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This co-working facility in Toronto was the first in Canada for Spaces, photographed on November 27, 2017.

Glenn Lowson/The Globe and Mail

The world’s largest co-working office space provider has filed for creditor protection for many of its offices in Canada, exposing a weakness in the shared office business model during a severe economic downturn.

Swiss-based IWG PLC, which operates under the Regus and Spaces brands, has provided flexible office space for businesses and entrepreneurs for three decades. It has about 3,000 locations globally, including 137 in Canada.

IWG was viewed as a safer and more conservative company than its main rival, WeWork, which was launched after the 2009 financial crisis and expanded quickly, only to fail when it tried to go public last year.

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But this week, 39 of IWG’s Canadian office affiliates filed for bankruptcy protection under the Companies’ Creditors Arrangement Act. Each of the affiliates holds one or more leases in Canada that are guaranteed by a U.S. IWG entity, which have provisions that allow Canadian landlords to terminate the lease if the U.S. guarantor files for insolvency as it did in mid-August.

That includes Regus locations in British Columbia, Alberta, Manitoba, Ontario and Quebec, according to the filing with the Ontario Superior Court. The other IWG offices in Canada operate under different leases.

The court protection calls into question IWG’s and WeWork’s business model, which involves taking out long-term leases in buildings, slicing up the space and subleasing it for shorter periods. The co-working companies profit as long as they can find enough subtenants. If subtenants don’t pay, however, the co-working company does not generate revenue to pay their leases or turn a profit.

IWG’s and WeWork’s business boomed in Toronto and Vancouver over the past decade, as tech companies clamoured for space and as contract work and self-employment grew.

But trouble for IWG started in April after countries restricted non-essential activity to stop the spread of the COVID-19 virus. Work-from-home mandates reduced demand for IWG’s temporary office space and drove down occupancy rates across its portfolio, the court filing said.

IWG said it had to slash prices to attract and retain its subtenants, which can include anyone from individual freelancers to startup companies to established businesses and technology companies. As the pandemic progressed, some of IWG’s subtenants were late with their rental payments as they in turn lost business and tried to conserve cash amid the economic crisis.

Like landlords, IWG provided rent deferrals for some of its hardest-hit subtenants. But unlike landlords, IWG had to turn around and ask some of its landlords for forbearance. Although IWG said it had various successes, some of the landlords were not amenable.

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IWG initially asked the Canadian courts to recognize its request for creditor protection in the U.S. when talks broke down between its U.S. office subsidiaries and its U.S. landlords. The U.S. landlords issued notices to lock out their IWG tenants, which led IWG to file for Chapter 11 bankruptcy protection mid-August to avoid eviction while it restructured.

In Canada, IWG said the majority of its offices have continued paying the rent as it negotiates its leases with certain landlords. The court filing said there is about $2.2-million in rent arrears across IWG’s entire Canadian portfolio of leases.

So far, it said the negotiations have been primarily positive and have not resulted in a wave of lock-out notices being issued similar to the U.S.

But some of the Canadian leases are guaranteed by a U.S. IWG entity and may be in “technical default,” because some IWG affiliates in the U.S. filed for bankruptcy protection, according to the court filing. IWG said it wanted to ensure that Canadian landlords did not use that as an excuse to lock them out of their premises.

“There is a serious risk” that the leases could be “terminated on the basis of defaults triggered by the commencement of the Chapter 11 cases,” the Ontario filing said.

“There was a significant concern that if the landlords are permitted to terminate the leases or ’lock-out,’ ” IWG without notice, it “could result in devastating cascading effects” on IWG, its Canadian subsidiaries and its subtenants.

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In fact, one landlord in Edmonton did just that, locking the doors to one of IWG’s shared office spaces on Aug. 25 and refusing to allow the subtenants to enter.

“Staff located at the premises were forced to set up a table outside the premises in order to explain to occupants the lock-out situation, causing significant disruption to the operation of the company and the occupants,” said the filing.

The precise location in Edmonton was not disclosed in the court documents, nor was the name of the landlord.

IWG managed to get a court order to void the termination.

Most of the Canadian leases are structured as individual special purpose entities, which are subsidiaries of U.S. and British Regus corporations under the IWG umbrella. The company is structured that way to help protect the parent company in an event of a default.

One of their Canadian landlords, Allied REIT, said in an interview that Regus and Spaces had made their payments, and it would not reduce the rent “in any way” for the troubled company.

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Asked whether Allied would lock IWG out if its subsidiaries defaulted on payments, Allied CEO Michael Emory said: “We’ll cross that bridge if we get there, but I don’t think we’ll get there. Regus and Spaces appear to value their space with Allied enormously, both present space and future space.”

IWG’s Canadian executive did not respond to a request for comment.

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