This article details the issues addressed by a legal due diligence undertaken in respect of a proposed co-working premises to identifying risks associated with converting the same into a co-working space. It is Part I in our series of articles on setting up and operating a co-working space in India. You can read Part II of this series at here.
Part II of the series details the typical issues addressed by a technical due diligence undertaken in respect of a proposed co-working space to ensure continuous, safe, and incremental operations from the same.
Part III of the series details the safeguards and mechanisms that an operator of a co-working space can negotiate to nullify or mitigate the adverse affects of the sale of such property by the owner to a third party.
Operators of co-working spaces spend significant resources to transform lifeless, vacant spaces into vibrant, community-driven business and innovation centers. Naturally then, a thorough due diligence of the proposed co-working property becomes essential for ensuring business continuity from such properties. In this article we look into a few of the important aspect that a due diligence of a proposed co-working property will typically address.
Typical property-related due diligences for setting-up a co-working space can be divided into two sections – the first being the title search, meant to determine the titular claims of the property owners; and the second being to identify if the property is legally suitable to be operated as a co-working space.
A title search of a prospective property is essential in determining if the current owners have adequate ownership rights over the same. Large commercial developments are often situated on erstwhile agricultural lands. Where a property has been constructed upon a land that was earlier in the nature of an agricultural land, a thorough title search should ideally be conducted to trace the title across the previous 30 years. This period provides adequate evidence-set to satisfy the existence (or a lack thereof) of a distinct, unbroken title chain. Agricultural lands are often subject to partitions, and intestate succession across generations. A careful due diligence will reveal inconsistencies (if any) in the ownership chain of small land parcels that have been aggregated to form the larger land mass on which the property is situated. For non-agricultural lands, or those lands that are given on leasehold basis by a state authority towards development, the aforementioned time-period of 30 years can be significantly reduced.
Contested title over a property can lead to crippling litigation between contending owners spreading across years. The right of the property’s claimed owner over the property is also thereby called into question. This, in turn, adversely affects the legitimacy of the operator’s contract with the claimed owner, consequently its operating rights in respect of the property, and certainly of business continuation from the disputed premises.
Since buildings are constructed according to plans sanctioned by the local authorities, due diligences also take into account the sanctioned plans that have been issued in regards to the same. Lack of appropriate sanctioned plans, or in cases where the building has been constructed in contravention of sanctioned plans can be grounds for demolition of the building (or parts thereof) to rectify portions that are not as per the sanctioned plans. Such an action can create severe disruption to the operators and occupants of the building. Also important to consider is if the land upon which the building is constructed has had its license of usage changed from agricultural/ residential to commercial. This is important since co-working spaces are considered ‘commercial’ in nature and hence typically not allowed to operate upon a land licensed for agricultural/ residential use.
Due diligences will also look into lift and fire N0Cs (No Objection Certificates) and approvals. These ensure that the building is equipped with adequate fire fighting systems; and the appropriate permissions for installing and operating lifts has been obtained. It should be borne in mind that lifts require constant certification and typically the same is renewed on a yearly basis. Building bye-laws may also provide for fire safety norms which deal with issues such as occupancy load, and fire exit specifications. Due diligence will also examine if adequate fire insurance has been obtained by the owners to minimise risk on account of a fire in the building.
Due diligence will also consider if the utility connections that have been provided for in the building are in the nature of domestic (residential) or non-domestic (commercial). Utility tariffs vary in terms of the type of connection opted for, and stiff penalties are applicable in case of misuse of domestic connection for non-domestic purposes.
The safe knowledge of the feasibility of enjoying un-interrupted business operations from co-working spaces is essential for operators and occupants alike. Due diligence of a prospective property takes into account the risks associated with using the same with the intention of establishing a co-working space. In this regard, a limited red flag due diligence may be sufficient for most operators. However, at the very least, the aforesaid points must be covered to ensure that there are no unforeseen events that create a continuity issue for the co-working space.
This post has been authored by Sayanhya Roy, Principal Associate, Ikigai Law
Disclaimer: This article is meant for general informational purpose only and is not a substitute for professional legal advice. This article is based on the laws applicable in India as on the date of publication.