Coronavirus impact: Tenants occupying co-working spaces ask for flexible terms following pandemic

With the Maharashtra government announcing a temporary shutdown amid growing concern over the spread of coronavirus and most employees or clients deciding to work from home, there is confusion and anxiety among those who have booked spaces in co-working offices – so much so that some have already started renegotiating terms, real estate experts said.

A co-working operator, who did not want to be named, said that they have had to close down more than 10,000 seats following the announcement of a temporary shutdown in Maharashtra. “This is a directive from the government and we have to follow it,” he said, adding “Some clients have requested for more flexibility in their membership agreements.”

Globally, multiple precedents are available where occupiers in markets, where effects of COVID-19 are more pronounced, have asked for refunds. If things were to escalate, this may be the likely outcome in India as well, experts warn.

Sample this tweet – “@WeWork will not let us cancel our 6-month lease or return our $19k deposit. We have a 17-person office that we cannot legally use in Culver City & went remote March 11. They said WE are breaching our contract bc they are open and have ppl working there despite the order.”

Based on a consensus estimate from various international research agencies, the total market for flexible or co-working space was expected to grow from 30 mn sq ft to more than 40 million sq ft in 2020 in India across the top 10 cities this year.

“As much as 75% of this space falls in the managed co-workspace category and 25% in the co-working business centre segment. Based on market feedback, we see the 25% co-working segment, that comprises start-ups and newfound small businesses (that occupy seats in the open plan), to be the first casualty during the pandemic,” explains Anckur Srivasttava of GenReal Advisers.

“In the case of the 75% managed workspace segment, we are currently seeing corporate occupiers revaluating their current commitments, and, unfortunately, if things were to continue unabated, we may expect them to start optimizing their real estate occupation costs in the near future. We also see a re-evaluation of corporate real estate growth plans in the short to mid-term but that situation is likely to unfold in the next couple of months,” he said.

The impact of co-working operators is most likely to see the first quarter profit and loss statements in the red, he warns.

Co-working operators say that they have not yet received requests for refunds but start-ups that occupy seats in the open plan have requested for terms to be renegotiated.

“The force majeure provision is in-built into the agreement from both sides, the tenant and the landlord. It’s too early to comment on how clients in India will react. The call for closure is a directive from the government and we have no choice but to close the facility. We have communicated the same to our clients,” an official of a co-working company, who did not want to be named, said.

Vinayak Agarawal, Co-founder and CTO, myHQ, said the concerns around COVID-19 have led to reduced footfalls at its workspaces. "But we believe this blip is temporary and will only last till precautions are deemed necessary. We aren't seeing any decrease in our immediate revenues. In case the situation grows more alarming and persists beyond April, there might be a decrease of 15-20% in the short term revenues,” he said.

He says that none of the company’s clients has so far reached out to opt out of long-term agreements due to the COVID-19 situation.

WeWork, Awfis and Garage Society refused to comment.

Co-working companies in India typically sign leases with landlords for a lock-in period of one to six years, and service agreements or flexible membership agreements with clients for one day to five years.

The legal recourse available to both clients and the co-working companies is the force majeure provision factored into the agreements signed by the parties in case refund or cancellations are sought due to COVID.

“Termination of membership due to non-usage of co-working space, whether due to COVID-19 or any other force majeure event, would be dependent on the agreement entered into with the user as well as the government acknowledging that such an event is beyond the control of the parties,” said Yudhist Singh,  Senior Partner at law firm YNS & Associates.

“Co-Working companies spend a lot of money in terms of lease rent, fit-outs, maintenance etc. Therefore, unless they are exempted from incurring such fixed costs due to a force majeure event and unless their contractual obligation with the respective landlord, maintenance agency etc. is suspended, they would be suffering an undue loss which may also adversely affect their solvency,” he said.