Breaking Contracts - What's your penalty?

At our coworking space, most members sign up for the Monthly Membership which is on a one-year basis. We have them sign something that states this clearly, and says that if they choose to leave the contract early, they would need to buy out of it in full.
Recently, a member decided to quit, and to buy out the remainder of his membership, he’d owe $1,600. There’s no way he was going to pay that… What do you charge for this penalty? What do you think is fair to enforce the one-year term?

Hi Kaylyn,

Short answer: No penalty.

Here’s the long answer…

At Foundery our coworking memberships are all month-to-month.

Memberships are pre-paid on the 1st of each month, but there is no commitment beyond the calendar month.

Even with our private office package options, we only require a ‘last month’s deposit’ and 60 days notice to move out, with no mandatory lease term or membership commitment beyond the 60 days.

We also have members who travel between cities and spaces, pausing and reactivating membership as required. There is no fee or penalty to do so.

The flexibility is what makes coworking memberships attractive and accessible for many of our members (especially freelancers and those just starting out) as they may have trouble predicting their income or guaranteeing a consistent revenue stream in those early days.

If you are paid up (membership is in good standing) your key works. If you don’t buy a membership that month, your key doesn’t work. We use a very simple system.

I am curious as to why you require the one-year term?

I understand a notice clause or charging a penalty if the member’s actions cause you to lose income (like the ‘60 days notice’ clause to re-lease our offices) but wouldn’t you just replace the member who is leaving with another member?

My advice would be to do away with the one-year term altogether, but since you already have an agreement in place, your options are to enforce it or to modify the agreement with this member.

I would suggest asking this member to cover 1 month as you find a new member to replace him.

I should note that although everyone has the option for month-to-month flexibility in The Foundery Buildings, we’ve had Creative Blueprint members stay with us for more than 8 years now and many of our original Foundery members still work there after 4 years, month-to-month.

The month-to-month option doesn’t necessarily translate into short-term members.

Building a solid, strong community is a big part of our core mission.

For many the flexibility is simply peace of mind, allowing them to focus on more important things (like their work) and to thrive because of that.

Ashley

Creative Blueprint & Foundery

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On 2015-05-29, at 3:37 PM, Kaylyn Gelata wrote:

At our coworking space, most members sign up for the Monthly Membership which is on a one-year basis. We have them sign something that states this clearly, and says that if they choose to leave the contract early, they would need to buy out of it in full.
Recently, a member decided to quit, and to buy out the remainder of his membership, he’d owe $1,600. There’s no way he was going to pay that… What do you charge for this penalty? What do you think is fair to enforce the one-year term?

Visit this forum on the web at http://discuss.coworking.com


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I don’t want to simply repeat what Ashley has said because I agree with 100% of it - from the value of keeping memberships flexible and making people WANT to stay instead of requiring it.

And like Ashley, we take and keep a “deposit” equal to whatever level of membership people have, which is refundable with so long as they give at least 30 days notice…so it effectively acts as a last month, giving us 30 days to gain a new member before we show a financial loss. Upgrades and downgrades work the same way (we adjust the deposit and with downgrades, they get the difference back if we get notice of the downgrade. People are always appreciative of this model, and the freedom it gives them to work and live like they need to.

But I’m curious what makes your memberships “monthly” when there’s a one year contract? How do you describe/explain that to your members when they’re signing up, what makes that different from a lease?

In general - I try to avoid thinking in terms of penalties to punish bad behavior, and instead focus on incentives for good behavior (a.k.a. you get a deposit back for giving appropriate notice). This allows for a MUCH happier relationship between us and our business (which, in turn, makes them want to stay longer!), rather than them feeling like we’re simply the enforcers of the law.

-Alex

···

On Fri, May 29, 2015 at 8:10 PM, Ashley Proctor [email protected] wrote:

Hi Kaylyn,

Short answer: No penalty.

Here’s the long answer…

At Foundery our coworking memberships are all month-to-month.

Memberships are pre-paid on the 1st of each month, but there is no commitment beyond the calendar month.

Even with our private office package options, we only require a ‘last month’s deposit’ and 60 days notice to move out, with no mandatory lease term or membership commitment beyond the 60 days.

We also have members who travel between cities and spaces, pausing and reactivating membership as required. There is no fee or penalty to do so.

The flexibility is what makes coworking memberships attractive and accessible for many of our members (especially freelancers and those just starting out) as they may have trouble predicting their income or guaranteeing a consistent revenue stream in those early days.

If you are paid up (membership is in good standing) your key works. If you don’t buy a membership that month, your key doesn’t work. We use a very simple system.

I am curious as to why you require the one-year term?

I understand a notice clause or charging a penalty if the member’s actions cause you to lose income (like the ‘60 days notice’ clause to re-lease our offices) but wouldn’t you just replace the member who is leaving with another member?

My advice would be to do away with the one-year term altogether, but since you already have an agreement in place, your options are to enforce it or to modify the agreement with this member.

I would suggest asking this member to cover 1 month as you find a new member to replace him.

I should note that although everyone has the option for month-to-month flexibility in The Foundery Buildings, we’ve had Creative Blueprint members stay with us for more than 8 years now and many of our original Foundery members still work there after 4 years, month-to-month.

The month-to-month option doesn’t necessarily translate into short-term members.

Building a solid, strong community is a big part of our core mission.

For many the flexibility is simply peace of mind, allowing them to focus on more important things (like their work) and to thrive because of that.

Ashley

Creative Blueprint & Foundery

On 2015-05-29, at 3:37 PM, Kaylyn Gelata wrote:

At our coworking space, most members sign up for the Monthly Membership which is on a one-year basis. We have them sign something that states this clearly, and says that if they choose to leave the contract early, they would need to buy out of it in full.
Recently, a member decided to quit, and to buy out the remainder of his membership, he’d owe $1,600. There’s no way he was going to pay that… What do you charge for this penalty? What do you think is fair to enforce the one-year term?

Visit this forum on the web at http://discuss.coworking.com


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Visit this forum on the web at http://discuss.coworking.com


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The #1 mistake in community building is doing it by yourself.

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I think I would not call it a monthly membership if it has a 1-year term.

All our memberships are paid in advance; to terminate the contract they only have to intentionally not pay the upcoming month. (we do contact people first, the intention is not to have somebody suddenly be "homeless" because they forgot something)

In the past we tried a model which was based around an anchor business and related sector coworkers; we presently do not have a location with that model, but I am working with a company interested in it. In that situation I would build in notice requirements for leaving, because that is one of the features of that approach: if you anchor leaves, the community needs to re-form in some fundamental ways, which is not really fun to do without warning.

The reason for a penalty theoretically is usually that the landlord has had costs or made alterations or otherwaise modified toe space for a certain use, in reliance on the contract, those cost are then compensated by the penalty. (I realize this is mostly not how it is used in commercial real estate now, but that was the idea in the beginning). If this has not happened, then I would need to think about why a penalty was necessary before putting one in a contract.