A foot in the door

Virtual and shared office spaces have vastly expanded access to coveted inner-city physical presence for small- and medium-sized businesses looking to scale. The “hot desk” approach has in recent years enabled new enterprises to get a foothold in big cities like New York at a lower cost, with fewer complications, and at an earlier stage in their development.

In place of complicated leaseholds for office space, which may entangle you in the intricacies of local landlord and tenant law, shared space licenses have emerged as a common legal tool. These licenses are more streamlined contractual arrangements whereby a licensor, who in most cases will also be a tenant, will permit a licensee to use a defined area in what is commonly a large, shared space amongst other licensors. The law surrounding shared space licenses remains fairly amorphous. Below is a quick guide to the pros and cons of licensor/licensee relationships.

PRO: Lower cost and commitment

A lease or sub-lease will typically entail considerable security deposits, written guarantees and insurance obligations for the tenant, which can tie up large portions of your capital that you want to spend elsewhere. Leases also often contain lengthy notice periods, which, in the unfortunate event that things don’t go to plan, may oblige you to continue paying rent and maintenance fees under a lease when your venture is downscaling or even exiting the market altogether.

A contractual license, on the other hand, does not typically entail advance deposits and can be terminated with little or no notice.

CON: Instability

The flipside of a lack of advance notice periods is a potential unplanned uprooting of your business operations. It should also be noted that unlike leases, licenses are generally non-transferrable to third parties.

PRO: Integrated services

A license agreement will usually be presented as a combined use and service package, with all essential office utilities, such as the internet, rolled into one or several block payments. This allows for a more seamless set-up of operations and stops you getting bogged down in contracting for various utilities.

CON: Less legal protections

A lease grants a tenant interest in the property, and with it, the right to exclusive use at the exclusion of anyone else, including the landlord, with the latter permitted to enter the premises only under circumstances outlined in the lease. A license agreement, however, grants no interest in the property the licensor is occupying, and so the landlord or tenant granting the lease can, in theory, enter the premises whenever they choose or peaceably eject the licensor immediately upon termination of the agreement.

CON: Less protection for business assets

One consequence of non-exclusivity in use of licensed space is greater vulnerability to the theft, loss or misplacing of valuable business assets and confidential information stored on the premises. Before entering into a license agreement, the terms of the agreement should be carefully examined for confidentiality provisions and liabilities for theft or loss of property.

CON: Is your license compliant with state and local law?

Simply naming an agreement a “license” does not necessarily mean a court will consider it so if a dispute arises. What constitutes a license rather than a lease varies depending on state and local law. If a court finds a license agreement is a lease, or vice-versa, this may mean significant and unexpected consequences for you, the business owner.

A license to use space must also comport with the provisions of the underlying lease for the premises, if any, and relevant local ordinances. A late discovery that a proposed commercial activity is prohibited onsite can result in unnecessary frustration of a business plan.

In short, obtaining a license to use a shared workspace is not without its risks. But its potential benefits to your business in terms of cost and convenience are significant. The best thing to do is to engage smart counsel to guide you through the minefield.

If you have any questions or need advice on the implications for your business please feel free to contact us here.

 

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