Hidden risks in serviced office agreements

What is a serviced office?

This is usually a fully furnished and equipped office space that is managed by a facility management company and made available for short-term or long-term rentals to businesses, varying from one week to a year, or even longer, for example. Agreements for serviced offices are a type of licence, rather than a lease, meaning they come with less security but more flexibility.

The key features of a serviced office are that:

• it is furnished with essential office furniture such as desks, chairs and storage units;
• utilities such as electricity, heating and air conditioning are typically included in the rental fee;
• the licence fee is often based on the amount of desks available and charged on a daily rate;
• services like cleaning, maintenance and receptionist services may also be provided;
• there may be shared facilities such as meeting and conference rooms, kitchens and reception areas;
• Wi-Fi is usually available to the office users; and
• the office is likely to be in a prime location for businesses.

Why opt for a serviced office agreement rather than a lease?

Business entrepreneurs are usually looking for a flexible and cost-effective office solution which a serviced office agreement can provide over a lease. Most leases are longer-term commitments with burdensome responsibilities for tenants, such as repairing and decoration obligations.

As serviced offices are usually fully furnished, it also means that there is no hassle of purchasing office equipment which needs to be moved at the end of a lease. Businesses can therefore move into these offices and start work immediately and the services of cleaning and maintaining the office spaces are also provided, so they do not have to deal with such day-to-day jobs. A serviced office agreement can also be for a very small space, numbering only a few desks for example, whereas a lease is often for a much larger space, which a start-up may not need yet.

The decision to opt for a serviced office agreement or a traditional lease depends on the specific needs and circumstances of the business. Businesses seeking a quick setup often find serviced offices to be very convenient, but as is the case with any attractive ‘solution’, there are often associated risks which licensees need to be aware of.

What protections available in leases are missing from serviced office agreements?

The specific terms and protections in leases versus serviced office agreements can vary, but there are some general differences to keep in mind.

• Leases are clear on the rent payable and whether there are going to be increases in rent, and how those increases are to be determined. Serviced office agreements are often short-term, and the rent demanded can often increase at short notice, on a ‘take it or leave it’ basis.
• Certain leases provide tenants with security of tenure rights under the Landlord and Tenant Act 1954, which allow business tenants to renew their lease at the end of the term. There is no such right in a serviced office agreement.
• Traditional leases often involve negotiations between landlords and tenants, providing an opportunity to tailor the terms to better suit the specific needs of the business. This can include negotiating rent increases, break clauses, and notice requirements. Businesses can work with legal professionals to draft a lease agreement that specifically addresses their concerns, ensuring that important terms related to maintenance, repairs, and other responsibilities are clear and mutually agreed upon.
• Leases are extensive documents that work on covering numerous events for the duration of the lease term, whereas serviced office agreements are frequently tailored to the owner’s requirements and may be silent in terms of any remedies a licensee may have in case the owner breaches its obligations.
• To stay true to being a licence, a serviced office agreement will have a version of a ‘lift and shift’ provision, meaning the business can be moved around the serviced office, and the space being let will not be exclusive to the business – other occupants and the provider will be able to pass through it.

What to look out for in a serviced office agreement

A business should clearly understand the total cost of renting the serviced office, , and what services and amenities are included in the rental fee and whether there are any potential extra costs. Serviced office agreements are often accompanied by the owner’s hefty terms and conditions, which need to be carefully examined alongside the agreement. Such terms and conditions usually contain onerous payment requirements, such as payment by direct debit, or a reduction of services provided to the business.

The office space a business is renting will also need to be clear – the number of desks, the layout, whether the space can accommodate any future growth or changes in their business, and the notice period for having to move to another location. Permissions, such as access to other facilities like kitchen areas, or the ability to have visitors, should be well understood to ensure these are adequate. It may be, after careful consideration, that a longer terms and more formal lease is more appropriate for the needs of the business.

If you need help reviewing a serviced office agreement or a lease, get in touch with our Commercial Real Estate team here.