Co-sharing work spaces attract high revenues – but they also carry risk

The concept of a co-sharing economy has become increasingly prevalent, for both physical objects but also for commercial work space.

This growth in the “sharing culture” means we have seen a heavy sprinkling of spectacular interior designs emerge, offering top-end lifestyle amenities such as gyms, shops, cafes and restaurants housed within buildings, to allow higher-quality spaces to be created.

Although this represents a burgeoning business opportunity, given the strong market demand and high investment returns, it also raises several areas of accompanying business risk.

Rather than owning a property in Hong Kong, most operators run their business within rented premises.

First they often have to pay high amounts for decoration and initial deposits, coupled with insurance and marketing expenses to attract customers, members, sub-tenants and investors.

They may also have to organise social activities for tenants such as yoga classes and educational seminars, and always maintain high standards in common areas.

These can all add up to immense financial pressure when businesses launch, as they have to generate solid revenues right from the get-go.

If these operators cannot meet their financial obligations, they may not be able to continue and run the risk of re-entry by the landlord. This presents the key risk for operators, landlords, investors and sub-tenants alike.

Before any workspace fit-out process can start, operators and landlords have to reach consensus on the rent-free period, the responsibilities and liabilities of the operators, and when the business will actually start having to pay rent.

Any renovation work will have to comply with Buildings or Fire Ordinances or other regulations, and any Government Leases, Deed of Mutual Covenants (DMC) or management agreements signed for the building, with some approvals needed from relevant government departments.

And the actual fitting out process, if not managed carefully, may prolong the rate of recovery of costs and the start of revenue-generating operations.

Another tricky issue arises if a number of sub-tenants collectively rent a co-sharing space.

With multiple sub-tenants, there can often be no clear delineation between them, and when a particular site becomes in need of repairs or upgrade, the landlord or operator may face difficulties in ascertaining who ultimately bears the cost.

To avoid any confusion, sub-tenancy agreements have to clearly set out the responsibility for maintaining the state of the premises and its facilities, and possibly add the cost of any potential risks onto the rent.

Land use is also an important consideration for any owner or operator, especially given the current trend of co-living and co-working spaces coming under the one roof, meaning mixed use for the buildings concerned.

Allowances would have to be added to meet relevant Outline Zoning Plans, DMCs and government leases, in these cases.

The types of activities organised in the building can also affect electricity, water and air-conditioning use, and the number of actual people working in a space needs to be taken into consideration.

Relevant trade licences for their intended business activities have to be carefully managed, too.

For instance, a landlord may lease a building to an operator, subject to the condition that no occupants sell or make food and drink on site, or run any moneylending activities.

In such cases, restrictions need to be clearly included in arrangements with members, sub-tenants or licensees.

The last key item to note is the right of re-entry granted to landlords under most leases, to repossess any property if specified breaches of the lease occur. If there’s a default, the landlord can exercise that right and the master lease or tenancy can be forfeited and all sub-tenancy agreements terminated.

In other words, all the actual occupants of a property – no matter how much they spent fitting it out – can be legally kicked out if breaches occur, leaving them with possibly high losses to them, other members, sub-tenants or licensees.

As the entrepreneurial and freelance economies continue growing, so will co-sharing.

So it is vitally important to be fully aware of all the business and legal risks involved.

Polly Chu is a partner at global law firm Withers in Hong Kong