Co-working spaces need due diligence on transient members

Co-working is a business service provider model that involves individuals working independently or collaboratively, in a shared office space. Traditionally, shared workspaces were hotel lobbies, coffee shops, cyber-cafes and restaurants. Cafes lease out seats even today. The trend of allocated co-working space in commercial buildings is all set to grow in India with its current potential freelance workforce at over 15 million. Estimates state that by 2020, over 13 million people in India may be working out of co-working spaces.

India’s mushrooming startups, MNC’s and freelancers prefer co-working spaces due to the multitude of advantages like the reduced operational costs, flexibility, diverse work environment as well as zero fixed capital investment. It is also convenient for international firms searching for provisional workspaces in a new country.

Though co-working spaces are causing a massive disruption in the workspace industry, there are potential adverse effects. While making the most of its advantages, there is a need for due diligence on clients/members that goes beyond collecting identification and corporate documents. Despite the comfort and clarity at co-working spaces, there are numerous factors that may have a direct impact on businesses. Between safety rules, standards, access conditions and prevention rules, there are enough reasons that co-working spaces can give one cause for concern. Since there are no laws specific to the co-working space, it is even more imperative in the present scenario to undertake risk consulting. With time, bigger corporates are also setting up their offices in co-working spaces. Without due diligence, there could be a negative impact for the business, and this could also create a loss of confidence and integrity.

Here are some reasons why due diligence is an essential process in co-working:

• Reputation

A co-working space must safeguard its premises from being used for illegal activities like terrorism, money laundering, Ponzi schemes and other business frauds. One needs to ensure that there is no negative reflection on their reputation, and this boils down to a thorough fact check on potential clients. You have to be diligent about promoters as well and check to see if there is any fraud, money laundering or bribery cases against them. This could easily happen to co-working spaces.

• Restrict Misuse

It’s natural for occasional disputes to arise when sharing space with others. When it comes to leases and agreements, each country has specific laws and one must protect their business and space during operations. There is also the issue of fraud against the landlord. A fraudster can easily misuse the space that they have taken on rent and the co-working space could even be used as a ‘boiler room’ operation. The risk is higher in co-working spaces as down payments and advances are a smaller amount, which makes it easier for a fraudster to set themselves up in a shared space rather than a traditional setup. It is therefore a necessity to check if there are any legal cases running against the company.

• Security

In co-working spaces, one needs to be aware of the client in terms of background by checking the authenticity of documents provided. A formal procedure to ensure authenticity and integrity of documents and records of clients is lacking. An official email ID, certificate of incorporation (for a company), GST registration certificate, PAN card and one address proof are all that is required to rent a dedicated workspace. At many co-working spaces, ‘hot-desk’ individuals provide far lesser information and no deposit. In most cases, documents provided are not validated or formally scrutinized. This means that there is no confirmation of the company’s actual business, services or details of any legal concerns in the past.

• Legal ambiguity

When it comes to illegal activities being conducted by the tenant, a landlord is generally held responsible. Any workplace violence or sexual harassment incident requires authorities including the local police to visit, question, or even directly involve the landlord in investigations. Since co-working spaces are a new category of commercial business, there is no significant legal clarity or framework for disputes. Therefore, one needs to look at how they are covered in a legal disagreement or liability. There are certain factors to consider, including the lease agreement between the landlord and the co-working space if they are not the same person, the licence period, the consequences of termination, and more. One also need to do a thorough check on whether the building and pollution laws have been adhered to by the owners. The Karol Bagh, Delhi incident that happened earlier this year is an example where the fire law was violated.

In a generic contract, the owner of the co-working space is indemnified from any actions of the client. Such an indemnity, however, does not absolve owners in case of criminal activities. In the past, cyber-cafes were subject to regulation due to various issues created by its users. The POSH Act defines a workplace to be any place visited by an employee during their employment. This implies that a co-working space would also be under the ambit of ‘workplace.’ So, who would be held responsible? Ignorance of the law is not a defence; therefore, it is important to run a proper background check and be duly diligent.

The co-working space is an emergent industry that has taken on the traditional leased and rental market workplace aggressively. As this industry matures, owners and investors will have to grapple with prevailing weak controls and systems and make sustained efforts to catch up with the exponential growth of the industry. One of the minimum components of these checks and balances would be enhanced KYC checks.

Due diligence is not an option - it is mandatory if you plan to run a long-term business. A co-working space must protect itself from being used in malfeasance, being conned or allowing its reputation to be tarnished by its tenants.

(Edited by Suruchi Kapur- Gomes)

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