diff --git a/openhands/runtime/base.py b/openhands/runtime/base.py
index b5f983dc28..854f3fc823 100644
--- a/openhands/runtime/base.py
+++ b/openhands/runtime/base.py
@@ -1089,7 +1089,7 @@ fi
         return False
 
     @classmethod
-    def setup(cls, config: OpenHandsConfig):
+    def setup(cls, config: OpenHandsConfig, headless_mode: bool = False):
         """Set up the environment for runtimes to be created."""
 
     @classmethod
diff --git a/openhands/runtime/impl/local/local_runtime.py b/openhands/runtime/impl/local/local_runtime.py
index 90b21954b6..9ad124aeb5 100644
--- a/openhands/runtime/impl/local/local_runtime.py
+++ b/openhands/runtime/impl/local/local_runtime.py
@@ -36,6 +36,7 @@ from openhands.runtime.impl.docker.docker_runtime import (
     VSCODE_PORT_RANGE,
 )
 from openhands.runtime.plugins import PluginRequirement
+from openhands.runtime.plugins.vscode import VSCodeRequirement
 from openhands.runtime.runtime_status import RuntimeStatus
 from openhands.runtime.utils import find_available_tcp_port
 from openhands.runtime.utils.command import get_action_execution_server_startup_command
@@ -379,7 +380,7 @@ class LocalRuntime(ActionExecutionClient):
                 _create_warm_server_in_background(self.config, self.plugins)
 
     @classmethod
-    def setup(cls, config: OpenHandsConfig):
+    def setup(cls, config: OpenHandsConfig, headless_mode: bool = False):
         should_check_dependencies = os.getenv('SKIP_DEPENDENCY_CHECK', '') != '1'
         if should_check_dependencies:
             code_repo_path = os.path.dirname(os.path.dirname(openhands.__file__))
@@ -390,8 +391,13 @@ class LocalRuntime(ActionExecutionClient):
         # Initialize warm servers if needed
         if initial_num_warm_servers > 0 and len(_WARM_SERVERS) == 0:
             plugins = _get_plugins(config)
+
+            # Copy the logic from Runtime where we add a VSCodePlugin on init if missing
+            if not headless_mode:
+                plugins.append(VSCodeRequirement())
+
             for _ in range(initial_num_warm_servers):
-                _create_warm_server_in_background(config, plugins)
+                _create_warm_server(config, plugins)
 
     @tenacity.retry(
         wait=tenacity.wait_fixed(2),
diff --git a/openhands/server/conversation_manager/docker_nested_conversation_manager.py b/openhands/server/conversation_manager/docker_nested_conversation_manager.py
index 4cc47adb44..a526656e7b 100644
--- a/openhands/server/conversation_manager/docker_nested_conversation_manager.py
+++ b/openhands/server/conversation_manager/docker_nested_conversation_manager.py
@@ -498,6 +498,7 @@ class DockerNestedConversationManager(ConversationManager):
         env_vars['SESSION_API_KEY'] = self._get_session_api_key_for_conversation(sid)
         # We need to be able to specify the nested conversation id within the nested runtime
         env_vars['ALLOW_SET_CONVERSATION_ID'] = '1'
+        env_vars['WORKSPACE_BASE'] = '/workspace'
         env_vars['SANDBOX_CLOSE_DELAY'] = '0'
         env_vars['SKIP_DEPENDENCY_CHECK'] = '1'
         env_vars['INITIAL_NUM_WARM_SERVERS'] = '1'