Tips and Tricks for Developers and Co-Working Providers Profiting from the Flexible Working Revolution - Boodle Hatfield

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21 Oct 2021

Tips and Tricks for Developers and Co-Working Providers Profiting from the Flexible Working Revolution

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4 min read

Co-working space is not a new phenomenon. However, the demand for co-working space is greater than ever.

As organisations grapple with new flexible working policies, some employees are looking to recreate the office closer to home. This is particularly true of employees living in spaces which cannot accommodate a desk or those keen on the office environment, but who have a long commute that they would prefer to avoid! It is this which has fuelled a demand for affordable co-working spaces in residential areas.

A few entrepreneurs have seen this demand as an opportunity. They have coupled the need for co-working space with the decline in demand for retail spaces. Approaches have been made to residential developers to fit out the ground floor space (traditionally that reserved for shops) as co-working space.

The relationship between the developer and the entrepreneur is symbiotic. The entrepreneur benefits from:

  • A blank canvas: The space is usually handed over with a Category A fit-out. The entrepreneur is therefore unconstrained in its design of how the space is to work.
  • Limited repairing costs: The space will likely still be within the initial snagging period and thereafter will have the benefit of collateral warranties. As such, in the first 5 or 10 years, the cost of repairs is likely to be de-minimis.
  • A captive audience: With residential accommodation above, the co-working space is likely to be the natural choice for the residential development's occupants.

The developer also stands to benefit:

  • Fodder for its sale brochure: In a similar way that being close to a good gym acts as an enticement to potential purchasers, the co-working space could be a draw for potential residents.
  • Hard to let space: In recent years, the ground floor retail space has become increasingly tricky to let. Securing an income stream from the space is advantageous for a developer.

Perhaps because there is an oversupply of retail space or alternatively, because place making is a hot topic for developers, in a number of cases the traditional fixed rent remuneration structure (as between the developer and entrepreneur) has been displaced, in favour of either: (a) a nil rent with a promise to offer discounted space to residents; or (b) a profit share arrangement.

For those developers and entrepreneurs looking to agree the installation of co-working space in the ground floor of a residential development, they should consider the following points:

  • How long should the agreement run for? Should either party be able to terminate the agreement early?
  • Who is paying for the costs of fitting out the space? The traditional rent free period is not appropriate if there is a profit share arrangement.
  • What is the remuneration structure? Is it a profit share? Or is it a fixed rent? If debt funding might be required in the future, with security being offered over the freehold, the developer should give some thought as to whether a profit share arrangement could be viewed adversely by any funder.
  • If there is a profit share, should the developer have some control over the entrepreneur's marketing and pricing strategy? Should there be further controls over when the co-working space is open?
  • How is the service charge going to work? Will the entrepreneur pay a service charge? If not, can its share in the costs be recovered from the development's residents? If it is to pay a service charge, should this expressly exclude the costs of repairing the lifts and the residents' common parts (given that this will be of no use to it)?
  • Should there be a prohibition on the entrepreneur's assignment or subletting of the co-working space? Or, at the very least, should there be a pre-emption option in favour of the developer, should the entrepreneur wish to assign the co-working space? If there is a profit share arrangement, then the covenant strength of the entrepreneur / its brand will be key. In addition, the development's residents may be sold on having a specific co-working provider in the space. For example, a resident may prefer a provider that has multiple sites across the city, which any given assignee may not have.
  • Should the permitted user be closely defined? If the developer is keen on place making, then it will be key that the use of the ground floor space remains unchanged.

Those who successfully negotiate terms for a co-working space on the ground floor of a new development, could capitalise from the flexible working revolution.

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