An Australian business run from a WeWork co-working office has raised questions about the security of its bond following news the global giant has filed for bankruptcyin the US.
Steve* runs a small IT business out of an Australian WeWork location and after reading about the company’s financial woes on news.com.au he contacted his WeWork sales consultant to inquire about how the business accounts for the bond payments it receives from tenants.
When he first moved his business into a WeWork office, he paid the company two months’ rent as a bond – referred to as a service retainer by WeWork.
“I asked my contact at WeWork to confirm whether our bond is being properly accounted for as a liability and not being treated as general revenue and used for general expenses,” he told news.com.au.
He said rather than receiving an answer to his question, the concerning response he received was: “We do not have a legal obligation to hold service retainers in escrow”.
If a payment is held in escrow, it is held by a third party or in a separate account and cannot be touched until the business transaction between two parties is complete.
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Steve said that while his bond was a relatively small amount of money and not being able to recover it wouldn’t sink his business, he questioned whether this would be the same for all small businesses being run from WeWork locations.
“Have they got the cash in the bank to pay everybody back?” he said.
“It could be substantial for other businesses.”
The fate of WeWork’s 15 Australian office locations remains in doubt following the news the beleaguered business, which is listed on the New York Stock Exchange, has filed for Chapter 11 bankruptcy in the US.
Under Chapter 11 bankruptcy, a business can continue operating while its owner and creditors reorganise its debts to enable the business to become profitable.
It is possible that this could lead to the closure of some – or all – of its Australian locations.
WeWork’s business model involves taking long-term leases on office space, which it then sublets under short-term arrangements.
In recent months WeWork has been looking to reduce its operating costs, of which lease liabilities account for two-thirds, by renegotiating its leases globally.
Steve also questioned what would happen to WeWork’s tenants if the global giant failed to make rental payments to the owners of any of the Australian buildings it leases.
“What happens if the landlords lock the doors?” he said.
In Australia, WeWork closed three locations in October, exiting leases at 66 King Street in Sydney’s CBD, 50 Miller Street in North Sydney and 260 Queen Street in the Brisbane CBD.
Steve also criticised WeWork after the company signed him up to a new 12-month lease just days before he was notified his office was one of those that would be closed and that his business would need to relocate to a less convenient WeWork site.
When he asked his sales consultant why the office was closing, he was told it was because the building owner wouldn’t agree to reduce the amount of rent WeWork was paying.
WeWork sites have reportedly been plagued by falling occupancies, with its Sydney occupancy rate in the fourth quarter of last year at 76 per cent.
But Steve said that WeWork pushed through an increase in his rent when he signed the new lease, which it justified by claiming the site was at 100 per cent occupancy.
“They’ve been a bit cavalier in their approach,” he said.
WeWork’s 15 remaining Australian locations include one in Perth, three in Melbourne, three in Brisbane and eight in Sydney.
WeWork failed to respond to a request for comment from news.com.au.
*Name has been changed for privacy reasons.
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