United States: Is Your Lease Ready For The Sharing Economy?

It is difficult to read a business publication or attend a webinar without hearing about the sharing economy. The sharing economy is an economic model in which individuals are able to borrow or rent assets owned by someone else, allowing access without ownership.

Although it may seem like a 21st century idea, a sharing economy has existed in real estate for more than 3,000 years. Sharecropping leases date back to ancient Egypt. Roman landlord/tenant law was relatively robust, while leases in feudal England were decidedly pro-landowner/anti-serf. According to Milton Friedman, the modern concept of leases had crystallized by the 14th century.

Fast forward 700 years, and specific concepts have also crystallized. Virtually every lease restricts a tenant's ability to assign its lease, or to sublease the premises to a third party. Even in the absence of specific language, statues prohibit a tenant from renting its leasehold to any other person without the prior consent of the landlord.

This is where ancient property law clashes with the 21st century version of sharing. Companies such as LiquidSpace and Desktime have appeared, offering tenants the opportunity to turn their unused office space into cash. These platforms give companies the opportunity to monetize excess conference rooms, offices and desks, making them available to third parties by the month, the day or the hour.

A check of one of the online sites shows a small office available for $140 a month and a conference room listed for $42 an hour. This may seem like a great idea for a tenant with extra offices or rarely used conference space. What could go wrong? In most cases, the sharing arrangement violates the host tenant's lease.

Several methods enable a tenant to allow another to occupy its leased space. In an assignment, the tenant transfers of all its rights under the lease to another party. If the tenant retains a reversionary interest in the space, the transfer is a sublease. In a license, the tenant gives its permission to an individual or an entity to use space for a specific purpose. Unlike a lease, it does not transfer an interest in the real property. A use agreement is a short form license for a very limited purpose.

Is it possible for a facilitator such as LiquidSpace or Desktime to structure a short-term sharing arrangement so that it does not violate a lease's prohibition against assignment or subletting? Probably not.

Although lawyers are ridiculed for using 10 words when two will do, those "extra" words are meant to capture any new scenario that the tenant may devise to thwart the intent of the lease. A typical office lease provision may read as follows:

Tenant may not, without Landlord's prior written consent:  (i) assign or transfer this Lease or any interest therein; (ii) permit any assignment of this Lease or any interest therein by operation of Law; (iii) sublet the Premises or any part thereof; (iv) grant any license, concession, or other right of occupancy of any portion of the Premises; (v) mortgage, pledge, or otherwise encumber its interest in this Lease; or (vi) permit the use of the Premises by any parties other than Tenant and its employees.

Why would a landlord care if a tenant rents out its extra desks by the day or its conference rooms by the hour, especially if it will help the tenant pay its rent? The reasons are myriad. Most landlords carefully vet their tenants, thoughtfully creating a specific tenant mix. Some office landlords grant exclusive uses to other tenants, which the guests' presence could violate. The use of a building by third parties could increase density and provide a stress on parking, elevators and janitorial services. The guest users of a meeting space might draw picketers or lend an air of disrepute to the building. The guests are not subject to the same insurance requirements as the tenants.

On the other hand, increased occupancy might add a level of vibrancy, making the building more attractive to potential tenants. The guests may eat at restaurants and shop in stores that the building offers. Guests may like the building so much that they become interested in leasing space directly from the landlord.

If the landlord wants to say no to future sharing arrangements. A prohibition on assignment, subletting and other transfers such as the provision quoted above should be broad enough to prohibit the monetizing of a tenant's unused space without the landlord's consent. In some cases, the landlord may want to specifically prohibit the listing or use of the premises as shared workspace.

What if the tenant violates this prohibition? Most leases require the landlord to give the tenant notice and an opportunity to cure all non-monetary defaults. This is not an effective remedy if the tenant has already accepted paid guests in its space. The landlord could make space sharing a "no-cure" default. Faced with repeated violations, the landlord would have to decide whether the situation is bad enough to warrant defaulting the tenant. Possibly a steep fine per violation (in an amount that would exceed the temporary rental value) would be a more appropriate remedy.

If the landlord is open to the idea of future sharing arrangements. If the tenant asks and the landlord is receptive, the lease should very specifically describe what the tenant is and is not allowed to do. For example, the lease could permit the license of individual empty offices to no more than one occupant at a time and for no more than 10 days a month. The lease might permit the license of a conference room no more than once a week to groups of less than eight.

Other areas of the lease may also need to be revisited. For example:

  • How will the guests gain occupancy to the building? Most leases prohibit the tenant from making additional keys or entry cards without the landlord's consent. If a code is required for entry, can every guest be given a unique code? Neither the landlord nor the tenant will want guests to have access to the space once the temporary use is over.
  • Where will the guests park? If parking for the building is at a premium, neither the landlord nor the tenant will want the building's full time users to be displaced by guests. The landlord will also not want its dedicated "guest" parking to be used by all-day occupants.
  • If the paying guest causes damages or injury, the indemnity language in most leases will require the tenant to indemnify the landlord. Nonetheless, a specific indemnity clause for claims caused by the paying guest may make the tenant think twice about what it is requesting and prompt the tenant to ask its insurance company about coverage for the acts of its paying guests.

If the landlord really likes the idea. The landlord may want to get into the shared space business itself. Some landlords have established dedicated shared working spaces, often devoted to business segments such as start-ups, solo attorneys, etc. Occupancy can be governed by license agreements or memberships. Other tenants in the building may see this as a positive or negative, depending on the quality of the occupants, the density and the extent to which building rules are uniformly imposed.

Takeaways. Tenants are cautioned against attempting to sneak paying guests into their space. Given the uptick in the sharing economy, landlords would be wise to bring up the issue at the beginning of lease negotiations, so either the tenant understands a strict prohibition, or the parties include very specific rules for paying guests. As ever, consult an attorney for any specific legal issues.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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