The litigation of the startup WeWork and its Lease Agreement

In 2019, the startup company WeWork was sued for breaching a lease agreement by its landlord.

WeWork’s business model involves leasing space, redesigning it for co-working purposes, and then subleasing it to individuals, small startups, and others.

The dispute revolved around a provision requiring consent for subleasing.

The Landlord’s Claim: The landlord argued that, according to this provision, WeWork did not have the right to sublease the space without obtaining additional consent. They also claimed that this practice could disrupt relationships with other tenants in the building.

The Tenant WeWork’s Claim: WeWork argued that they were acting in accordance with the lease agreement, which stated that the space would be used for the business purposes and business model of WeWork. Since WeWork’s business model involves leasing for co-working, they believed they were not violating the agreement.

Who was in the right, the landlord or WeWork?

This is just one example of the various disputes that can arise in relation to lease agreements. This highlights the importance of proper preparation when entering into such an agreement.

What is a Lease Agreement?

A lease agreement is an obligation-based legal relationship. Through this relationship, the landlord, as the provider of a specific asset (in our case, commercial space), enters into an agreement with the tenant, as the recipient. They agree on the rights and obligations arising from such a contractual relationship, as well as the amount and terms of the rent. All other aspects of such a relationship are also negotiated.

Lease agreements vary due to different reasons:

• Whether the contracting party is an individual or a legal entity, especially when the tenant is a company as a legal entity.
• The duration of the lease and the amount of rent.
• Special conditions that the real estate, as the object of the lease, must meet to satisfy the tenant’s criteria, such as the adaptation of commercial space to the tenant’s needs.
• The legal and factual condition of the property.
• Other elements, such as the possibility of displaying the company’s logo and the use of parking spaces.

What Precedes a Lease Agreement?

Negotiations for entering into a lease agreement are an essential part of the process. These negotiations can often take several months, so tenants must allow themselves enough time to conduct these negotiations without pressure.

During the negotiation phase, tenants must also be cautious if they have an existing lease agreement. They need to calculate the notice periods that must be respected when terminating the previous lease agreement.

Tenants should align the notice periods from any potential previous lease agreements with the start of the new lease agreement to avoid double rent payments. Several checks also precede the lease agreement during the negotiation process.

Legal Diligence of the Property – Subject of the Lease Agreement

A crucial part of the process of entering into a lease agreement is the legal due diligence of the property. This legal check is conducted by reviewing the one sheet for the property.

If negotiations are being held for leasing a property under construction, this check should include verification of the building documents, particularly whether the company constructing the property has a building permit.

When conducting a legal check through the review of the property’s one sheet, several aspects are examined:

• Ownership Verification: This involves checking whether the property is solely owned by the landlord, whether it is co-owned by multiple parties, or if it belongs to a third party.
• Encumbrance Check: This includes verifying whether the property is already leased, whether there is a mortgage on the property, or if there are any other encumbrances.
• Verification of the Registered Parcel and the Actual Location of the Property: Ensuring that the recorded parcel matches the actual location, and similar checks.

On-site check of the Property – Subject of the Lease Agreement

The physical inspection of the property, or an on-site inspection, is very important for several reasons. This inspection is usually conducted together with architects, designers, engineers, and other professionals.

The physical inspection of the property covers several aspects, with the most important being:

• The possibility of adapting the space to meet the needs of the tenant company;
• The feasibility of designing and redesigning the space;
• The possibility of installing equipment necessary for the tenant’s operations;
• The location of the property, which could impact the tenant’s business;
• Inspection of electrical installations and the plumbing system;
• Checking the elevators and sound insulation;
• The possibility of displaying the company’s logo on the building;
• The surroundings of the commercial space, such as which floor it is on and whether the floor will be shared with others.

All the above-mentioned factors, depending on the tenant company’s preferences, can be decisive in making a decision to lease the property. These are also factors around which negotiations with the landlord will be conducted.

Maintenance of the Property While It Is Leased

The maintenance of the property is another aspect that must be carefully considered when entering into a lease agreement, especially for long-term leases where the tenant company operates its business within the property.

Our law distinguishes between two types of property maintenance:

Regular maintenance and
Investment maintenance.

Article 573, paragraph 3 of the Law on Obligations stipulates that: “The costs of minor repairs caused by regular use of the object, as well as the costs incurred during its use, shall be borne by the tenant.”

Paragraph 1 of the same article states: “The landlord is obliged to maintain the object in proper condition during the lease term and to carry out necessary repairs.”

“He is obliged to reimburse the tenant for the costs that the tenant has incurred for maintaining the object, which the landlord himself would have been required to undertake.”

Regular and Investment Maintenance

According to the aforementioned provisions, the costs for regular maintenance, such as routine cleaning of the property, replacing light bulbs, etc., are borne by the tenant. The costs for investment maintenance, such as roof repairs, plumbing repairs, etc., are the responsibility of the landlord.

In reality, the tenant may encounter situations where, due to a burst water pipe or other damage in the property where they conduct their business, they are unable to operate and thus suffer financial losses.

These scenarios should be clearly defined in the lease agreement, specifically whether in such an emergency the landlord is required to respond and fix the damage or if the tenant, due to the urgency of the situation, should take action themselves, with the landlord reimbursing the costs.

Additionally, in such cases, the tenant should protect themselves in the lease agreement to ensure compensation from the landlord for losses incurred due to the inability to operate, such as compensation for the material damage suffered.

Enforcement Clauses in a Lease Agreement

Simply put, if a lease agreement contains an enforcement clause, and debtor-creditor relationships arise between the landlord and tenant, the party to whom the debt is owed can directly pursue the debt through a bailiff. This can be done by freezing the debtor’s bank accounts or by executing against their movable and/or immovable property.

An enforcement clause can be stipulated for non-payment of rent, forced eviction, etc. When drafting the enforcement clause, it should be clearly formulated and specify the extent to which execution can occur, whether it applies to the entirety or just a portion of the debtor’s property.

To ensure the enforcement clause is effective, the written lease agreement must be solemnized by a competent notary.

As for the dispute between WeWork and its landlord, it was resolved through an out-of-court settlement, which also ended the legal proceedings.

Note: This text represents informative content, transferred from the current laws in Macedonia with the personal opinion of the author. The content in no way and in no part should be considered professional advice.

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