The political and economic environment over recent years has created a lot of uncertainty. It has forced businesses to adapt to changing macro-economic trends and the wants and expectations of its employees to cater for the hybrid working model that is now the norm. As a result, there is a growing demand for flexibility as businesses are increasingly considering buildings which offer flexible, serviced office spaces.
Why opt for flexible office arrangements?
Serviced office spaces are flexible workspaces that are fully equipped, serviced and typically maintained by an operator or a management company. Depending on business needs, these spaces can vary in size from a single desk to an entire floor with flexibility to increase or decrease the space required quickly which may have huge impact on cost savings for businesses.
Demand for flexible office space is increasing and further growth is predicted not only amongst tech start-ups, SMEs and entrepreneurs but also larger corporates who are increasingly drawn by the richer and more varied working environment that flexible offices are able to offer. A Savills report concluded that because of the desire for flexibility, there has been a change in the size of occupiers who require flexible office space. The typical footprint in demand now is 2,500 sq. ft+ up from 500 – 2,500 sq. ft and there is increased demand from larger occupiers for flexible office spaces over 5,000 sq. ft.
There are several reasons for this. Flexible office spaces often come with essential furniture and IT and telecoms infrastructure already installed. They provide opportunities for collaboration as spaces are shared with other businesses allowing occupiers to take advantage of the surrounding business community which in turns helps facilitate higher levels of networking. The ongoing “war for talent” in the labour market is also forcing the occupiers to provide office spaces which offer multiple amenities to make their work environments more attractive. Higher fitting out and financing costs are also another factor as the responsibility for maintaining the office spaces is typically on the operator. All of the above has led to an increase in a diversified customer base for flexible, serviced office spaces.
It is easy to see why this type of occupancy is attractive in the market. Businesses can sign a standard agreement with the operator and start trading almost instantaneously. These agreements are typically short-term flexible licences allowing a business to scale up and down when necessary to react with the changing market.
But these agreements do carry with them potential legal pitfalls which may compromise a business’ commercial interests. In the search for speed and flexibility, businesses may enter into these ‘flexible’ agreements but without considering the legal and commercial consequences. To better understand this, we must go back to basics.
Back to basics
Underpinning the flexible office space model is the distinction between the traditional lease vs licence concept.
It is well-established in case law that where an occupier is granted an exclusive right to occupy for a fixed period then, regardless as to how the document is named, it will be as a matter of law, a lease. A lease is an estate in land, it can be bought and sold, can survive change of ownership of any superior interests and subject to conditions, afford security to occupiers even after expiry of the lease term.
A licence, by contrast, is simply a personal contractual permission – in this case, to occupy land/property. It does not confer any proprietorial rights nor any security of tenure and more importantly, it does not give exclusive possession.
Hidden Risks
With more flexibility comes limited security and control. For instance, without exclusive possession, a business can be required to move to another part of the building to accommodate other users or worse still, prevented from renewing to allow for more larger, lucrative businesses to take up space. Lack of control also means a business may not be able to govern things like signage, fit-out and who they share the space with – does this allow the business to build goodwill and brand identity? What if the allocated meeting rooms are suddenly leased to another occupier creating a shortfall in space? If a business is concerned about privacy and wants to protect confidential information, does it want to be surrounded by a high density of other businesses in the same space? All-inclusive agreements may look attractive but they also tend to be more expensive than traditional leasing option with any add-ons incurring extra costs while also allowing the operator to increase the licence fee on short notice.
While businesses are put off by commitment of a long-term lease, protracted negotiations and potentially burdensome and costly repair and maintenance obligations, businesses must have their commercial interests in mind and understand that there is an important line between flexibility and security. Ultimately, misunderstanding the correct legal nature of agreement being entered into can have serious implications.
Conclusion
The specific needs and circumstances of the business will ultimately determine whether it opts for a flexible office agreement or a lease. While there are hidden risks, there are clear advantages to flexible office agreements – smaller initial financial capital, minimal legal negotiations, modern amenities, space for collaboration and overall flexibility. However, businesses should be warned that too much focus on flexibility can result in overlooking and misunderstanding essential legal and practical realities which can prove to be costly.
Businesses should be advised that they speak with a real estate specialist to ensure that any agreement caters for their commercial interests. Businesses must understand exactly what they wish to achieve out of any occupancy arrangement, the risks they wish to avoid, the responsibilities they wish to take on and then decide what the best legal means of achieving those ends would be whether it be a short-term flexible office agreement/licence or a formal lease.
At Quastels, we have experienced lawyers in our Legal 500 ranked Commercial Real Estate Team who can guide you through any occupancy arrangement and provide you with practical and tailored legal advice to best protect your specific commercial interests.
To discuss any of the points raised in this article, please contact Nabel Shaikh or fill in the form below.
