The Fall of The Lease
To lease or to license — that’s the question. At least it should be for most companies about to embark on a hunt for office space.
The dilemma didn’t even exist a few years ago, when the only option was signing leases with landlords, arrangements that strapped businesses into long-term legal agreements crammed with restrictive and often punitive clauses. But now, thanks agile office innovators like Knotel, the question increasingly looms for office dwellers.
The pro-license arguments range from custom office spaces to on-call office managers. But they also revolve around nitty-gritty legal issues.
A pair of savvy real estate lawyers with the national firm Lowenstein Sandler LLP recently crafted an extremely helpful guide to license versus lease — no legal background necessary to understand the prose.
For the license side of the piece, it focuses on coworking arrangements that dot nearly every city in America these days — the rooms full of cheek-by-jowl entrepreneurs and start-ups, complete with coffee on tap for the morning and a keg for … whenever. Knotel is a different kind of agile office leader. Instead of shared space, individual companies claim entire floors of buildings. Shared niceties between employees from different companies might happen in the building lobby or the elevator, but they aren’t foisted upon one another within the office. Either way, most of the drawbacks of the license model revolve around coworking spaces. We surmount the cons at Knotel, and our clients enjoy all of the pros.
The piece is worth reading in its entirety, but we understand how busy you are. Agility is everything.
So here’s the Cliffs Notes.
What is a lease? You have probably signed at least a few in your life. It’s a contract governed by real property and landlord/tenant law that involves “stringent underwriting requirements on tenants and require(s) substantial security deposits, guaranties and insurance coverage to protect themselves.”
What is a license? A license is a comparatively simple document, typically involving far less — if any — legal negotiations between landlords and licensees. Licenses often offer less legal protections for licensees than for those entered into lease contracts; however, this potential downside is mitigated by Knotel’s model (more on this below).
What are license advantages?
- – Easy for non-lawyers to understand, comparatively short, and often quick to execute.
- – Less expensive than leasing. Things like security deposits, guaranty and insurance coverage often not necessary, flat fee covers wide range of costs, and licensees pay for exactly what they use, instead of paying of unused space.
- – Flexibility reigns. License agreements usually are much shorter then leases, and ending license agreements is generally easier. “Start-ups especially like the flexibility of licenses because often they are not able to predict their space needs over the long term and do not want to be locked into a years-long lease,” the authors say. But it’s not just start-ups that appreciate this arrangement — most fast-growing companies desire it.
- – Casual environments are common. While the piece here refers to the classic coworking space, given the flexibility of working with Knotel licensees have the option to turn their office into whatever they want — rows of cubicles, or a landscape of open desks, ping-pong tables, microbrews on tap and a yoga room.
What are license disadvantages?
Most of the disadvantages outlined in the piece apply to coworking spaces rather than Knotel. For example, the piece references “confidentiality and privacy concerns,” due to sharing a workspace with potential interlopers. But since Knotel licensees gain entire floors, that is not a concern.
Then there are technological concerns — with shared workspaces, it might be more difficult to address custom technology needs, due to the relatively chaotic nature of coworking spaces. But again, this doesn’t apply with Knotel. Licensees build-out their technology needs as they see fit.
The authors also highlight uncertainty — the risk of getting kicked out of one’s space with very short notice, say, if another larger tenant comes along and is willing to take more space. Trevor Clark, VP of Growth at Knotel says that applies to month-to-month coworking arrangements more than flexible workspaces like Knotel: “The risk of early termination [at Knotel] is so miniscule that it’s a red herring compared to the risk of signing a lease that you can’t get out of.”
To license or to lease? Really, it doesn’t seem like much of a dilemma at all.