More than just a safe address for micro companies

People need space to live, businesses need space to work, technological advances mean that many businesses’ space needs are minimal. In an increasingly digital economy, certain businesses – especially fledgling or smaller businesses – can be run from a single laptop. This could be anywhere from a coffee shop to the entrepreneur’s kitchen table.

All businesses need a postal address, however, and those registered with Companies House need a registered office with a physical address. Using a home address may not be appropriate or desirable even if that is where the company is run from. A virtual tenancy gets round this problem –enabling a company to have an address without the expense of actually owning or renting a physical property that they do not need.

A virtual tenancy can be a lease of a small space, or even just a licence to use an address, with a contract to provide services. It differs from a traditional lease in that a tenant does not have to occupy the actual space and may not be able to. For example, leasing a post box would give a tenant a postal address but could not be used as an office. This post box could be in the common parts of a building already let by   a landlord or could be in a small unused room.

A registered office needs to have a physical address large enough to enable someone to inspect the company records. This could be just a plaque on a wall adjacent to a reception area, enabling a landlord to let a small physical area to a large number of virtual tenants.

What do landlords of virtual tenancies need to do?

The landlord needs to provide an address where the tenant can receive post, either storing it for the tenant to collect, or forwarding it to them.

For a more comprehensive virtual tenancy, the virtual landlord needs to provide somewhere for the company records to be held, e.g. at reception in a building. These will cost more than a simple mail drop service, and will depend on the location of the registered office and the credibility of the landlord. For the average level of service, science and innovation parks can secure £50 - £75 pcm while exclusive locations demand more than that.

Why virtual tenancies?

Tenants

  • It is a cost effective way for tenants to comply with Companies House legal guidelines and requirements.
  • Tenants acquire credibility by association with the location.
  • Virtual tenancies can give the impression that the tenant company is bigger than it really is.
  • If cashflow is constrained, a tenant can save money by moving from a physical tenancy to a virtual tenancy without their customers noticing a change in address.

Landlords

  • Virtual tenancies are an efficient revenue stream.
  • They require little to no set-up costs and take up only a small amount of physical space.
  • In light of the low costs the income generated is almost entirely profit.
  • A downsizing tenant can be retained while their business recovers.

Where are virtual tenancies being used?

We are increasingly seeing virtual tenancies being associated with science and innovation parks. Fledgling companies, especially in technology based sectors, do not necessarily need the physical space; but they do need the support and guidance offered by those parks.

What do you need to consider?

Tenants

  • Credibility: the credibility of the landlord and the associations of the property are important considerations. Some properties have in the past been used for criminal or fraudulent activities; some are in desirable locations such as central London or near respected institutions. Many science and innovation parks are associated with, or run by, universities and these carry a certain prestige which can be beneficial.
  • Cost: this will be a factor for any business to consider and will relate to the location of the property, the credibility of the landlord and the services provided.
  • Services: some virtual tenancies operate solely as a mail drop, some allow use of hot desks or communal facilities, and some provide additional business support.

Landlords

  • Lease documentation needs to set out exactly what services the landlord is agreeing to provide to head off potential disputes.
  • Landlords need to consider the money laundering regulations.
  • Reputation management: The actions of that tenant will reflect on the property and negative associations could damage a brand or cause significant embarrassment for larger institutions.

Money Laundering

Anti-money-laundering regulations require companies which offer virtual tenancies to register with HMRC. Virtual landlords must monitor who uses their property for mail drop or as a registered office, and must carry out identity checks.

This issue originally arose in the 1920’s in the era of dead letter drops. These involved leaving letters in spare post boxes to be picked up by covert agents. While the days of such cloak and dagger activities have passed, virtual tenancies could be used as a cover for criminal activities and thus pose a potential money laundering risk. Proper vetting of these tenants is therefore essential. There are exemptions to these regulations, e.g. for charities, however these are specific so advice should be sought.

This whistle stop tour of virtual tenancies has outlined what they are, how they work, and some of the issues you would need to consider. Overall, for landlords, virtual tenancies are a good source of additional revenue requiring little space and benefit from low administrative costs – thus they have the potential to generate a good profit margin.

Originally written for the UKSPA Breakthrough Magazine

About the author

Michael Goldfinch Solicitor

Michael works in the commercial property team assisting with a range of property transactions.


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UKSPA - What is a virtual tenancy?

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UKSPA - What is a virtual tenancy?