Office lease agreement for IT coworking: what should be in it

Many IT companies which have realized that joining Diia City won’t be in their best interest have begun restructuring into a coworking – and, as expected, have encountered problems with changing their lease agreements. Most landlords aren’t particularly fond of such initiatives.

Even when they agree to it, they often try to sneak in new responsibilities for the tenants, raise the rent, or come up with some other exotic demands. Right now a lot of companies are looking for a new office for this very reason, which goes to show the importance of doing your homework before signing a lease agreement for the stability and security of one’s business.

So today we are going to discuss provisions that should be present in lease agreements aimed at creating an IT coworking space. We will also examine other aspects that should be specified in this document and name unacceptable terms that landlords are likely to suggest.

A risky way to rent an office

There’s a lease scheme that you shouldn’t agree to under any circumstances if you intend on moving in smoothly and for a long time. Here it is.

When office space is owned by an individual, he must pay a tax in the amount of 19.5% of the lease agreement’s value. In order to optimize the tax burden, he creates one or more sole proprietorships (depending on how big the space is), registering them under his aunt, son, driver, etc. Then he rents that space out to them for a pittance (which, of course, they aren’t paying anyway). These sole proprietorships, in their turn, sublease the space to you at the market price.

Thus, you’re making arrangements with the actual owner, but officially, you sign the agreement with a sole proprietorship he controls, which brings his expenses down to 5% tax + any payments to the sole proprietorships for their services.

This kind of arrangement is extremely dangerous for the tenants. No matter how great and detailed the agreement, you’re still signing it with a sole proprietorship, and if one day the owner raises your rent by $15 per square meter, that agreement isn’t going to help you.

That’s because, under the terms you’ve agreed to, you’re renting the space from the sole proprietorship, which is going to lose the right of sublease as soon as the actual owner terminates his contract with it. Then you will either have to pay up or move out.

An important lease condition for the IT coworking model

Structuring an IT business into a coworking space in Ukraine today is the most expedient and most secure solution for a company. If you are planning to rent an office for IT coworking, keep in mind that the lease agreement should grant you the right of sublease.

This is to enable the coworking operator to sublease spaces, with the landlord’s official authorization, to coworking members, who are usually sole proprietorships.

When signing a new lease agreement or renegotiating an existing one, be sure to read it carefully. If you want the lease to last, the relationship between you and the landlord should be clearly defined and understood by both parties. With this in mind, let’s talk about what you should pay particular attention to in the lease agreement.

If you wish to restructure your business into a coworking space, get our advice on lease agreement terms here.

What should be included in a lease agreement for IT office space

The agreements that landlords offer all too often have all sorts of obligations and prohibitions for the tenants and only a modest list of those for the owners themselves. Before signing one, you can, and should, discuss and incorporate other provisions, those aimed at protecting you and your business.

If you have already found a suitable place, make sure the agreement contains the following provisions.

1. The rights and obligations of the parties. This paragraph should give a clear and exhaustive answer to the question “What we can and cannot do in the office.”

The tenant’s obligations should be sensible, and shouldn’t be a source of constant stress for you and your colleagues. To give an example, I once saw a lease agreement under which the tenant had to pay a fine of UAH 5,000 for opening a window while AC was on. You shouldn’t agree to terms like that.

The landlord’s obligations should also be clearly spelled out. The more detailed this part will be, the better you’re going to understand where you stand with your landlord.

2. Liabilities of the parties. Those stem from the obligations. This section details what repercussions there will be for the party that violates the terms of the agreement.

Say, water from a leaky pipe gets all over your equipment while it was the landlord’s responsibility to monitor such things and conduct maintenance when required. If he allows a breakdown like that, he should, as one option, compensate you accordingly.

The tenant’s liabilities should be specified as well.

3. Responsibilities involving the use of the premises. Cleaning, waste disposal, security – who is responsible for these aspects of office life, and most importantly, who’s paying for this. Some or all of it may be accounted for in the rent, but tenants can also ask for a separate agreement on these services.

4. Procedure for paying utilities. This also can be included in the rent. Sometimes there are meters installed, and you are paying for what you’re actually using. There can be situations, however, when you’re getting the bills but don’t get to see the meters – this option is by far the worst, as you could end up paying not just for yourself, but also for some guy’s nightly Bitcoin mining.

Therefore, it is important to agree on, and put in the text of the agreement, the procedure for monitoring the use of and paying utilities. You should be aware of what you’re paying for.

5. Good internet connection. This service is often already included in the rent as well, but bad/unstable connection could still happen.

The owner may be telling you how fast and stable the connection is, but it’s better to see it in action first. If it turns out that the internet is not good enough for you, you could ask for a lower rent and find an ISP that suits you.

6. Renovations. It’s not uncommon for a landlord to start raising the rent just a few months after an IT company renovates the office space. It’s all done properly and within the bounds of the agreement: you get your one month’s notice, and then you can either pay up or move out.

Since renovation is essentially an investment in the premises, it would make sense to state in the lease agreement:

• that the landlord, for the period of 2-3 years, may not terminate the agreement,

and/or

• that the cost of renovation must be included in the rent (reduced monthly payments or exemption from rent for several months, depending on the amount spent on renovations).

7. Schedule. You should discuss this with the landlord, and, if you’re satisfied, put it in the agreement. It will spare you from a situation somewhere down the line when you need to work late or at night, but then a security guard comes in and asks you to vacate the premises, because they only work until 7 pm.

8. The issue of price. You must specify not just the rent itself, but also the mechanism for changing it.

Most often, I see lease agreements that say something along the lines of, “If the landlord decides to raise the rent, the tenant has a month to agree or move out.” Never sign a lease like that! The rent is likely to go up more often than you think.

Specify in the agreement that the rent may be changed after discussion and upon agreement by both parties, on the basis of a document signed by them both. Alternatively, the agreement could state that the rent may grow by, say, $5 per 1m² per year.

9. Termination of the lease. It’s in your best interest to make sure that at no point the landlord will be able to kick you out, or, at the very least, to do it without warning.

Through negotiations, arrange for – and mention it in the agreement, of course – that the lease  may not be unilaterally terminated, for, let’s say, 2 years. Furthermore, the party initiating early termination will be liable to pay penalties.

It all sounds awfully complicated

I’ve heard this from more than one of my clients looking to sign an office lease agreement. Later they had to use our services again – to sort out conflicts with their landlords, or even to liberate their own equipment from the office, because the owner was refusing to let them back in.

The more time and attention you devote to the agreement before signing it, the faster and easier you’ll find negotiating other things with your landlord in the future.If you’ll soon be moving into a new office and would like some help, contact Tretten Lawyers here. It’s our job to keep your affairs in order.