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TUPE in the commercial real estate sector

Loknath Das October 25, 2019 Real Estate Comments Off on TUPE in the commercial real estate sector
TUPE in the commercial real estate sector

Image result for TUPE in the commercial real estate sectorJoin us for our latest TUPE Club webinar, focussing on the key considerations on TUPE in the commercial real estate sector.

During the webinar we’ll talk about:

  • The basics of TUPE
  • How and when TUPE matters in the commercial real estate sector, with a focus on:
    • Buying / selling property
    • Grant, termination or assignment of leases
    • Appointment or change in property manager and other contractors
    • Hunter v McCarrick – what does it mean and how is it approached in practice?
  • Contracting for TUPE and how to mitigate the risks

Our speakers, Jane Fielding and Rebecca Jones will run through these issues, giving you practical tips and sharing their experience of market approach on dealing with the most common tricky issues arising from them.


Siobhan Bishop: Hello and welcome to this Gowling WLG TUPE Club Webinar on TUPE in the Real Estate Sector.

I am Siobhan Bishop from the Employment, Labour & Equalities Team and I am joined by Jane Fielding who is a Partner in our Team and Rebecca Jones, a Principal Associate, and they both have specialist experience in this sector; of advising in the Real Estate Sector.

So specifically, we are going to look at the Commercial Real Estate Sector.

So moving on to the first scenario, Rebecca is going to look at “What is TUPE?”

Rebecca Jones: That’s right, before we get stuck into the nitty gritty of TUPE, in the range of real estate situations, I thought it would be helpful to get you warmed up with a quick overview of what is TUPE and what TUPE does.

Well TUPE stands for the Transfer of Undertakings (Protection of Employment) Regulations 2006. I have underlined the protection of employment bit because this is what TUPE is all about, the key policy underlying it, and how the courts will interpret it; they will come at it from the perspective that this is about protection of employment.

The key principal is that a change of ownership or responsibility for work should not interrupt employees’ rights. Employees follow the work or the activity and there is no need for contracts between the transferor and the transferee. Those are the terms that we give to the parties in the transaction. We will come on to talk about the different types of transfer but I just want to highlight that point that there is no need for contracts between the two parties.

The important thing is to look at the start and end point of where the work is moving to and from to identify whether a transfer has taken place.

On the next few slides we are going to look at the key functions of TUPE – what does it do and why is it something that we need to cater for in a real estate situation?

First of all, it preserves and protects employees so that their employment is not disrupted by the transfer.

Specifically looking at those protections, the first protection to mention is that employees transfer to the new entity responsible for the business or the service delivery. That is an automatic transfer of their employment. They transfer on their existing terms and conditions of employment so they are entitled to the same pay and the same contractual benefits after the transfer as they enjoyed before.

It is also preserves and protects claims against the previous employer which transfer with the employees and that is very important in terms of the parties’ contractual arrangements. The new employer steps into the shoes of the old employer. So, if there were any claims or any unpaid wages or other issues this all becomes the responsibility of the new employer.

In short, the new employer becomes responsible for anything that happened on the old employer’s watch. For this reason, the parties to the transfer will usually look to apportion liability pre and post transfer. The final protection to mention there, is that collective agreements and trade union recognition will also transfer.

We have looked at the things which are preserved by TUPE and building on that there are also certain obligations and enhanced protections for employers to be aware of.

The first of these is that the outgoing employer has an obligation to provide workforce employee liability information and that is information that has to be provided 28 days before the transfer.

It can be helpful in situations where there is no direct contractual relationship between the parties, but generally it is seen as too little, too late and we will come on to look at that in a little more detail later.

The second obligation is the duty to inform and consult with representatives. Consultation should be carried out with employee representatives in good time before the transfer. There is no fixed time period but what is in good time really depends on the impact of the transfer for the individuals and if everything is straightforward then we would expect a period of around two to four weeks to be sufficient.

Moving on to look at the increased protections that TUPE offers.

There are two points to mention here. Firstly, it is more difficult to change terms and conditions of employment. We saw that employees transfer on their existing terms and conditions and it is quite common for the new employer to want to harmonise those terms with its existing workforce, but TUPE actually provides employees with protection against changes, which makes that more difficult. That is not to say that it does not happen but it is something that employers have to plan and cost for.

The second point is the increased protection against unfair dismissal, so dismissing employees is more difficult if the transfer is the reason for the dismissals. The new employer cannot simply replace the old workforce with its own people. Workforce changes are something it is necessary to think about and plan for. Importantly the two year qualifying service requirement does still apply for unfair dismissal claims. So if you have individuals that have less than two years’ service then there is a little bit more flexibility there.

The final point to note there is that if employees are dismissed by the existing employer before a transfer then that liability is something which transfers to the buyer. The buyer will become liable for it so it is something that the buyer needs to factor in when looking at a TUPE scenario.

Siobhan: Thank you Rebecca for setting the scene for us there with the legal background, and next we will turn to the big question Will TUPE apply?

So Jane, when will TUPE Apply?

Jane Fielding: Yes, that is the million dollar question and we spend a lot of time helping clients to identify that or the risk of it applying but I will say upfront there is not always 100% certainty of that. So sometimes we just have to take a view and proceed on the basis that it or it will not, but that is not necessarily always without risk.

There are two tests which are on the slide there that you have to look at to see whether TUPE applies. The first one is where there is a business transfer. That has been with us since TUPE first came in 1981 and that is where there is the transfer of an economic entity which retains its identity after the transfer.

The second test is one that came in 2006 largely to address the fact that the old test had started being applied as a matter of case-law to outsourcings. So this service provision change test was brought in to try and give some greater certainty in outsourcing situations. This applies where activities which are carried out by or on behalf of the client are carried out by a different party after the transfer from the party that did them before.

In every scenario you need to consider both tests because they are not mutually exclusive. Just because something does not meet the service provision change test, it could still be a business transfer, so you need to consider both.

Looking at each of those in turn and the business transfer one first.

As I mentioned, there needs to be the transfer of an economic entity that retains its identity and that is expanded in the TUPE regulations to say there needs to be an organised grouping of resources pursuing an economic activity. It does not matter whether that economic activity is ancillary or central to the business but it needs to be identifiable in and of itself. So the classic business transfer situation is in an M&A context where a business is sold as a going concern. If you look at that in a real estate context, that could be the commercial property sale of a hotel or a retail park where the buyer, the new owner, will continue the same business from that property, so they will be the transferee in TUPE language.

We often get asked about a temporary closure of the property for a refurbishment. Does that defeat TUPE and, if so, how long do we have to close it for and the answer to that is not in and of itself.

It depends on the factual scenario of any particular situation. But a temporary closure for a refurbishment, so the property may be still be going to be operated as a restaurant but there is an overhaul of the décor. If it is closed for month or so, that is not going to stop TUPE applying. It might be a slightly longer period that it is closed for, to perhaps get a new licence for the premises if it is a pub, and that takes a bit longer than anticipated. If it is still going to operate as a pub afterwards, even a slightly longer one will not stop TUPE applying. So it is going to be fact specific but it is not a get out of TUPE card just to close it down for a while.

In a real estate context, it could apply and we will look at this in a little bit more detail later, where there is the grant or termination of a lease or the assignment of a lease, for example, if there is a multi-tenanted property like a shopping centre and one of the outlets changes hands in terms of leaseholder, that could also trigger a transfer.

Turning to the service provision change, this was largely brought in to address outsourcing situations. It applies where activities are being carried out by a client on its own behalf and they decide to have a contractor to do those services for them. Those activities are a first generation outsourcing. But it can also apply where the client has decided to change contractor, to switch to a different provider, so a second generation outsourcing. It can also apply where the client decides they now want to do that activity back in-house and they insource it. So, in all of those scenarios, we might be looking at a service provision change.

Putting that into the real estate context, a common example is property managers who might be providing property or asset management services, potentially onsite, and also back at their own offices, offsite.

There could be cleaners and security guards who are attached to the building in question performing those services and they might be employed by the owner of the building or by an FM provider.

There are all sorts of scenarios where TUPE could apply.

For there to be a service provision change various conditions have to be met.

There is a quite a specific definition in TUPE but one of the key ones is that the activities before and after the transfer have to be fundamentally the same. Another important one which has emerged from case-law in terms of how it is defined, is that there needs to be an organised grouping of employees in Great Britain whose principal purpose is carrying out the activities on behalf of the client. Each element of that definition is important.

It could be that there is a property management company in place and the way it organises itself is that no individual employee is assigned to any particular client. Everybody services everyone. That would mean that there would not be a service provision change because there would not be an organised grouping of employees assigned to a particular client.

The other thing that is important to remember, particularly in a real estate context where there might be several chains of sub-contracting, is that TUPE specifically says that a contractor includes a sub-contractor. You need to think in any situation whether there are TUPE transfers between contractors or sub-contractors and we will have a look at that in a more detail later.

And finally, there is a principle that has emerged from a real estate case that although it talks in TUPE about the client, if there is more than one client, a grouping of clients, then there still can be a service provision change.

This principle came out of a case where there were residents’ management companies on a residential estate. They grouped together to commission services for the estate jointly and when they changed provider, because they had a common intention to commission those services jointly before and after and they were after the same scope of services, the fact they were more than one client did not defeat TUPE applying as a service provision change.

Siobhan: Thank you very much Jane and I think as we have seen from what you have said, the legal tests themselves are in a sense quite formulaic and where the real difficulty, and the real skill comes in, is when you are applying those tests to a real life situation and looking at the actual facts.

Rebecca and Jane are both going to deal with some of those. I think we will start off with Jane looking at the first of those situations.

When will TUPE apply in the Real Estate Sector?

Buying/Selling a Property

Jane: Yes we are going to look first at buying or selling of property. There is quite a busy diagram on the next slide to illustrate the fact that there could be multiple TUPE transfers. If you are looking at a situation where there is a property, with a business being operated from it, and the property is transferred as part of that business transfer (where the business is sold as a going concern), that is why it says TUPE question mark at the top, where you have got the sale between the seller and the buyer. If that business with the property in it is actually being sold, not as a going concern, but it changes hands by way of a share transfer then TUPE does not apply.

It is important to understand what type of sale you are dealing with. Is it an asset sale or a share sale? Assuming for these purposes that it is an asset sale there could be a TUPE transfer at that level. Then we need to think about whether there is a change in property manager managing that property? There could be a TUPE transfer there and then one level down there could be a main FM contractor – the pink bubble. It may be that the buyer continues with the same contractor, in which case there wouldn’t be a TUPE transfer. Or it may be that they change, in which case they might, under the service provision change most likely.

Also, as I mentioned earlier, TUPE specifically says sub-contractors are also counted as contractors – it may be that the main FM contractor has sub-contracted certain services. It could be, for example, they do general cleaning of the building but every so often there is a deep clean or pest control that comes in and that is sub-contracted to specialist sub-contractors.

At all those different levels there could be TUPE transfers that you need to be thinking about.

The most common scenario that we deal with is the sale of a commercial property. It could be the sale of a hotel, it could be retirement homes or a shopping centre. When considering whether TUPE is going to apply we need to know whether the building is going to be sold with vacant possession and, if so, what is going to be happening eventually in the long term. If it is being closed just for refurbishment, we have already talked about the fact that that does not necessarily stop TUPE applying. But if it is being sold with vacant possession because it is going to be redeveloped and it is going to be used for something very different once it is occupied again, then it may be that it does not retain its identity and therefore it does not meet that business transfer test which we talked about right at the beginning.

For example, it might be that somebody is buying up a former day school where pupils came and went and the rooms were configured as classrooms and that is going to be sold with vacant possession and turned into retirement flats. There it is going to be residential and a completely different use. In that circumstance it clearly would not retain its identity and TUPE would not apply.

We also need to think about whether there are existing leases in the property and if there are business that are tenants. Once the building has been sold, will those tenants carry on running their businesses? If so, then the employees of those tenants will simply carry on being employed in those businesses and TUPE will not be relevant. But we need to think about associated transfers. As we saw from the diagram earlier, are there property managers, providers of facilities services like cleaning, security guards etc. who we need to think about and whether or not there is a TUPE transfer that we need to take into account.

Change of Property Manager

It is not just where buildings are sold that we need to think about TUPE. It could be that the building is staying in the same hands but the owner or the property manager on their behalf has decided that they need to have a change of services and the first thig the owner might decide is to change the property manager.

Does TUPE apply there? Well, possibly. As ever with TUPE, it is going to be facts specific. The first thing to consider is what services the property manager is providing. For there to be a service provision change, the services that the new property manager will provide need to be fundamentally the same as those that the outgoing property manager did. It may be that the scope is sufficiently different for that not to happen. We also need to consider whether there is an organised grouping of employees. Depending on how the current property manager has configured its workforce, it may be there is nobody dedicated to the particular property’s work and there would not be a service provision change. We also need to think also about other sub-contractors.

Often the property manager will simply act as an agent and commission the facilities management services on behalf of the client. If the property manager changes, that should not disrupt that relationship because the contract will be between the owner and the facilities manager provider, as a sub-contractor. However, that is not always the case so we always need to double check that, to make sure that there is not a TUPE transfer at that level as well.

Picturing that as a diagram, it is a fairly simple one. You have the client at the top, they have got their existing property manager and they decide to change and they appoint the new property manager. The TUPE transfer will be between the existing manager and the new one. There is no contract between them but because of their respective contracts with the client, TUPE will operate at that level. There is no bounce back up to the client and out again. It is between the existing and the new property manager providers.

Rebecca: OK. We have looked at the sale of a property and we have looked at service provision changes for a property manager and other contractors that are involved. I want to explore what happens when we bring the two of those things together. So we have a property sale involving simultaneous change of owners and contractors, does TUPE apply?

On this slide we can see there are two different transfers happening. Firstly, at the top level, we have a change in the owner of the property. It is moving from client A to client B and, as Jane explained, that could involve a TUPE transfer of employees who are engaged by the owner if the necessary requirements are met.

When we move down a level things get a little more complicated. Jane took us through TUPE and how it applies on a service provision change. Importantly for a service provision change to occur there must be a single client for whom the service is provided. What this diagram shows is that the identity of the client is changing at the same time as the identity of the service provider. The owner is selling property and all of its contractors stop providing services on completion of that sale and the new owner then brings in its own contractors.

To look at this in more detail it is known as a Hunter v McCarrick situation, after the case that first considered this issue. After several appeal stages, the case was actually decided as McCarrick v Hunter but that does not slip off the tongue quite so easily so we are going to go with Hunter v McCarrick. So let us have a look at what Hunter v McCarrick says and what it means in practice.

On the face of it, Hunter v McCarrick might provide an exception to the usual TUPE position. There is no service provision change where there is change of client at the same time as the change of service provider. This means that a buyer who is buying that property might have more flexibility if it wants to change contractors and bring in its own people when it completes on the purchase of the property.

It is important to remember at this point that TUPE is mainly an issue for the buyer because the effect of TUPE is to make the buyer responsible for employees and liable for pre-transfer liabilities and responsible for dismissals in connection with the transfer if the seller’s employees transfer to it or if the contractor’s employees transfer to its contractors.

The buyer may well find the Hunter v McCarrick situation helpful because then it does not have those normal worries.

Where there is no transfer, the redundancy and the employment costs will remain a matter for the seller and its contractors.

If there is no transfer, then the employees will either need to be redeployed or made redundant by the seller and its contractors. There is a question as to whose issue this is going to be between the seller and its own contractors.

The redundancy and employment costs are likely to be incurred by the seller’s contractors, rather than by the seller itself, because it is the contractors that actually employ the individuals. However, what we are finding in real estate scenarios is that it is becoming more and more common for contractors to make sure they have indemnities that protect them against that and to push that cost back up to the seller, if it is incurred.

Looking at the detail of Hunter v McCarrick, to decide whether this exception applies it is necessary to consider the position at each level of the chain. I find it helpful to sketch out a diagram which shows the position before and after the transfer.

On the left hand side of the page, we have the seller and below that its contractors and say sub-contractors that are providing services in connection with the property with a note indicating where the employees sit.

Then on the right hand side of the page, we sketch out the buyer and its intended structure after completion. Then draw a dotted line down the middle of the page that shows completion with all of the changes happening at that same point in time.

There would be a change in the managing agents and the suppliers and a change in the client at the same time so everything changes on completion. I that is the case, then there is a Hunter v McCarrick exception which means that it cannot be a service provision change.

However, could there still be a regulation 3(1)(a) business transfer? This is a significant caveat to the Hunter v McCarrick position. Hunter v McCarrick says that there will not be a service provision change in this scenario but what it does not consider is whether there could be a TUPE transfer as a business transfer. If we go back to Jane’s section right at the beginning, once we have decided that there is no service provision change, we must also consider whether the service could amount to an economic entity in itself. With most of these services, they are labour intensive arrangements which could be more difficult to judge because there are not a large number of assets to consider when deciding whether there is a going concern transferring.

Taking security, for example, take the security guards out of the equation for a moment and look at what else is needed in connection with that service. For example, CCTV, security office radios and so on that are used for the security provision. Think about who owns all of the kit and what is going to happen with it. If the buyer takes on the kit after the transfer or after the sale, then it is more likely that there is going to be an economic entity (which is the security provision) which has transferred. It is important to consider whether there could be a business transfer even if there is not a service provision change. Remember that it is the buyer that is going to take the risk of any uncertainty, so unless the buyer can obtain an indemnity from the seller (covered later) then it is the buyer that potentially has that risk.

I think one question that is worth asking early on is where does the buyer want to get to and why? What we have seen in the service industry over the years is that the parties will often agree to proceed on the basis that TUPE applies if there is any uncertainty. Remembering that TUPE is about employment protection and there is a good chance that the tribunal will come down on the side of TUPE applying if there is uncertainty.

It is also worth considering if the seller has security before the sale and the buyer is still going to need security. Often the easiest approach is to proceed on the basis that TUPE applies and generally that is going to be fine. The employees themselves will not take issue with it. Having said that, there may be very good reasons why that does not work in a given situation. So the buyer should think about it early on. Think about whether Hunter v McCarrick might apply, whether there is any uncertainty there, decide the aim and then be clear about the potential risk and costs which might be lurking.

It is easier to try and negotiate a commercial solution which is likely to be the best possible outcome for the buyer in that scenario. When looking at TUPE clauses in a maintenance contract, we want to see a set of clauses that apportion liability in relation to transfer on commencement of the contract and a set of clauses that apportion liability when the contract ends.

The next scenario that I want to look at is facilities and maintenance contracts and how to approach those in a sale situation.

In this scenario we have a seller who has appointed its contractors. The buyer plans to stick with those contractors when it completes on the sale. However, when it looks at the contract that the seller has negotiated with its contractors, it finds that TUPE has been forgotten.

What is the impact of this and what can the buyer do? Let’s take a look at that in stages. We have a seller who has negotiated a contract with its contractor that has poor TUPE protection in there and we have a buyer who is looking to retain those contractors. The buyer has got two choices. First it can take an assignment of the contract. What happens is that the buyer takes on the contract and it finds itself with the same poor contract terms in respect of TUPE.

The second option is that the buyer can take a novation of the contract. This gives it the opportunity to secure more adequate TUPE protection. If the buyer is talking to the contractors about staying in place after the completion of the sale, it might have an opportunity to agree to renegotiate the contract to address any poor contract terms and make sure that it has adequate protection in place.

If they buyer seeks to change the contractor and appoint a new contractor after completion of the sale, then TUPE is likely to apply at that time. So TUPE would apply to transfer the staff of the existing contractor to the buyer’s new contractors.

The subsequent contractor is going to look to the buyer to make sure that it has indemnities and contractual protection against any historic liabilities or any risks that the employees bring with it. In the first situation, if the new contractor takes over a contract that the buyer had on poor TUPE terms, the buyer is not able to go to the current contractor and to back off any indemnities that the new contractor seeks from the buyer.

The buyer has taken over that contract from the seller and the buyer is left with the same poor contracting position. This is likely to mean that the new contractor will price for that uncertainty because it is not getting the indemnities. The buyer then ends up having to procure the services at a higher cost than it would otherwise.

Where the buyer has novated the contract, it may be able to secure better contract terms. The buyer is then in a position where it can say to the new contractor, it can be clear exactly who is transferring and it can have protection from the buyer against employment risks that transfer and that the individuals might bring over with them. The buyer can ensure the subsequent contractor has protection against the consultation process and the various obligations that occur in relation to the transfer process. In that scenario the buyer is then able to back off anything that it has agreed to provide to its new contractors and it has been able to then retender the services at the most effective contract price.

Jane: Thanks Becky. So I am going to look briefly at the situation with leases. So where a lease is granted or assigned to a new tenant we also need to consider whether TUPE applies. A landlord could forfeit the lease or operates a break clause or accept a surrender from a tenant. In all those scenarios TUPE could apply depending on the facts.

Then on the next slide there is a diagram of how that would work. So the landlord has given the lease to the existing outgoing tenant, somehow in one of those three ways the lease comes to an end, and the landlord grants a new lease to the incoming tenant. If TUPE applies, it will apply between the outgoing tenant and the income tenant. Again there will not be any bounce back to the landlord and then a bounce out again of staff to the new tenant. It is simply directly from one tenant to the other and, as with the providers, there will not be any sort of contractual agreement between those two tenants, so they will both be looking to the landlord for any contractual protection that they have.

The employees of an existing tenant may transfer to the new tenant, if the same business is going to be operated from the property by the new tenant. It could be that it is a pub and one tenant is giving up that pub and a new one is coming in. The staff may transfer. Or it could be that there are services attached to the building so cleaning, security etc. as we have talked about, there might be a TUPE transfer there.

But what happens where the old tenant is operating a different sort of business? You will see on the slide there are some scenarios. If the old tenant is operating a DIY store and the new tenant is going to be operating a restaurant, that is clearly going to be a very different business and TUPE is not going to apply to the employees employed in that business. There might be ancillary services attached to the property such as cleaning or security which might transfer but the employees in the core business will not because it is not a business that retains its identity after the building is given to a new tenant.

Conversely if the new tenant is going to be operating a DIY store as well, then clearly that is going to be the same sort of business, same identity, and TUPE applies.

And then the third one is the “maybe” TUPE applies option. A flat pack furniture retailer moves in. Is that sufficiently close to being DIY? Although you buy the furniture as a product, you then have to assemble it. Is that sufficient for DIY? That is one where you would have to dig deeper to look at that but that is a “maybe” one for TUPE applying.

As you can see from those different scenarios, the key is does the business, or the way the building is being used by the new tenant, mean that it has retained its identity and that is going to be a question of fact in each case. Even if it does not retain its identity, consider whether there are ancillary services delivered to the building which might trigger a TUPE transfer. Also think about what happens if there is no new lease. It could be that the landlord decides to take the business over themselves and, in that situation, there could be a TUPE transfer of the business to the landlord. It could be that the landlord decides to take on provision of the services that are delivered to that building directly. Again that could be a TUPE transfer.

But if there is no new lease because the building is going to be completely redeveloped and it is going to be used for something different in the future, then that is likely to defeat TUPE because it will not be the same business being carried on. It won’t retain its identity. If it is a temporary refurb and there is no lease granted at that point, but there is going to be one granted in the future, then we need to look at how long that is for, what the purpose of it is and is the business, once it starts operating again from that premises, is it going to be the same as before?

All those points we made earlier about temporary cessation of business, temporary vacation of the property are going to be relevant there.

Siobhan: Thank you very much Jane and Becky.

What I want to do next is to drill down in a bit more detail to another key practical issue which is about employees. Who will actually be caught by TUPE? Of course, sometimes in a deal there may not be many employees who are actually impacted or who are on the ground and who might be caught by TUPE and there is a real risk that they can be overlooked until quite late in the process.

Let us spend some time looking at which employees are in scope and Jane is going to look at who is assigned.

Jane: Yes, so this is often quite a big area of contention, particularly if the transferor is struggling financially or they do not have new work to redeploy employees on to. We quite often see people trying to put more staff on to services than one might think the service required or needed.

We are talking about employees of the transferor. If we are talking about a business transfer, we are talking about employees who are assigned to that organised grouping of resources which is part of the business transfer definition.

If we are looking at a service provision change, then they have got to be assigned to the organised grouping of employees and although you might think that is not that the same thing in a service provision change. It is actually a two part test.

You have to look first at whether there is an organised grouping of employees because it has got to be a conscious organisation of staff. Then as a second question for each individual employee in the mix is whether they are assigned to that organised grouping. Obviously there is a great delay of overlap but they are two separate questions and assignment is going to be very fact specific. What we do know is that somebody has got to be assigned other than on a temporary basis, so we are looking at things like whether they are there as temporary cover, are they there as cover for someone who is off sick for a short period time or have they recently arrived at the building but actually it is a permanent transfer to that place and we have to look at all the factors.

None of the factors is determinative in and of themselves. On this slide we have listed out the various factors that are most commonly considered. At the top we have got time and I am just going to do a bit of myth buster here. We often get asked whether, if it is more than 50%, that means somebody is assigned for TUPE purposes. No, it does not. It is often a starting point to identify the people most likely to be in scope but it is not simply a question of how much of their time they spend on the particular business or service that is in question. So, it is a factor, but it is not a determinative factor.

We also need to consider things like the nature of the work, what does it say in their employment contracts? If it says that your job is to be the onsite property manager at the shopping centre then that is going to be quite a strong pointer to assignment. But if that is not actually what they are doing in practice because things have moved on since the contract was drafted, then we may need to look at that more closely, look at the actual responsibilities of what they are actually doing.

Allocation of cost is an interesting one. Often in a real estate scenario, if the cost is being covered by the service charge for a particular property and it is all of the cost, then again that is a strong indicator of assignment. The last one we look at sometimes is a little bit subjective. What is the value of that individual to the service or the property in question? Is there somebody who has been there, got particular knowledge of that building, even if they can be moved to other places, actually their knowledge of that particular building is vital. It is things like that that we are looking at.

In a property sale we need to think about whether there are employees who might be direct employees of the seller. They might be involved in running the business that is operating from the property or they might be employed facilities people in the actual building. It is just that the seller employs them directly rather than contracting out.

We need to think about property manager employees who are responsible for the building and they could be offsite or they could be in a large property where perhaps it is multi-tenanted and there is a lot of property management required. They might actually be embedded in the property in question in an office of the property manager.

We also need to think about employees of any tenants who are running businesses from the property in question and whether or not they are going to be assigned and then of course they also may have sub-contractors. So we need to think about all those people who might be in the mix.

As with whether TUPE applies or not in the first place, there are grey areas with who is assigned and these often arise where there is a part transfer. There might be a portfolio of properties or it could be one property that is split up into different leases and that portfolio is being split. Then we have to think about, depending on which properties are being split out, which employees are assigned to those and maybe there is not anyone assigned and maybe it has not been set up that way.

We need to think about the impact of any splitting on any employees back at head office. If the property manager has organised themselves so that they do have people dedicated to particular properties, is the fact that the portfolio is being split going to impact on that? Is anybody assigned or is the property manager going to be left with a redundancy situation because no one is assigned but they do not have as much work?

That can play out in terms of support functions as well. So there could be marketing or sales functions if it is a new development and there is a lot of activity in assigning or selling the properties and getting leases on properties. It could be there is a particularly busy time on a particular site at a particular point in time but that is not going to be an ongoing activity and that could also affect whether someone’s assigned or not.

People’s work may be spread across different properties and there could be shared services where there are teams supporting a number of properties. This is similar to the head office for the property manager, if people are not organised in a way that is assigned to the properties that are splitting off, whoever employs those individuals might be left with a redundancy scenario.

Siobhan: Thank you Jane. As we can see there are quite a few questions you need to look into in a great deal of detail before establishing whether or not somebody is assigned and coming to conclusion on that.

Next we are going to look at what the obligations of TUPE are on each party. Rebecca will give an overview the main issues and if you would like more information on any of those, for example the information on the consultation process, there are other webinars available on our website where you can get more information, but Rebecca what are the main obligations the parties need to consider?

Rebecca: In this next section I want to explore the key TUPE obligations that the parties have in a scenario where TUPE applies.

Looking at this firstly from the point of view of the current employer, also known as he transferor. That is going to be the seller in a sale scenario or the outgoing contractor in a service provision change scenario. As the current employer, the seller or the outgoing contactor, has obligations under TUPE which are set out on that slide. Firstly, to provide employee liability information. We touched on this earlier but essentially it is an obligation to provide information about terms and conditions of employment, about grievances, disciplinaries and claims that have arisen in the recent past and, as I mentioned earlier, it is generally seen as too little, too late but it is an obligation under TUPE that the seller or the outgoing contractor needs to comply with.

Secondly, there is an obligation to inform and consult. Now the obligation to inform and consult is mainly a matter for the outgoing employer and they have an obligation to inform and, in most cases, consult with employee representatives. The new employer has a duty to provide information about measures which it proposes to take in relation to the transfer, and we will come on to that when we look at the obligations on the new employer, but it has to provide that information to the existing employer for the consultation process to play out. It is a good idea for the seller, or the outgoing contractor, to request that information in preparation for the consultation. We talked earlier about the timing of that process and it can generally be completed in a period of around two to four weeks if there is nothing significant that is going to change. It is worth bearing in mind that if there are no existing employee representatives or trade unions in place, then time needs to be built into the process to allow for that to happen.

And then the final bullet point on the slide is to think about the contractual obligations. So as well as the obligations that the seller has under TUPE it is important to check whether it has any contractual obligations. Tis is most likely to be relevant for an outgoing contractor but that contractor needs to have a look and see whether it has agreed to provide any information about employees at any specific time, whether there is any restrictions and what it can do with employees in the period leading up to the termination of the contract which might trigger a transfer. Also it is possible that there might be some general cooperation provision that requires it to cooperate with the new employer to enable the transfers to run smoothly.

As well as the statutory and contractual obligations, there were various steps that the seller or the outgoing contractor should take to protect itself in more commercial terms. Firstly, look at workforce planning. It is important for the seller to consider what it wants to happen versus what is going to happen under TUPE versus what the buyer wants to happen. It is then possible for the parties to identify any mismatch and start to think about how contractually or commercially that can be dealt with.

For example, in a scenario where TUPE applies, the seller should think about whether it is comfortable with its employees going across. Are there any star performers that it wants to keep and, if so, it needs to check whether there are any contractual restrictions that would prevent it from keeping them.

And what if there is a Hunter v McCarrick argument? Is the seller prepared to incur redundancy costs implementing redundancies because the individuals will not transfer? What if the buyer wants an indemnity against the uncertainty of TUPE applying in that scenario? So, generally the sooner a party is clear about its position, then the stronger its negotiating position is going to be when it asks for cover for those uncertainties and those risks or those costs from the other party.

Having done that workforce planning, where there is a mismatch between what the parties want and what will happen under TUPE, it is worth assessing the potential cost early on. The main considerations are redundancy costs, the cost of notice pay and possibly unfair dismissal claims and consultation claims. However, often if it is a situation where there are only a handful of employees involved and that might be an insignificant figure compared to the wider deal costs. So it is worth looking at that early on and coming to an agreement as to how that is going to be portioned and who will carry that cost.

Moving on from the seller side to the buyer side. Looking at a buyer in a sale scenario, or an incoming contractor in a service provision change, who is essentially the new employer, the first thing to do is to carry out due diligence. If this is a situation where TUPE might apply, ask for employee information from the seller, or the outgoing contractor, to understand who is doing what, where those employees sit, who employs them, so that a TUPE analysis can be carried out.

Compare what is currently happening to what the buyer intends will happen and identify any areas of risk for which the buyer might want to seek protection from the seller. For example, if the buyer is buying a property where there are cleaners engaged by a sub-contractor which is going to be replaced, the buyer might identify that there is a Hunter v McCarrick argument. However, it would be wise to be clear to the seller that it requires an indemnity to protect itself against the uncertainty. The earlier that that is put on the table, the more likely the seller will agree.

As with the seller, the buyer is subject to some obligations under TUPE. First to provide measures information which is information about any changes which will occur for the employees as a result of the transfer. That could be something fairly minor like a change in healthcare provider for a private healthcare benefit, it could be a shifting of pay dates, or a change in the holiday year or it could be something much more significant like redundancies and relocations. The buyer, or the new employer, needs to work out what those issues are and make sure that it has notified them as measures information to the seller so that the seller, or the outgoing employer, can then carry out the consultation process about that.

It is possible, although also relatively rare, that the buyer could have an obligation to consult with its own employees where the buyer has employees that are going to be affected by the transfer. For example, the buyer has individuals that are carrying out functions that the seller’s employees are doing when they come across and there could be resulting a redundancy situation. Then potentially the buyer could be subject to an obligation to inform and consult as well as the seller.

Another key consideration for a buyer where TUPE will apply is to ensure that it thinks about and negotiates adequate contractual protection for itself.

We will look at contracting for TUPE in a more detail in the next section but remember that that buyer or the new contractor is going to inherit any existing liability and so it will need to negotiate contractual cover with the seller, or the outgoing employer, where it can to apportion that.

An added consideration in the service change scenario is that TUPE might apply both at the start and the end of the contract. So a contractor needs to be thinking ahead as well as planning for the present and looking at exist at the same time.

In particular, given the risk of a Hunter v McCarrick argument, the contractor would be well advised to try and negotiate protection against redundancy costs if TUPE does not apply and it is left with staff at the end of the contract.

Siobhan: Thank you Becky and thanks for highlighting the importance of a contract in a TUPE scenario and, indeed, that is what we are turning to next. So how can the contract be used in a TUPE scenario to help mitigate those risks and manage the process smoothly and of course how the allocation of liabilities reflects the commercial strength of the parties. Plus detailing your particular requirements so tailoring particular clauses to this specific circumstances in a deal. Jane what do you need to keep in mind on a sale or the commencement of services?

Jane: A one-off sale is most likely to be a business transfer. The commencement of new services is likely to be under a service provision change.

If you are the seller (or the client) then you need to think about what protection you currently have.

If you have an incumbent provider, the existing contractual terms relating to employees (with that provider) matter because it is important whether the seller has got protection backed off that so it can pass protection onto a new provider, if we are in a service provision scenario.

Obviously, if there is just a sale, and there is not a contract in place, it may be that, depending on the risk the seller is prepared to take, it is relaxed about liabilities as it knows about its own employees.

So we need to know to gauge that risk and to look for where the back protection might be. Are the employees transferring from the client or an existing contractor? If they are transferring from that existing contractor, we need to look at the contract with that contractor to look at what protections the seller has.

We are looking for the gap in that exposure and we are trying to gauge the risk commercially. So, if because of the nature of the deal, there is one security guard potentially in the mix and that person has less than two years’ service, you still need two years’ service for normal unfair dismissal. So, the risk profile of dismissing that person, that one individual with their short service, is probably not that costly depending on the value of the overall transaction.

That is going to be a very different risk profile from where you have a large shopping centre with lots of different FM staff assigned and they have got long service. In that situation, you are going to be much more concerned if you are the client and you have poor TUPE protection in your existing contract with the current contractor because your exposure might be considerably more.

Turning to if you are the buyer or the income contractor, you are going to be looking to the seller, or the client, for that protection. The type of protection you are going to be looking for by way of indemnities is a number of things.

You are going to be looking at indemnities for a failure by the seller or the current contractor to carry out the information and consultation exercise properly. The primary people to be informed and consulted are going to be the employees of the seller, client or any existing contractors. As the incoming employer, you are going to want to know that is done properly, because if it is not you are going to inherit those liabilities.

The second indemnity you are going to be looking for, given that TUPE effectively transfers the staff with all of their baggage, is any pre-transfer liabilities or any claims they have got. You are going to be looking at an indemnity for that. You do not want to carry the can for that or pay the expense of it as the buyer.

The third one is an indemnity for any failure on the part of the seller, or client, in giving the employee liability information. So, if that is not accurate and therefore you incur liabilities that you had not planned for, you are going to want that indemnified.

Finally, what we normally see in a TUPE scenario is a list of people in scope to transfer and that is a defined list. Then there will be an indemnity for people who are not on that list who are described as unexpected transferring employees.

The seller controls the list as it ought to know who should be in scope. However, if there is a long sub-contracting chain, the seller may not know who is in scope and the unexpected transferring employee indemnity gives the buyer security that, if that list is wrong, and other people turn up on day one and claim to have TUPE transferred, there is a mechanism in the indemnity for the buyer to dismiss those people within a timeframe and call on the indemnity.

That indemnity is usually quite heavily negotiated in terms of carving-out liabilities that the buyer or the incoming contractor causes in the way they handle those people. So, the seller probably would not agree to be on the hook for discrimination claims if the buyer or the new contractor could have avoided that.

If we are looking at this from the perspective of the seller or the client though, they are also going to be looking for indemnity protection from the buyer, or the new contractor, and their concerns are going to be similar but slightly different.

The first type of claim they are going to want to be indemnified for, are regulation 4(9) and regulation 4(11) claims.

These are claims where the liabilities will stay with the seller even where the liability is triggered by something that the buyer (or the new contractor) does or proposes and the employees object to transferring to the buyer (or the new contractor). Although it is not caused by the seller (or the old contractor), the liability will stay with them. They are obviously going to want an indemnity for that.

The types of liabilities under Regulation 4(9) are for proposals to make a substantial change in the working conditions to the employee’s material detriment. That could be changing pay rates, changing hours, changing location and more seriously, proposals to carry out a repudiatory breach of contract. That could be making changes to pay with no proper process or something similar.

Similar to the concerns that the buyer will have, the seller (or the client) will want to be indemnified for the buyer (or the new contractor’s) failure to comply with the consultation requirements. That would be for not giving measures information to the seller; that is the extent of the buyer’s obligation. The seller will also want to know that from the point that the transfer takes place, any employment liabilities or dismissals are going to be on the account of the buyer (or the new contractor) subject to that unexpected transferring employee’s indemnity that we talked about. They will want a clean slate going forward.

Sometimes though there are more complicated issues to think about. There may be bespoke clauses that are drafted.

We might be want to contract for the Hunter v McCarrick uncertainty that Rebecca has talked about. We might, even if there is no service provision change, want to be clear that we still think TUPE applies because there is a business transfer.

It may be that there are redundancies and the parties have reached a commercial agreement to split the cost of those redundancies. That might be on a capped basis or it might just be limited to enhanced payments but not statutory redundancy payments, so there might be bespoke drafting around that.

There might be requirements allied to the fact that there might otherwise need to be redundancies, for the seller (or the outgoing contractor) to redeploy people to avoid triggering that redundancy indemnity. In fact, redeployment in some way is quite often a requirement of an unexpected transferring employee’s indemnity.

There might be actually a scenario where everyone has decided and agreed that there is going to be a no TUPE scenario and that could be relevant, for example, if it is a new build and all the services are going to be newly provided. There will not be anyone to transfer so it is genuinely not a TUPE situation. Or it could be that there are new services being provided as part of a portfolio of services. For example, there could be a multi-tenancy building and there is going to be, for the first time, a restaurant for all the tenants to use and that is genuinely a new service and therefore no TUPE.

Siobhan: Great, thank you very much Jane. And now we are looking at what happens at the other end of the deal. In a service provision change there will come a point when those services will end for some reason and Rebecca is going to look at the issues to consider on termination or exit arrangements under TUPE.

Rebecca: Yes, so as Siobhan said, there can be a situation where TUPE is going to apply when the agreement ends and it is important to think about that at the outset so that you have contracted for it appropriately.

For example, if there is a three year cleaning contract in place and there are employees that transfer on the commencement of that arrangement, it is also important to think ahead about what is going to happen at the end of the contract starting with what the contractor is likely to be asked to sign up to by its client. These are the obligations we find on the contractor that the client asks them to agree to.

Firstly, information about assigned employees and their terms and conditions. Thinking about what information will be provided, how often and when that is going to happen.

It is very common to see a requirement for the contractor to provide employee information during the term of the agreement, either on request or perhaps on an annual basis but also specifically within a fixed period before the expiry of the contract. Often we see there is an obligation for employee information to be provided either six or three months before the contract expires and also once notice has been given on the contract. It is common to see a provision that requires employee information to be provided within, say, seven days of that notice having been given and that is important for the client because the client can then use that information to retender the services. Anyone who is then bidding for the contract, knows how many employees are going to come across and they know how much they are going to cost so they can factor all of that into their tender pricing for the services.

Secondly, it is common to see a set of what we call ‘anti-sabotage provisions’. Those are clauses which usually kick in in a similar timeframe to employee information being provided at the end of the contract. It might be that the clauses are effective as soon as notice is given. It might be that they are in place for the last six months of the contract.

They are a set of clauses that restrict what the contractor can do in the period leading up to termination of the contract.

For example, the contractor cannot redeploy its best people away from the services and it cannot assign its underperforming employees to the services. It cannot suddenly increase the number of employees that are on the contract so that they all end up transferring under TUPE to the new employer.

As well as the obligations and restrictions that the contractor will usually be expected to agree to, there will be various indemnities that they are expected. These are mainly intended to address the fact that TUPE will transfer the employees and any associated liability to a new contractor after the contract terminates. They serve to make sure that the contractor remains responsible for what has effectively happened on its watch. While it has been the employer of the individuals and any liability has incurred, then the contractor remains responsible for the cost of that. Also if there is any liability that is due to the acts or omissions of that contractor, then again indemnities make sure that the contractor remains responsible.

It is usual for those indemnities to be given both in favour of the client for whom the service is being carried out but also in favour of the new contractor. The reason for that is that TUPE will transfer the liability to the new contractor, if there is a new contractor being bought in. If the indemnities are given in favour of the new contractor, this is preferable for the client. The client can then invite the new contractor to enforce those indemnities directly.

The standard suite of indemnities that we typically see are on the slide. Failure to inform and consult on termination of the contract. Employee liabilities that have arisen during the term of the contract. Failure to provide accurate employee information. Cover for unexpected transferring employees on termination where the contractor has provided a list of employees but then there are other individuals that claim to transfer, then we would expect an indemnity to cover that.

Also any failure to co-operate to achieve a smooth transfer if that obligation is set out in the contract.

So that is what we would expect to see from the contractor’s side. Moving on to look at what the contractor will be usually expect to receive from its client, we have a lighter set of provisions on termination. This is reflective of the fact that TUPE transfers liability away from the contractor for the most part, so the contractor has less need to obtain indemnity protection to cover it.

The provisions that we would usually expect to see are set out on the slide. They would cover failure to provide measures information by the new employer. It would also cover employment or dismissal of the employees following termination. So once the employees have transferred to the new employer (or the new contractor), the contractor would expect an indemnity to cover any claims arising after the transfer. It is actually not strictly necessary for the contractor to have that indemnity because TUPE will transfer the liability anyway, but it is something that we see normally included and it is useful for a contractor to protect itself against misconceived claims. An employee can just claim against anybody who he has been involved with in the recent period, then the contractor can find itself on the hook there (at least in terms of costs to defend it).

Finally, protection from claims under Regulations 4(9) and 4(11) which again Jane spoke about earlier. The constructive dismissal style claims which arise from plans or proposals of the new contractor but for which the current employer could have liability.  We normally expect to see an indemnity making sure that it is has got cover for those matters.

Siobhan: That is great, thank you. We have now reached the point where we are going to pull together the practical aspects of everything we have talked about.

We have taken a look at what TUPE is, what it does, how it commonly applies in a variety of real estate scenarios and how the parties can contract for it.

We will finish with some helpful hints and tips to bring all of that together for you. Over to Rebecca.

Summary of TUPE in the Commercial Real Estate Sector

Rebecca: Thanks Siobhan. In summary, due to the nature of real estate transactions with employees often lurking under sub-contract arrangements, we find it is very common for pockets of employees to come to light at the last minute.

Taking advice and thinking about TUPE early on can minimise that risk.

Once due diligence has been carried out and employees identified, then the parties can identify any mismatch between what they want to achieve and what will happen under TUPE. We call that forewarned and forearmed. In that situation, a party is likely to negotiate a better outcome for itself. The earlier it has thought about these issues and got its card on the table.

A buyer, who has been clear from the outset that it wants to be fully indemnified against a TUPE risk will more likely obtain that protection than one who has identified an issue late in the day.

Conversely, a seller who has been clear that there are employees in scope to transfer, is going to be in a stronger position to hold firm on that than one who has identified employees late on in the day.

When we are talking about the need to always consider TUPE, remember it can apply to the whole range of real estate scenarios. So if you are involved in any of the following, then do take a moment to run through a quick TUPE checklist at the outset. So ask: what employees are working at this site? Who employs them? How will their employment be impacted by the transaction?

We have a summary on the slide there of all of the sorts of transactions where TUPE might be an issue. It could apply to transactions involving a seller or a buyer, leaseholders, tenants, property managers or sub-contractors. Any of those people and in any of these types of scenarios – so where there is a sale of a property, a grant, assignment or termination of a lease, or the appointment or change in property manager and sub-contractor.

Whenever a party finds itself in one of those scenarios, just run through that quick TUPE checklist early on.

Finally, be prepared. Review service and maintenance contracts to understand what they say about employees. Make sure there is sufficient TUPE protection if those agreements are going to be assigned. Have a think about what additional obligations arise under the contract. Is there an obligation to provide employee information or any restrictions to be aware of? Check what apportionment of employee liabilities is provided for. So, if having done that TUPE analysis, if TUPE does not have the desired outcome, think about whether settlement agreements can be used to deal with employee terminations and that can help to provide commercial certainty and be clear about the costs.

Bear in mind that no two scenarios are the same. The fact that we have looked at so many scenarios where TUPE can arise in a real estate situation, just goes to show that it really is very diverse and we often find that there are no two scenarios that are the same.

Finally, the key point to take away is that lack of preparation can result in more concessions. The earlier that you think about TUPE, know where the people are and what the contracting position is likely to be, then the better commercial outcome is likely to be negotiated for a party.

Siobhan: Thank you very much Rebecca for that very helpful summary. And that brings us to the end of our session today. It just leaves me to say, thank you to you for joining us and of course, thank you to Jane and Rebecca for giving us all those insights and practical tips on TUPE and the real-life examples that you have given in the commercial real estate sector.


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