Narrator: You’re listening to WeirTalking Leasing, an eight-episode podcast series from WeirFoulds LLP’s commercial leasing group, educating landlords, tenants, and property managers on today’s commercial leasing landscape in Ontario. Our legal specialists will be discussing everything new and interesting from lease terminations, office sharing, unattractive properties, cannabis, and so much more.
David Thompson: Hi, it’s David Thompson. I’m here with Lisa Borsook, our Executive Partner at WeirFoulds, and we’re talking about office sharing today. So we’ve seen a global trend that’s embracing coworking and office sharing. Lisa, do you want to tell us a little bit about what it’s about?
Lisa Borsook: I’d be happy to. So perhaps the most prominent company that is doing office sharing is WeWork. It’s in the news all the time. I think they’re thinking about going public. WeWork, I understand, has about 400 locations currently in 27 countries. And arguably it’s the biggest tenant in London and New York City. So, what do they do? They enter into leasing relationships with various landlords in largely metropolitan cities, and then they license out the use of that space to a variety of different entities who come in and share that space using different models. And they do it at a premium and that’s how they make money out of the arrangement. It’s a very attractive arrangement right now because in larger metropolitan areas in particular, longterm leases and skyrocketing property prices have really made it impossible for young professionals to think about renting in a metropolitan area.
Lisa Borsook: So if you’re in a startup business and you’re trying to figure out what’s the best way to allocate your capital, allocating it for rent may not be the best use of your money. So what you do is you go to a company like this, and you make arrangements to take a bit of space on a much more short-term basis. You can often get a suite of services associated with that space. You can get complete digital connectivity. Sometimes you can get furniture, fixtures, sometimes staffing. And you can do all of that without having to make a long term commitment. In terms of cost, you can take all that pot of money and you can apply it towards your startup business. It’s also a way for larger companies that don’t have any footprint in the particular city to test out a market. So I’m told that that’s what Amazon did in Vancouver.
David Thompson: So do you see there’s different structures to the deals? You talk about membership, or you talk about subleasing, so are there different ways that tenants can get involved or members can get involved?
Lisa Borsook: There are a whole bunch of different models that people are using. Imagine a company that operates largely with consultants. If it leases a floor of a building, half of those offices could be empty at any given point in time. So instead of paying for space that nobody’s using, you can take a floor of a building and people can come and go and use the particular desk or use the particular facility as they need it. So it’s a much more efficient and cost-saving way to use space. And it’s a little different model from the way it started, which was to structure the floors exactly the way you see conventional office space and then just lease out an office to different people.
David Thompson: So you talk about having a designated office, or not. So there’s a term hoteling, which I guess means taking your laptop and parking it at a table or something. Can you sort of develop that for us a bit?
Lisa Borsook: What I understand, for instance like you and I occupy space in the TD Center, and what I understand TD is doing with 20 floors in this building is creating more of a hoteling structure. And the ambition is to renovate a whole bunch of work areas, turn them into a different kinds of more collaborative and creative work environments. And then within that sort of kind of much more open space idea, they create phone areas, smaller enclosures where you could have more private conversations. They include conference rooms which have video conferencing screens. They put in lunchrooms. But the workspaces themselves are really open and you just move around them with your laptop. That’s what really “hoteling your employees” means. And it works really effectively if, for instance, you’re in a consulting business, and you have employees that come and go that don’t require a regular office every single day, five, six, seven days a week. So it’s a very efficient way to use expensive space and to make sure that all of your space is getting used. Because if you walk into a lot of sort of much more conventional office locations, you’ll find that half of the offices are empty. Well that’s just square footage you’re paying for that nobody is using. If you hotel your employees, then the objective is to be able to fill up all of your space at different times with people as they come and go.
David Thompson: So Lisa, what do you think in general is driving the trend in Canada?
Lisa Borsook: Well, I think that certainly this growing startup community that we have is a significant factor. These are companies that are trying to find ways to more efficiently use their money, and they’re trying to find ways to more efficiently use space. They also say that it’s certainly impacted by millennials in the workplace. So millennials are largely living in much smaller living environments. And when they come to work, they’re looking for a place where they can connect with their colleagues, where they have lots of space to socialize with people, and also of course a wireless environment in which they can work with some sense of security. So, the answer I think is that the trend is being driven by what people describe as a growing demand for community. And some of these companies offer that community in innovative and interesting ways. They offer you a speaker series, classes, members’ events. They connect you with other people that are sharing your space. Or if you’re in a membership arrangement you can actually find a way to use space in 15 or 20 different cities. So there’s a lot of advantages to new startup businesses in particular and people that are trying to find new ways to attract employees and breed collegiality and connectivity.
David Thompson: Right. So part of it, I guess, is efficiency of using your real estate, but what else do you think is driving the trend?
Lisa Borsook: I’ve been searching for an apartment for my son who’s just graduated from university. And if you’ve looked at apartments in the metropolitan Toronto area, you know that they are living in 750 square feet of space. So, one of the benefits of office sharing, coworking spaces, is that it actually encourages employees to come to work because they have a larger environment to occupy, and they have the opportunity to collaborate and work creatively with others within that space. And that’s something that seems to be very welcoming. It gives them a chance to get out. They have lunchroom facilities, they have other opportunities to work collaboratively. And that really resonates with people who are living in tiny little apartments.
David Thompson: Right. And whether they wear their fuzzy slippers or not is probably up to them when they come in in their pajama pants or whatever. Not saying your son would do that.
Lisa Borsook: No. I can’t say whether or not they show up in their slippers.
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David Thompson: So the documentation, the paperwork, how does that work? Because it seems kind of a little bit of a flexible arrangement. So how do you do the paperwork?
Lisa Borsook: It’s a great question. And different companies who are the principal renters of the space use different models with respect to the people that they’re letting use their space. So the company up on top, it’s entering into a pretty conventional leasing arrangement. So it finds some space that it wants to use for this office sharing purpose. It determines the benefit of that space principally by reference to location as opposed to other amenities because it wants to make sure it can fill up that space at a premium. It leases the space, and it usually does it on a fairly longterm basis with a conventional leasing model. The terms of those documents are going to be different, and we can talk about that later. The idea though is that they then subcontract out that space to whoever’s using it, and there are different models for that. Some people use what are called license agreements, and they have terms for the occupancy and use in exchange for which the person using this space pays an occupancy fee and then gets perhaps various other additional services and amenities for which they pay extra, typically on a per use basis.
David Thompson: So if you’re the user, you’re the tech company, and you’re going to be the sub tenant or the licensee, how would the paperwork work? What would the documents need to say?
Lisa Borsook: Well, there are different kinds of documents depending what company you’re contracting with. And it can be a licensing or a sub-leasing arrangement. Those are two different legal concepts. It can be a membership arrangement, which is another kind of concept that’s used by these office sharing companies. I think the important thing to think about is not so much how they name the document, do they call it a sublease, do they call it a license, do they call it a membership arrangement? What you really want to know is what you’re getting out of that arrangement. So, are you locked in for a specific period of time? Do you have any exclusive space that’s specifically for you?
David Thompson: So for example, if I wanted to use a meeting room or I wanted to get photocopies or something, I could buy those à la carte from the supplier.
Lisa Borsook: 100%. You understand exactly what they’re doing. And then for companies that are larger, that have a bigger footprint may be in different cities, they ask you to enter a membership agreement. So then you pay a membership fee and there are different subcategories of membership. And each of those different subcategories entitles you to a different suite of services. So for instance, if you’re really interested in having a social relationship, you might enter into a social membership, and then you would get the benefit of networking activities, classes, special events. And that may also include day passes or access to other centres within the network. So they use a membership model, and then you pick the type of membership that you’re looking for that suits your business.
David Thompson: Is that membership, is that for Lisa and David? Or could that be for two people of your new startup?
Lisa Borsook: It could be for a company, for instance. So, if you want to take a certain kind of membership as a company, as a startup company, then it wouldn’t really matter as much if it was you specifically that was coming into the space or somebody within your company structure.
David Thompson: Right. So, I’ve heard that some of these companies are losing money. Why do you think they would be losing money? That kind of doesn’t make sense if they’ve got this premium price on their real estate.
Lisa Borsook: Well, that’s a great question too, and I’m not perfectly sure that we know the answer. What I’m told is it’s not a question of demand. They seem to think that there’ll be an endless demand for this kind of space. But it’s more a question of their rationalizing the costs associated with the suite of services that they provide to their members, and maybe they haven’t done that perfectly.
David Thompson: Oh, right. So they’re not charging enough for everything that they have to provide, and they’ve got that overhead of the main lease. Now what does the head landlord think if it’s a big office building, and Cadillac Fairview is in our building and all of a sudden they’ve got somebody subletting or licensing to all of these people. Are the landlord’s getting involved? Are they leveraging it at all?
Lisa Borsook: There are some landlords that can’t figure out why they would lease space to a company like this when they could do it themselves. So they’re resisting the trend to lease space to office sharing companies and trying to do the same thing in their own buildings. We could get a little more granular than that. We could say that in the downtown Toronto market, the downtown Vancouver market, finding office space is so impossible that landlords don’t really care who they lease to. They’re just trying to get the biggest deal they possibly can, the most amount of rent, and given what a premium people are paying for space, they don’t care whether they’re leasing to that company or another. But there are challenges associated with leasing to an office sharing company that landlords do have to pay attention to.
David Thompson: What do you think an economic downturn would have? What kind of impact would that have if there is a recession? I’m not going to say the D word, but if there’s a… if it goes badly in the economy, would these companies get busier or do you think they’d get less busy? What do you think?
Lisa Borsook: Arguably, if a lot of these startups or whatever decided that they wanted to walk away from the space, it’s much easier for them to do that. They have no covenant to start with, which is something that landlords have historically always looked for.
David Thompson: So what do you mean by covenant?
Lisa Borsook: The covenant is the credit worthiness of the particular occupant. So landlords who are leasing to office sharing companies are looking at their covenant. The office sharing companies are not really looking at the covenant of the people whom they’re licensing their space to. So arguably anyone could license that space, and if things went badly in their business, they could walk away from that space. And the question is, well, what would happen if there was a general downturn and everybody walked away from this space? Some people say, well, they’re too big to fail, that landlords have leased so much space in greater metropolitan areas to these companies that they’re not going to let them fail, they’re going to sit down and try and renegotiate their arrangements to make sure that these companies don’t fail. The other side of the coin is that there’ll be more people who might have otherwise entered into more conventional leasing relationships that will actually look for this kind of space because they don’t have to make as big a financial commitment if the economy isn’t as sturdy as it is now.
David Thompson: So if I was going to be a member or a licensee or a subtenant, any of the ways you talked about structuring the deal, so if I was going to be the user, the end user, I’ve got my little startup co., And I got three or four people and we want to get involved with this, what would I be looking at? What would be my concerns if I’m going to be the subtenant or the licensee?
Lisa Borsook: Obviously, if you come into an open office environment with three or four of your employees, you’re concerned about confidentiality and intellectual property issues. You want to make sure that within that space nobody can get access to your intellectual property. So you’re going to want to make sure that the provider of that space has a secure internet connection and that the possibility for a breach with respect to your own confidential information is more remote or it’s protected in some way. You also have to be concerned about the other uses within that space. I mean, if there are other uses where they’re leasing a portion of that space to people that are, I don’t know, constantly screaming at one another across the table that they’re working at, that could be disruptive.
Lisa Borsook: So, what you’re trying to do is figure out the best way to protect your interest in the kind of work environment that you are looking for. And if that means that you’re looking for a quiet work environment, you’re going to want to build into your documentation some assurances about that. And you’re certainly going to want to make sure that the head landlord is okay with all of these arrangements. You’re going to want to make sure that the integrity of these arrangements isn’t going to be disturbed by either the head landlord, its lenders, or by other people with whom you’re sharing space.
David Thompson: One last question. Is it true that some of these places have free beer and food to try and entice the subtenants and licensees to come?
Lisa Borsook: I think for sure. I think there’s a suite of services that they’re providing, and in some of them, absolutely, there’s lunchroom facilities and lots of different kinds of facilities that make it very attractive for people to go to work every day.
David Thompson: Lisa, any last tips for landlords?
Lisa Borsook: I think that it’s important for landlords to understand right from the beginning that when they enter into a relationship with one of these office sharing companies, the conventional things that they’ve always protected in their documents, they’re going to have to rethink them. So the provisions in their documents that historically have said that you can only have a certain kind of business operating within those premises, those are going to have to go out the door. They’re going to want complete flexibility on licensing and subleasing to other parties. Some of them are looking for rights of first refusal in case they want to take on more space. Generally speaking, landlords aren’t going to have the kind of control that they’re used to having over who’s coming and going into the premises. They want to think about security, they want to think about tenant mix. And at the end of the day, they probably want to look a little more closely at the insurance and the indemnification provisions in their leases to make sure that they’re not going to have any additional exposure created by this new kind of tenancy operating within their building.
Lisa Borsook: So I think that when they go to negotiate, they’re going to have to understand that there are different kinds of things that they need to be concerned about. And similarly, they’re going to have to make concessions with respect to things that they’ve historically protected, that these office sharing companies need to have enormous flexibility with respect to.
David Thompson: Well, that’s been great. Thanks very much for joining us this morning. And thanks to everybody for listening. We’ll see you next time.
Narrator: Thanks for joining us for this episode of WeirTalking Leasing, by WeirFoulds, LLP. Please take a moment to rate, review and subscribe. And if you’d like to hear from our lawyers on another topic, send us an email at email@example.com.