Recent difficulties encountered by landlords with their co-working tenants illustrate in sharp relief why the tried and tested safety manual of pre-lease completion checks should apply to them just as much as it does to any other tenancy.
Save perhaps where a co-working solution offers the only prospect of breathing life into long unoccupied space (and mitigating the empty rates!), landlords should resist the temptation to agree covenant dilution and place themselves entirely at the mercy of the credit of their co-workers.
Landlords face particular risks in the co-working sector, where leases are granted to newly created special purpose vehicles with no balance sheet. Their value relies entirely on income being generated from its occupiers consistently over the term of the lease: in other words “letting risk” remains a continuing challenge, rather than something which would ordinarily be transferred to a tenant on completion of its lease.
So, what are those tried and tested safeguards?
- Parent company guarantees – these properly allocate risk and can be flexible enough to evolve to reflect the changing fortunes of the tenant;
- Rent deposits – these keep the liability off the consolidated accounts of the tenant group, and provide another flexible mechanism to ensure risk is more sensibly shared;
- Pre-agreed assignment/release – landlords may be prepared to pre-agree a lease assignment from parent to SPV against agreed financial performance targets being achieved.
Irrespective of whether any such safeguards have been secured, landlords can also help to mitigate the consequences of a sudden tenant default through targeted and workable ongoing monitoring by reserving the right to receive real time financials, possibly also coupled with the ability to demand new security if the financials demonstrate an enhanced risk of default as against agreed thresholds.
At the end of the day, irrespective of the obvious appeal of co-working as a dynamic new phenomenon in our market, landlords must not let this blur their vision when they embark on lease negotiations.
Siobhan Burton, real estate counsel, Linklaters
