How landlords and tenants can make a success of space sharing arrangements.
Landlords beware: the way in which businesses use office space is changing. There has been a significant shift towards utilisation of shared and communal workspaces. Shared/co-working spaces are said to help initiate creativity and promote community and collaboration. They also present a viable solution to a problem faced by many start-ups and small businesses: that the traditional landlord and tenant model of leasing property does not suit these businesses. Similarly, the opportunity to share space can benefit tenants who are paying rent for unoccupied space.
Traditionally, commercial landlords looked to secure tenants for as long a period as possible. This does not suit many start-ups and small businesses particularly well as in five years' time they are likely to have either folded or expanded well beyond the space they initially leased. Sharing space enables these types of businesses to secure space in desirable locations that would otherwise be unaffordable, and potentially unavailable for the shorter periods of time they require.
However, the legal complexities surrounding sharing spaces can quickly detract from the advantages of such spaces. There is considerable scope to update the legal framework governing the relationship between landlord and tenant to the advantage of those wishing to utilise shared spaces. However, this will take time and time is very much of the essence for start-ups and small businesses looking to maximise the opportunities of co-working space. Similarly landlords (or tenants) with space to spare who could benefit from allowing other businesses to use that space, risk missing out.
Once the decision to share is made, for the most successful outcome parties ought to work together but each party will also need to consider certain points in order to protect themselves.
When granting a 'traditional' lease to tenants, the landlord will seek to control when and how a tenant can allow a third party to occupy their premises. However, there may be some benefit to relaxing these provisions to allow tenants to permit third party occupation in various guises (most likely by licence so as to avoid giving possession). A tenant may be reluctant to take on a lease of premises that meet all their requirements but which is for more space than they immediately require. Unoccupied space is costly however if the tenant can easily allow a third party to occupy that space under their lease, they will not only cover their rent, but may also be able to generate some profit.
However, landlords may also want to benefit from any income derived from such an arrangement. Consequently, they might seek to charge rent under the lease at a premium due to the advantages offered to the tenant by increased flexibility in terms of occupation rights. Tenants should be wary of such rents, particularly given that if they are not successful in setting up a shared space arrangement, they will be unable to recover the additional rent.
Landlords always need to consider whether they are prepared to offer their tenants security of tenure. If a landlord is not happy with the way a tenant is exercising an increased ability to share occupation, they will want a get out. Excluding security of tenure under the Landlord and Tenant Act 1954 so that the landlord is not under an obligation to renew a lease on termination and including a landlord's break clause are both advisable to allow the landlord to terminate a lease as soon as possible should they have issues with a tenant. This could also be beneficial for a tenant hoping to allow occupation of unused space: if they cannot generate a profit from the extra space, they will want to be able to get out of the lease as soon as possible to minimise their losses. As such, tenants might wish to consider a mutual break clause, excisable on a relatively short notice period.
Where a tenant is looking to share their unused space, they are likely to be required to obtain permission from their landlord to enter into an agreement that permits sharing space, otherwise they risk a breach of the lease. This will also be in the interest of the third party seeking to occupy the space, as lack of landlord consent risks complications later on. Without landlord consent to such an arrangement, a breach of the lease is likely to occur, allowing the landlord to terminate and leaving both tenant and the occupant of the shared space without business premises.
Whilst the above points are by no means exhaustive, they demonstrate the importance of taking good legal advice if looking to negotiate space-sharing provisions in a commercial lease. Both landlord and tenant alike should take legal advice so as to ensure they can both make such an arrangement work to their respective advantages, without compromising either party. Bespoke arrangements and provisions can be incorporated in any such agreement based on the individual requirements of the parties and these can compensate for the present restrictive legislative framework in this area.
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.