Co-Working space, a recent concept is indeed an innovative and laudable one for its key benefits such as cutting costs, flexibility and networking among others. In India the recent start-up culture has only boosted the never-ending need for quality office space in a cost-effective manner. The idea of providing services in the form of Co-Working spaces and its success stories has set its foot in India as well.
What is Co-Working?
Co-working the situation in which several employees of different companies share an office space, allowing cost savings and convenience through the use of common infrastructures, such as equipment, utilities, receptionist and custodial services.
It is needles to mention that any business set up would entail a set of legal due diligence task to minimize legal risks, legal requirements to be fulfilled before commencing business under existing law in force and will also face legal challenges under the existing legal regime. Therefore, it is only logical to understand the Co-working space from a legal perspective.
THE BUSINESS FRAMEWORK AND APPLICABLE LAWS-The business model of Co-Working space can be run under two forms:
- Ownership Model– Wherein the land upon which the Co-Working space is to be developed whether or not it has an existing built-up structure is purchased or otherwise owned by the Co-Working Company.
- Landlord Partnership– Wherein the Co-Working company enters into a leasehold agreement with the owner of premises upon which the Co-Working space is to be provided.
The said two framework and the business sought to be provided is subject to multiple statutes in force such as Indian Contract Act, 1872, Transfer of Property Act, 1882, Information Technology Act, 2000, Intellectual Property Rights and several other acts. However, as on date there is no specific legislation in force to deal and regulate exclusively with the legal issues arising from such emerging business industry.
Legal due diligence/requirements for co-working space companies:
- Legal Title: It is crucial to have the legal title of the premises where the business is sought to be developed thoroughly verified whether it be on lease hold basis or ownership. The title of the seller/landlord should be perfect at the time of executing the leasehold agreements/sale purchase agreements. A proper due diligence would include to do a complete check of any stay order, injunctions issued against the said premises and include a representation and warranties clause in the agreement assuring the same. Additionally, if there arises a situation, one can obtain an Encumbrance Certificate from the concerned Sub-Registrar which would reveal if there is any existing charge over the property by way of mortgage etc. The conveyance deed of the said property is to be perused to ascertain that if the property has other co-owners whose consent is legally required for executing a lease hold agreement/sale agreement. Lastly, it should be properly checked that the user of the land sought to be taken up should be of “commercial” and not residential.
- Legal Clauses: The Co-Working space opting to work under the Landlord Partnership Model should ensure incorporating the vital Legal Clauses in the leasehold agreement. The most vital is undoubtedly the clause pertaining to sub-lease. There should be a clause in the Lease hold agreement which clearly permits the Co-working space in its capacity of lessee to further sub-let the premises with flexibility in tenures. This clause would lay the foundation of the Co-Working space business and its scope. Further, the author believes that the clause pertaining to lock-in period of the lease hold agreement i.e. the tenure for which neither party can terminate the lease without cause is relevant. Therefore, it is advisable to have longer lock-in period so that the potential sub-lessee feel secure and a sense of permanency is struck when entering into sub-lease arrangements.
- Sanctioned plans: If the premises have an existing built-up structure which is intended to be used for setting up the Co-Working Space, then it should be ensured that the built-up structure is in conformity with the sanctioned plans and layout approved by the concerned development authority and there is not illegal construction. It may cause serious legal impediments on smooth operations if any notice is issued under concerned Municipal Act for demolition of any illegal construction and more importantly when such space was let out to a client.
- Licenses: The Co-Working Space would have to ensure that all the licenses that are ordinarily required to run a commercial building is procured. One of the USP of such business is to provide 24*7 power back up and if Diesel Genset is sought to be used for the same then certain permissions for the same is to be obtained. Further, if the property is high rise multi-storey building which uses lifts and elevators then necessary licences has to obtained under the Lifts and Elevators Act. Registrations under Shops and Buildings Act may also be required under the concerned State Act.
- Incorporation: Like any other business entity the Co-Working space entity will require to incorporate itself as a partnership firm, LLP, Company etc. Each of them is governed by separate law and rules and differ in legal compliance requirements. Once incorporated it would require to obtain GST, PAN and other important registrations.
Other than the aforesaid points the Co-Working Space also needs to keep vigilant to minimize legal disputes, for instance, the reputation of the client and his credentials should be thoroughly verified via properly drafted KYC documents or assigning the task to third party Investigative vendors. This is important as many firms may be involved in illegal activities of running Ponzi schemes duping public or running fake call center which are criminal in nature and may prove to be troublesome for the Co-Working space company. Further, the author suggests that cybersecurity issues should be addressed if they intend to provide common high-speed internet services to all its clients for securing data privacy.
To conclude it would be safe to say that there is existing law dealing with different legal issues that may arise in the Co-Working industry however legal issues arising from and peculiar to Co-Working space is yet to be identified. Thus, there is no existing single piece of legislation to deal with the Co-Working industry neither the need has been felt to regulate it however it will be interesting to see if we can witness any such legislation in the near future in the wake of boom in this industry.
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