If the slump in business due to the coronavirus pandemic was not enough already, several young Indian startups are now facing a death knell due to contractual technicalities and indifference from co-working major WeWork.
Earlier this month, WeWork India, which is run by Bengaluru-based real estate company Embassy Group, said its existing customers need to pay only 30% of the rent throughout the lockdown period that started on March 25. But in reality, instead of allowing clients to pay just 30%, WeWork is offering to give a credit equivalent of 70% to their existing contracts.
This means that customers will have to continue paying the entire rent each month even though they are not using the space. At the end of the lockdown, WeWork will add extra days to their existing contracts equivalent to 70% of the rent for the days its offices remain shut.
“I need to save my money today, not a few months later,” Subho Halder, co-founder and chief information security officer of mobile app security testing startup AppKnox, told Quartz. “Who knows if a company may survive or may not survive until then.”
When AppKnox moved into WeWork in November 2018, it was among the most expensive shared working spaces in Bengaluru. “But we didn’t care, we were getting revenues and could spend,” said Haldar. AppKnox pays Rs3 lakh ($3,924) per month—nearly 15% of its total expenditure—as rent for its 16-member team to operate from WeWork’s Bengaluru facility.
Lately, the six-year-old company has seen a drop in its revenue as some of its clients have suspended services in the wake of the pandemic. AppKnox’s senior management has taken salary cuts to stay afloat, and continuing to pay WeWork’s rental could cost them dearly.
On its part, WeWork said it could not offer a rent waiver because it is still bearing operational costs, including paying on-site employees, partners, and contract workers. “Our buildings are being sanitised regularly and have been repurposed to prioritise safety and health once we reopen,” a WeWork spokesperson told Quartz. The company said it is working with small businesses and startups faced with unprecedented economic challenges on a case-by-case basis.
When AppKnox’s co-founders reached out to WeWork to explain their situation, the co-working major offered to waive off just Rs7,500 monthly parking charges and not a penny more, Agarwal’s correspondence with the company show.
WeWork, an industry leader with over 35,000 members across India, could set a bad example for the entire co-working community in India, experts said.
“Those with deeper pockets ought to take deeper responsibility in such a grave situation,” said Sanchit Vir Gogia, founder of advisory firm Greyhound Research, who also operates from one of WeWork’s Gurugram offices, paying Rs21,000 plus tax per head for his team.
Force majeure or not
Some of WeWork’s rivals are handling the situation in a far better way so far. For instance, on the day of the lockdown announcement (March 24), 91Springboard’s CEO Anand Vemuri sent a letter to its members saying it was declaring Covid-19 a “force majeure” event, waiving off fees until the end of the lockdown and allowing contract terminations without resistance.
BHIVE Workspace, another Bengaluru-based co-working space, has also relaxed the rules. A client, image and video processing and delivery company Gumlet, moved its employees to remote work on March 16, even before the official lockdown. “Since we are not going to use the office for quite some time, we reached out to BHIVE and they agreed to give us a concession for two months,” co-founder and CEO Aditya Patadia said. “This was a very kind gesture by them. If this lockdown continues, we can trust our workspace provider for their support.”
But here’s what WeWork told AppKnox when they demanded a rent waiver:
WeWork is not liable on account of, any delay or failure to perform its obligations as required by the Agreement as a result of any causes or conditions that are beyond WeWork’s reasonable control and the existence of a force majeure event does not give rise to any termination event.
“Bigger players may play hardball and stick to their guns largely because of their own funding constraints,” said Prashant Thakur, director and head of research at ANAROCK Property Consultants. “However, smaller coworking players recognise the current situation as an opportunity to attract customers by virtue of better flexibility as well as cost arbitrage.”
Of course, some smaller players have also started taking from the market leader.
The founder of a New-Delhi based tech startup, who did not wish to be identified, said Oyo-owned Innov8 co-working space is also asking for full rent payout for April, which it says will be returned in the form of discounts in the months of May, June, and July. Innov8 is also not allowing its clients to terminate contracts.
WeWork’s conundrum
The coronavirus breakout could not have come at a worse time for WeWork.
Once valued at a staggering $47 billion, the unicorn is now strapped for cash. It posted a $1.25 billion loss in the third quarter of 2019 and has been laying off staff globally.
The Softbank-backed company’s reputation has taken a solid beating during the coronavirus outbreak across in the US, too, as it is keeping its offices running by claiming to serve “essential services.” In fact, in the US, WeWork is even raising rents for some tenants, and charging an annual fee that it can bill at any time during a year at its discretion.
Thousands of tenants have stopped payments and threatened legal action. Ironically, WeWork itself has skipped paying rents in some US locations because of the poor business conditions.
“WeWork has a lot to lose. Their scale of payouts is unimaginable. You cannot compare it to an Innov8 or 91springboard,” Gogia of Greyhound said.
The best WeWork can do at this time is to go back to landlords and renegotiate rentals, experts say.
“With a business model like a co-working space, the impact is similar to running a retail outlet. While our current clientele is intact with us, we have witnessed lesser engagement with new companies,” Akshita Gupta, co-founder and chief marketing officer at ABL Workspaces, said. “We will only be able to pass on the rebates once we get it either from our landlords or from the government.”