Coworking Agreements: What Founders Should Read First

Coworking agreements often describe themselves as a license or a service agreement. Cornell's Legal Information Institute defines a license as permission to enter or use property owned by another, and notes that it can have limits and can be revoked or forfeited. Cobot, a coworking software company, describes the coworking agreement as a service, compares it to a hotel accommodation, and says the space is not leased at any time.

That matters because you may not have the protections a tenant would expect. A law firm article from Norris McLaughlin describes a license as freely revocable, with no protection for the licensee against interference by the licensor, while a lease generally turns over exclusive possession for a period.

The same article makes a second point: the label does not settle it. It says courts look to the terms of the agreement, and that features such as notice before termination, cure periods for defaults and holdover provisions may suggest a lease even if the document is called a license. The rules differ by state, so treat the label as a starting point and ask your attorney what you actually have.

• ✓Does the agreement call itself a license, membership or service agreement?
• ✓Does it say that no lease or property interest is created?
• ✓Can the operator relocate us, or end the agreement early? On what notice?
• ✓What is our remedy if the operator cannot provide the space?

Some agreements renew automatically unless you give notice, and the notice date can fall well before the term ends. A New York tenant broker, Metro Manhattan Office Space, has published a first-person account of a membership that would renew for a full calendar year unless the member opted out by a set date. That author has an interest in promoting direct leases, as do we, so take it as one example. It still shows what a founder should look for.

• Find the renewal term. Does it renew month to month, or for another full term?
• Find the notice deadline, and how many days before expiration it falls.
• Find the notice method. Some agreements may require a particular form or an email to a particular address.
• Ask whether the operator's notice period is the same as yours. The same account contrasts the member's long opt-out window with the operator's short notice when the location closed.

On signing day, put the notice deadline in the calendars of at least two people, with a reminder set well ahead of it. Founders change roles, and office managers leave.

The advertised membership price is only the first line of the bill. Read how it can change, and what sits outside it.

• ✓Can the operator raise the price during the term, or only at renewal?
• ✓Is there a cap on increases, or can the renewal price be whatever the operator sets?
• ✓How much notice do we get of a new price, and does it arrive before our deadline to leave?
• ✓Which items are extra: meeting room hours, guest passes, printing, phone lines, dedicated internet, parking, after-hours access?
• ✓Is there a one-time setup fee, or a fee when we leave?
• ✓Is the deposit refundable, on what timeline and subject to what deductions?
• ✓If we prepay, what happens to the money if the location closes or we leave early?

Pay particular attention to the order of those dates. If a price notice can arrive after your deadline to opt out, you have no practical way to respond to it. In the account above, the member also reported that only part of a prepaid amount came back after a closure. We cannot speak to any other member's experience, but the question of prepaid money is worth settling in writing.

A founder is unlikely to think about a sale of the company while signing up for desks. Yet acquirers and investors do ask for a list of contracts, and a small agreement can create an awkward moment during diligence.

• ✓Can we assign or transfer the membership at all? Is the operator's consent required?
• ✓Does a change of control or a merger count as a transfer?
• ✓Can a parent or affiliate's staff use the space?
• ✓If we form a new entity, for example in a reorganization, does the membership move with it?
• ✓Is anyone personally guaranteeing the agreement, and does that continue after a sale?
• ✓Can we add or remove named users without amending the agreement?

Do not assume a short agreement is silent on this. Have your counsel read it alongside any planned financing or sale, and see our guide to change-of-control clauses for how the same issue plays out in a lease.

A coworking agreement can affect your security position in ways a tour will not reveal. Cobot's sample service agreement, for example, reserves a right for the space to disclose information about a member when needed to comply with law or legal process, disclaims liability relating to access to and use of its services, and caps liability at an amount the operator fills in. Your operator's form may be different, which is why you should read it.

• ✓Who can enter our private office, and when, and is any notice required?
• ✓Does the agreement let the operator monitor network traffic, or collect information from our use of its systems?
• ✓Does it cover what happens to our data if we use the operator's network?
• ✓Can the operator disclose information about us, and to whom?
• ✓Are we allowed to install our own locks, cameras or network equipment?
• ✓What happens to our property left behind when the agreement ends?
• ✓Does the agreement match what we have told customers about our physical and network security?

If you hold personal information, the Federal Trade Commission's guide for businesses recommends locked storage for paper files and backups, control over who has keys, and a plan for dealing with unfamiliar people on the premises. A shared space does not remove those responsibilities, so your security lead should confirm how you will meet them.

Once the five items above are clear, check how the agreement allocates risk if things go wrong.

• Closure or relocation. Can the operator move you to another location? In the Metro Manhattan account, the member reports a short window to object and a short period to leave.
• Liability limits. Expect caps and exclusions, and consider whether your own business insurance covers your equipment and interruption at a space you do not control.
• Indemnity. Cobot's sample asks members to indemnify the space for their negligence and misconduct. Check how broad yours is.
• Disputes. Look for arbitration clauses, class-action waivers and where any dispute must be heard. The same account reports that its agreement waived the right to sue.

If you are weighing a coworking agreement against a sublease or a direct lease, TAG can put the alternatives side by side on cost and flexibility, while your attorney reviews the legal terms. In some cases the operator will negotiate, particularly for a larger private office, but standard forms are often hard to change, so it helps to know which two or three points matter most to you.