Landlords and investors could inadvertently become subject to third party tenancies with security of tenure if they do not carefully manage co-working spaces
- To avoid a tenancy being inferred, parties should avoid granting exclusive possession to occupiers
- Tenants seeking to take advantage of new revenue streams need to ensure they do not commit a breach of their lease when sharing space with co-working occupiers
- Co-working service providers have created a buzz across the City and beyond by taking increasing amounts of office space. The demand for flexible offices is certainly there, with tech, media and creative businesses opting for co-working spaces over permanent and expensive premises.
Traditional landlords prefer to have the security of a long-term occupier who will then take on the management of the co-working space. However, innovative developers and landlords are now creating their own co-working spaces within buildings, offering a mix of flexible and core space.
Across the market, there is also an increase in long-term tenants offering up space in their own premises to take advantage of new revenue streams. Such is the uptake that there are even online marketplaces matching potential occupiers with companies that have spare space.
Co-working service providers and tenants providing extra space will often offer the option of private offices as well as hot-desks. While membership can enable the use of space across a number of locations, evidence suggests that many occupiers will stay in one particular location.
Landlords will need to ensure that their long-term tenants do not create arrangements which risk granting security of tenure to unknown occupiers, which would bind them even where the head lease is excluded under Part II of the Landlord and Tenant Act 1954 (“the Act”).
Security of tenure
An occupier operating a business can obtain security of tenure under the Act if certain conditions are met, including: Occupation is under a tenancy and not a licence or tenancy at will.
- The tenant must be occupying for the purposes of a business. This includes any activity carried on by a body of persons, whether corporate or unincorporated. Where the business is carried on by an individual it must amount to a trade, profession or employment.
- The tenancy must be for a fixed term of six months or more, unless the tenancy contains provisions for renewing the term or extending it beyond six months, or if the tenant has already been in occupation for a period exceeding 12 months (including any predecessor in the same business).
The Act gives tenants the right to remain in occupation at the end of their term and to apply to court for the grant of a new lease. If the lease is within the Act, the landlord can only oppose the tenant’s right to renew on certain grounds; the most common being that the landlord intends to redevelop, or occupy the premises for its own use.
Opposing a lease renewal under the Act can be a lengthy process and in some circumstances can require compensation to be paid. Parties can contract out of the Act before a tenancy is created but circumstances can occur where a tenancy with security of tenure is inadvertently created.
Avoiding a tenancy being created
When considering whether a tenancy has been created, the court will examine if the occupier has legal exclusive possession and if, viewed objectively, the parties intended to create a tenancy. Simply labelling a document as a licence will not mean that a licence is created.
In the recent case of Stewart and others v Watts  EWCA Civ 1247;  PLSCS 342, the Court of Appeal reviewed the position on exclusive possession. Exclusive possession allows the occupier to exclude all others, including the landlord, from the premises (for example, a locked office). If exclusive possession exists, the occupier will prima facie be a tenant unless the circumstances and conduct of the parties show that the occupier was only to be granted a personal privilege with no proprietary interest.
Co-working service providers will offer a range of membership benefits over and above the use of an office to demonstrate the personal nature of the occupation. However, head landlords should ensure that standard form agreements with occupiers avoid granting exclusive possession, with terms which could include:
- An expression of the personal nature of the occupation;
- The right to require the occupier to move to another space;
- A requirement that keys be returned at the end of each day; or
- Permitting occupation only within certain hours.
Landlords will also need to ensure that co-working service providers take steps so that the reality of the occupation reflects those terms to avoid a tenancy being created.
Breach of alienation covenants
Tenants seeking to take advantage of the recent uptake of flexible space should first check that they are complying with the terms of their lease.
Most leases will restrict a tenant’s right to allow third parties to occupy the premises without consent. However, restrictions on subletting or assignment may not cover licence arrangements with co-working occupiers, therefore landlords and investors will need to review their standard lease agreements. Restrictions on sharing occupation or, in some circumstances, parting with possession are more likely to cover the co-working scenario and ensure that landlord’s consent is required beforehand.
Landlords will want to ensure that any tenants, who are not co-working service providers but want to offer space to co-working occupiers, put arrangements in place which do not risk inadvertently granting security of tenure. Landlords will want to review agreements with occupiers to ensure that the risk of granting security of tenure is mitigated, as well as including appropriate indemnity provisions and restrictions against disturbing other tenants.
Tenants who are considering allowing occupation of their premises will need to review lease provisions carefully otherwise they could commit a default which may lead to forfeiture.