What Will Happen To 7 Lakh People & Their WeWork Offices If It Goes Bankrupt?

From investors, and office goers, to the entire commercial real estate industry, the situation at WeWork is giving stress to everyone associated. With WeWork staring at bankruptcy, both the employees and employers of more than 7,00,000 people who work at the company's co-working office spaces are now worried.

WeWork Warned Of A Possible Bankruptcy Last Week

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With its shares down to nearly zero, WeWork had warned investors last week that its losses raise ¡°substantial doubt¡± in its ability to keep the company afloat, listing bankruptcy as a potential option. In the first six months of 2023, the company posted a net loss of $700 million. While that¡¯s a 40% decrease from its losses at the same time last year, it might not be enough to address WeWork¡¯s mounting liabilities, including $13.3 billion in long-term lease obligations and $2.9 billion of long-term debt, as per Fortune report.

The company has a plan, which includes renegotiating leases, selling assets and creating an app to better serve its customers, according to CEO David Tolley.

But WeWork has been in trouble for some time now¡ªdue in part to the pandemic changing how people work¡ªand the company has already largely explored the options that aren¡¯t bankruptcy, said Stephen Starr, a bankruptcy lawyer at New York-based Starr & Starr. Filing with the U.S. bankruptcy court might be in WeWork¡¯s near future.

Also Read: 10 Big Companies That Bounced Back From The Brink Of Bankruptcy

What Happens To 7 Lakh Office Goers If WeWork Goes Bankrupt?

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If WeWork does go bankrupt, what happens to all the people who work at its locations? Well, it depends on who you are. Co-working space giant WeWork doesn¡¯t own any of its offices and it usually leases almost all of its locations from other property owners. It pays rent to landlords.

And WeWork members pay to use the facilities and amenities, with contracts more similar to gym memberships than leases. This means WeWork members aren¡¯t awarded the same rights as tenants or subleasers in the event of bankruptcy, lawyer Starr said, as per the report.

If WeWork files for bankruptcy, members won¡¯t automatically be pushed out of their office spaces. But they could be kicked out of their buildings if WeWork cancels the leasing agreements it has with landlords, which it is allowed to do under U.S. bankruptcy law. Depending on the specifics of their contracts and local law, they might not get their money back, bankruptcy and real estate experts say.

Offices Could Be Left At The Mercy Of Landlords

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The Chapter 11 bankruptcy code allows management to stay in place and reorganize the company without the weight of previous payments coming due. With it comes the right for WeWork to forgo its building leases without repercussions. If that happens, WeWork would likely look at the income for every building in every city, and it would keep the ones that earn money and break leases for ones that don¡¯t, lawyer Starr said. Landlords in the latter category would end up on the list of parties WeWork owes money to, and they might not ever get paid ¡ª the company already owes money to a lot of people, and it only has so many assets it can sell to get cash.

WeWork has closed locations in the past, and in those cases, it relocated members to other nearby buildings it leased. Depending on how the current situation plays out for WeWork however, that may not be an option.

If WeWork ditches a building, members might be able to switch their office locations to new buildings. If it completely shuts down and ditches all of its buildings and leases, occupants would be left at the mercy of their building¡¯s landlord. Since the occupants aren¡¯t covered under eviction laws, which are reserved for true tenants, it is unclear how long they would have to vacate.

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Also, WeWork could also break its agreement with members if it files for bankruptcy. If members paid any deposits to the company ahead of time, they would then join the group of creditors to whom WeWork owes money. Their ability to get their deposits back could rely on the wording in their contracts and the laws in their individual states, lawyer Starr said. In the case of Knotel, a smaller co-working space company that declared bankruptcy in 2021, customer retainers were considered unsecured claims, meaning debts were added to the long list of parties owed. Their future payment was uncertain, the report mentioned.

While breaking member contracts is possible, WeWork might avoid taking such a step if its plan is to eventually emerge from the bankruptcy process. WeWork has the option between Chapter 11 and Chapter 7. The former allows the company to restructure and continue operations, while the latter will effectively shut down the company.

¡°Our members remain our top priority, and we are resolutely focused on delivering for them for the long term,¡± a WeWork spokesperson said. Of course, the growing concern with WeWork¡¯s business could drive members and landlords to sever ties with the company, fueling a vicious cycle that further hurts WeWork¡¯s balance sheet.

Office Rents Could Go Down For Coming Years

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Given how much each party has a stake, a restructuring deal¡ªwhether imposed by a bankruptcy judge or negotiated through some other process¡ªwould likely offer the best outcome for everyone.

By nature of the company¡¯s leases, WeWork holds a significant place in these buildings and pays a significant portion of the rent. Landlords are facing the same issues about in-office work that WeWork is, so it might be better for building owners to renegotiate terms with WeWork than try to find new tenants.

The ripple effects of a tenant as large as WeWork quitting leases could also spread a lot of pain in the commercial real estate industry, driving down rent for years to come. In cities like New York, WeWork has a huge footprint but return-to-office has been slow. Demand for office space is low, so if landlords lose WeWork, they will have to lower their prices to compete with each other. Over time, he said, that lower price becomes the norm.

And if landlords aren¡¯t willing to provide short-term leases or co-working spaces to orphaned WeWork members, the affected members might have a claim in court. While their agreements with WeWork aren¡¯t called leases, they could argue the content of the contract makes them leases, no matter what they are called, said Starr, the bankruptcy lawyer. Winning this argument in court would allow the companies or individuals involved the rights of a leaseholder, which could include staying in their building. But the details of their stay, including the length of time and who tenants pay, are unclear.

It remains to be seen whether WeWork is able to come out of this near collapse or ends up going bankrupt and putting the already struggling real estate industry into a tough spot.

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