This article examines the core conditions of the pre and post-take-over phases during the setting up of a co-working space, and the corresponding obligations of the parties. It is Part V in our series of articles on setting up and operating a co-working space in India.
Part I of the series details the issues addressed by a legal due diligence undertaken on a premises to identify risks associated with converting the same into a co-working space.
Part II of the series details the typical issues addressed by a technical due diligence undertaken on a co-working space to ensure continuous, safe, and incremental operations from the same.
Part III of the series details the safeguards and mechanisms that a co-working space operator can negotiate to nullify or mitigate the adverse affects of the sale of such property to a third party.
Part IV of the series details a few of the owner-rights typically contained in an O&M Agreement.
Part VI of the series details the ways in which operators and users can maintain information security in a co-working space.
The two broad phases when setting up a co-working space are the (i) pre-take-over phase, and the (ii) post-take-over phase. Take-over here refers to the operator taking over the co-working space from its owner to commence operations. An Operations and Management Agreement ('O&M Agreement') will provide the specific obligations required to be undertaken by the owner and the operator during the two phases. The pre-take-over phase pertains to the obligations of the owner that deals with ensuring that the property is sufficiently ready to be operated as a co-working space, while the post-take-over phase deals with the rights and obligations of the operator in regards to its day-to-day operations and management of the co-working space. Essentially, neither the take-over of the premises for operation, nor consequently the post-take-over phase can be initiated unless the conditions of the pre-take-over phase have been satisfactorily met.
One of the core conditions of the pre-take-over phase is the completion of all renovations and interior fit-out works in the co-working premises. While the renovation and/ or fit-out plans are determined and finalised by both the owner and the operator, the O&M Agreement may lay the onus of conducting the same on the owner. Consequently, the owner is required to undertake the renovations and/ or fit-outs within a predetermined time period. The owner is also required to obtain approvals and permits required in regards to the renovations. The owner is also responsible for ensuring that the co-working space is equipped with the requisite operating supplies and inventory (e.g. office stationery, F&B, consumer electronic devices, etc.) prior to the take-over date. The O&M Agreement may also address standardisation of design features and fit-outs in the premises, according to which the fit-outs are to be conducted. The parties will typically draw up extensive retrofitting plans to ensure that the finished co-working space is as per the appropriate standards.
The take-over date is a predetermined date when the co-working space would be taken over by the operator to commence co-working operations. Typical conditions applicable leading to the take-over date include (i) completion of all renovations and fit-outs to the premises, (ii) completion of pre-opening promotion and advertising of the co-working space, (iii) completion of soft-launch of the co-working space (including a stress-test) and to iron out any issued identified during the same.
Additionally, the owner and operator are required to finalise the list of employees towards the co-working operations, and the said employees have to be put through the requisite training by the operator. However, since the employees remain on the rolls of the owner and not the operator, it is the owner's obligation to bear the cost of such training.
The parties must also approve the pre-takeover expenses, and the operating accounts are to be opened, where such expenses will be deposited by the owner. O&M Agreements typically require that working capital requirements equivalent to two month's budgeted operational expenses is maintained at all times. This is to ensure adequate funds are available for the co-working space operations. The obligation to provide the working capital funds lie with the owner. In certain cases the operator may also negotiate a 'Launch Fee' payable to it upon the successful launch of the co-working space. Provisions for the same also need to be addressed in the O&M Agreement.
Prior to the take-over date, the operator is also required to obtain all requisite licenses and permissions in regards to the co-working space operations. Parties will also be required to mutually determine the standards of operations to be implemented while operating the co-working space. Additionally, prior to the take-over date, the parties may also opt to conduct a stock-taking of all the fixed inventories at the co-working space to ensure that the same are as mutually approved by the parties. Both parties would then need to sign-off on the same.
The post-take-over phase typically succeeds the successful soft-launch of the co-working space, and only once the issues identified during the stress-test have been resolved. Immediately upon the post-take-over phase, the operator takes over the co-working premises and commences operations in terms of the standards agreed between the operator and owner.
The operator is required to establish rates and charges of service for customers and house rules for customers for follow in the co-working space, draw up employment policies, and administrative rules for operations. The operator is also required to continue its promotional and marketing initiatives in respect to the co-working space.
With the taking over of the co-working space by the operator, the pre-take-over obligations of the owner are typically deemed to have ended (unless stated otherwise in the O&M Agreement). Primarily, the bulk of the obligations now lie upon the operator, and are mostly in regards to the operations and management of the co-working space, and management of accounts. The owner's obligation is limited to providing of adequate working capital, and taking appropriate action in regards to ensuring the fitness of the premises, renewal of permits and approvals, etc., obtaining of requisite insurances, and taking actions in respect of its employees as directed by the operator from time to time.
Originally published 24 January, 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
