what they should expect. We’ll also take an in-depth look at some of the main concepts and topics within coworking contracts, discussing several key points and questions like:
- Is a coworking agreement considered a lease?
- Typical agreement details, provisions, terms & conditions
- Rules & regulations to protect the facility and community
- Definitions of common terms
By examining these different points, we hope to provide operators and tenants with a better understanding of a typical coworking agreement. When both parties are fully-informed, the chances of a successful relationship rise dramatically.
Is a Coworking Agreement Considered a Lease?
The short answer to that question is no. Coworking isn’t regulated by a state’s real estate commission, primarily because it doesn’t have the longer contracts and significant upfront costs that often accompany traditional leases. For both a landlord and tenant, coworking space entails far less risk than traditional office space, where if someone defaults on the agreement, they simply leave the space without a long, drawn-out legal process. This also means that tenants do not have to work with a licensed broker when searching, negotiating, and moving into flexible workspace.
Remember, a coworking contract is far closer to an agreement a guest signs at a hotel, or even a membership to a gym, than a typical CRE lease. Operators are providing tenants with access to a host of services and economic benefits, not just the physical workspace itself. This is yet another reason why coworking doesn’t include the legal complications of traditional space, where in flexible workspace, the operator is much more host than landlord.
Common Agreement Details, Provisions, Terms & Conditions
Rather than complicated language, coworking agreements tend to be far more straightforward and even simple, at least with respect to traditional CRE contracts. In fact, most agreements contain just a few essential areas, as described in the following terms.
Description of Services – This portion of the agreement states what the tenant is entitled to – a floating desk, office suite, custom buildout, etc. It will also detail what services and amenities are included in the agreement, like wifi internet access, receptionist services, conference space, and others.
Prohibited Use – This is language detailing any use of services that are unlawful or otherwise detrimental to the operator, property, or community. This extends to both the physical and digital space, forbidding things like hacking, data theft, or anything else that damages, disables, or impairs anyone else’s use of the service or quiet enjoyment of it.
Use of Services – This section is usually a comprehensive list of specific actions a tenant must abide by, including things like:
- Pyramid schemes, chain letters and similar activity to target or overburden members of the community
- Harassment, violation of legal rights, or actions resulting in personal injury or loss of privacy
- Inappropriate, unlawful, or indecent material on or through space servers, including spamming and junk emails
- Violation of intellectual property laws and trade secrets, including copyright or trademark infringement
- Malware like Trojans, ransomware, spyware, and similar software with malicious intent
- Restricting other members from using any services, causing a business interruption, or preventing their enjoyment of any services
- Unauthorized access to computer systems and gathering of member data or confidential information
- Violation of any applicable laws and regulations
- Lack of reasonable care towards the operator’s own equipment
- Defamatory remarks or language made towards the operator or any member of the community with the particular purpose of causing harm, including loss of profits
Renewals & Terminations – This section discusses what happens when the tenant’s term comes to an end, as well as what constitutes a breach of contract and negligent actions or willful misconduct leading to severability.
Invoicing & Payment – A summary of the payment procedure, parties involved, and any services that might come at an extra fee. For example, shared meeting room time and printing services might be an added expense if they were to exceed a tenant’s allotted amount as detailed in the agreement.
There’s likely to be a few more areas that discuss other areas, including limitation of liability, indemnification, disclaimers, an operator’s insurance policy on the property, and perhaps renter’s insurance for a tenant. For a more detailed look at a typical coworking agreement, we urge you to review our accompanying template, particularly for new operators that want to provide a satisfying and successful experience for their tenants while protecting themselves as well.
Benefits to Coworking Space Agreements
We’ve spoken at length on the benefits of coworking space, first and foremost, the flexibility it provides to organizations. However, there are a few additional benefits that often go overlooked, particularly in the accounting and legal aspects of a coworking agreement.
They allow companies to avoid balance sheet issues that could negatively impact their valuations.
Accounting guidance states that companies must capitalize agreements longer than a year on their balance sheet. In other words, such agreements must appear as a line item in their liabilities. For already public or pre-IPO companies, this can lead to lower valuations, which, naturally, are especially worrisome for startups. Alternatively, since coworking agreements are more akin to a license for use, they allow companies to avoid balance sheet issues that could negatively impact their valuations.
From a legal perspective, coworking doesn’t have the potential legal entanglements that traditional leases usually have. Since the contracts are concise and straightforward, a company doesn’t have to pay for extensive billable hours from their attorney to review a coworking agreement. While a traditional lease can take weeks to negotiate and review, that is not the case with coworking. Things like conference room time and printing, although important, are nowhere near as complex as a tenant improvement allowance or similar complications in a traditional lease.
The Downside to Coworking Agreements
Of course, nothing is absolutely perfect, and although coworking is an extremely appealing option for most organizations, it doesn’t come without potential drawbacks. For many companies, the lack of long-term stability due to the shorter agreement terms is a significant downside to coworking, where, despite the restrictive nature of traditional leases, enterprises still want the comfort of knowing their office space is locked in for years to come.
Since coworking is inherently dynamic and flexible, however, many operators will provide longer-term leases to tenants if they value that stability over the agility of short-term agreements. Like most aspects of coworking and the flexible office space industry as a whole, there are viable alternatives for nearly any possible issue if a person knows where to look.
While our coworking agreement template is an excellent place to start for both operators and tenants to educate themselves on the contractual side of the coworking equation, an experienced coworking advisor can be an invaluable asset as well. Do your due diligence, conduct a thorough and organized search, and coworking can be one of the best business decisions you’ve made for your organization and team.