Entities providing co-working spaces could qualify as service providers and not real estate providers, thereby not being subject to stifling exchange control restrictions.
Several cities in India seek to foster a start-up culture so budding entrepreneurs flock to such cities, investing money and creating employment.
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Initial roadblocks encountered by entrepreneurs include finding accommodation and office space in commercial business areas. Entrepreneurs often do not have the wherewithal to (i) afford a substantial security deposit; (ii) independently avail all the services required to run a business; and (iii) lease area in a commercial building which is commensurate with the scale of operations. In addition to these impediments, available living space must be both economical, and take care of daily necessities allowing the entrepreneur to focus on business.
This is where the concept of co-working and co-living spaces come in. From a legal angle, there are some factors to consider.
Most organisations operating co-working and co-living spaces do not execute leases for the space, but rather enter into agreements for services that they provide. The services often include, in addition to space, a platform to network with other companies or individuals, use of infrastructure ranging from printers, copiers, scanners, use of audio/video conferencing technologies; even coffee machines, snacks, and much more. Therefore, an agreement that is signed between an individual or a company with an entity operating a co-living or a co-working space is generally in the nature of a services contract, and not a lease or licence of the premises.
Right to share
With the caveat that there are always exceptions to the rule, the provision of such spaces generally do not create a right of easement under the Indian Easements Act, 1882. While it can be contended that these agreements may have certain elements synonymous to a licence, the office space or living accommodation remains the coworking/co-living space’s property, and in its possession and control. What is typically provided in these agreements is a right to share the use of office/living space with the organisation operating the space so that services can be provided to those who subscribe. Most such agreements specifically disclaim the existence of a landlord-tenant or lessor-lessee relationship and specifically agree that no title, easement, lien, possession or related rights are being granted to the subscriber at the premises.
These arrangements can usually be compared to an agreement for accommodation in a hotel. Such characterisation forms the basis for why many entities providing some co-working and co-living spaces are not treated as undertaking real estate activities. This is an interesting angle in so far as foreign direct investment is concerned.
Foreign direct investment in the real estate space is prohibited subject to certain exceptions. The regulations define ‘real estate business’ to mean ‘dealing in land and immovable property with a view to earning profit therefrom ...’
However, on analysing the business models of co-working companies, the profit is not from the provision of immovable property, but from fees collected for services rendered. Entities providing co-working spaces would accordingly qualify as service providers and not real estate providers, thereby not being subject to stifling exchange control restrictions. This interpretation also excludes these agreements from the purview of the Registration Act, 1908 which requires certain agreements to be compulsorily registrable, providing a respite from significant stamp duty and any registration costs.
The ability to attract 100 percent foreign direct investment in such entities enable more investment in this sector thereby proving additional opportunities for entrepreneurs to concentrate on their growth and also for those who want to run or set up such spaces.
Vivek Chandy is the Joint Managing Partner and Vandana Venkatesh is an Associate with J. Sagar Associates. Views of the authors are personal.
First Published: Sept 6, 2019 6:00 AM IST
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