Key TUPE considerations when buying UK commercial property

A key consideration when acquiring commercial property in the UK is TUPE: the Transfer of Undertakings (Protection of Employment) Regulations 2006. Employment law is UK wide, so these provisions apply on all UK investment acquisitions.

What is the aim of TUPE?

The key aim of TUPE is to protect employees’ rights when the business in which they work changes hands. The regulations stipulate that employees assigned to the business or services being transferred will transfer automatically to the new employer with their existing terms, conditions, and continuity of service intact (subject to limited exceptions). Dismissals directly linked to the sale of the business are prohibited, subject to limited exceptions, and the onus is put on buyers to uphold existing employment rights.

Properties which are subject to commercial lettings might comprise an associated business (i.e. the seller’s commercial letting business at the property) being acquired by the buyer. Therefore, TUPE could apply to the acquisition of any UK commercial property with existing leases.

When does TUPE apply?

TUPE can apply to sales and purchases of commercial property with ongoing services or staff in situ, for example office building receptionist or building manager; retail centre cleaning, security, on site management or maintenance staff; hotel hospitality employees. In such cases TUPE may result in the automatic transfer of the entire workforce along with all accrued rights, obligations, and potential liabilities (again subject to limited exceptions) on sale of the property.

The regulations are triggered by a ‘relevant transfer’, being either:

• the transfer of the whole or part of a business or undertaking where there is a transfer of an economic entity that retains its identity after the transfer (looking at factors such as whether assets, goodwill and staff are transferring). Depending on the facts this could, for example, apply to the sale of a hotel or the transfer of a lease, or
• a service provision change, e.g. outsourcing, insourcing, or re-tendering a service contract where the activities carried out pre and post-transfer are fundamentally the same. This could apply to a change of managing agent.

Not every property acquisition will invoke TUPE, but it may apply where ongoing services are fundamental to the property’s operation. Similarly, TUPE may apply where assigning or insourcing contracts for security, cleaning, or facilities management. Whilst the buyer and seller cannot exclude or limit the application of TUPE, they can agree commercially who meets the cost.

Identifying affected employees and employer

A key step for buyers during the due diligence process is determining whether TUPE applies to any employees at the property; and who is their employer. The employer may not be the seller and, depending on the buyer’s management structure on acquisition, the new employer may not be the buyer. The TUPE transfer may happen between outgoing and incoming managing agents.

The buyer should:

• understand from due diligence and site visits which staff are on site and/or work at the property;
• identify who employs them;
• review employment contracts and staff rosters;
• understand service arrangements and the employment structure, e.g. managing agents or their subcontractors; and
• ascertain the percentage of time spent by each employee at the property.

The seller must provide the buyer with ‘employee liability information’ at least 28 days before completion. That enables the buyer to understand the situation and to determine what, if any, measures it may require to take.

How TUPE applies to transferring employees

TUPE applies to employees who work wholly or mainly at the property immediately before the transfer (completion) date. Those employees will remain employed at the property and their employment automatically transfers to the incoming employer. The identity of the incoming employer depends on the employment / contract structure, but transfers commonly happen between managing agents.

Employees transfer on their existing terms and conditions (with limited exceptions) and changes to these may be void. Dismissing or making employees redundant solely because of the sale is likely to be deemed an automatic unfair dismissal under TUPE if the sole or principal reason is the sale of the property without an 'economic, technical or organisational reason entailing changes in the workforce'.

The incoming employer takes on all associated rights, duties, powers and liabilities (except criminal liabilities) for the transferring employees. That includes outstanding holiday pay, ongoing disciplinary matters, and even potential claims that have yet to arise. If the buyer and seller are the employers, it is common for pre and post-transfer liabilities to be apportioned commercially in the sale contract.

Pre completion obligations

Prior to the sale (and TUPE transfer) completing, both the seller and buyer need to inform and in some circumstances consult with affected employees (or their elected employee representatives), providing comprehensive information about the sale and any associated measures being taken. There is no minimum time limit for consultation, but it must be undertaken ‘in good time’ before the sale completes depending on the nature and extent of any measures. Failing to consult appropriately can lead to significant compensation liabilities on the employers.

Consequences of non-compliance

Failing to comply with TUPE can be risky. Employees whose rights are infringed may be able to bring claims for unfair/automatically unfair dismissal, redundancy pay, or breach of contract. The financial repercussions can be considerable, especially if multiple affected staff are involved or if the sale of the property forms part of a larger portfolio transaction.

For buyers, managing the risk includes:

• engaging early to identify potential TUPE exposure;
• conducting sufficient due diligence on staffing arrangements, employment contracts, and service provision;
• addressing potential employment costs and liabilities in commercial negotiations on the sale and purchase contract; and
• ensuring all consultation obligations are met timeously.

Key takeaways

Buyers should be alert to TUPE when acquiring UK commercial property. Early identification, engagement and careful management is key. Taking advice proactively, conducting thorough due diligence, and ensuring compliance with information and consultation requirements can avoid costly surprises and ensure a smooth transition for both staff and property management.