The transfer values of a relevant transaction: Estates Gazette, 2 August 2008

02 August 2008

TUPE Regulations may apply when a lease comes to an end. Tas Voutourides considers the specific issues that arise in such an event and how to minimise the risks.

The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) protect employees' statutory and contractual rights following a change of employer.
TUPE applies on a "relevant transfer", such as a sale of a business, a contracting-in or out of a business function or a change in service provider. In addition,TUPE may also apply where a lease expires, is
forfeited or surrendered and the landlord or new tenant subsequently carries on the same business.
This article will examine the specific TUPE issues that arise on the expiry of a lease. First, it is important to recognise the two separate tests that trigger a TUPE transfer.


Two tests


The standard test is a transfer of an economic entity that retains its identity on transfer. This will cover situations such as a sale of a property or the termination of a lease.
The service-provision-change test occurs where, immediately before the transfer, an organised grouping of employees has as its principal purpose the carrying out of activities for a client. This will encompass situations such as a change in the managing agent that employs staff on a property.
Employees who carry out services in a property can transfer to the landlord or a new tenant under TUPE when the existing lease terminates.
In Forcningen afArbejdsledere i Danmark v Daddy's Dance HallA/S 324/86 [1998] IRLR 315, the tenant ran several restaurants and bars under a lease. When the lease ended, the tenant dismissed its staff. The
landlord subsequently agreed a new lease with Daddy's Dance Hall, which
re-employed staff of the former tenant but on different pay arrangements.
The union brought claims on behalf of the employees. It argued that since the Acquired Rights Directive 2001/23/EC applies to a transfer from one tenant to another, it should also apply where the transfer takes place in two phases; for example, a transfer from the original tenant
to the landlord, with a subsequent transfer to the new tenant. The European Court of Justice agreed. It held that, following the termination of a lease, a relevant transfer can take place where the landlord grants
a new lease to a new tenant that then continues to run the business without interruption and with the same staff.
In Daddy's Dance Hall, the new tenant immediately re-engaged the dismissed employees. However, a delay between the dismissal of employees by a former tenant and a subsequent re-engagement by a new owner will not preclude a transfer from taking place.
In PBork InternationalA/S v Foreningen afArbejdsledere i Danmark
C101/87 [19891 IRl.R41. Following the termination of the lease, a factory shut down and all employees were dismissed. A week later, the new owner reopened the factor) and re-employed only half the number of staff previously employed. The court held that a transfer had taken place: the temporary closure of the business and the delay between the dismissals and the re-engagements made no difference.
The cases above are examples of the standard test of TUPE which requires a business to retain its identity. This test will not apply where a landlord or a new tenant does not continue the business.
However, the service-provision-change test may still apply. This may occur where, on the termination of a lease, a landlord or a new tenant requires the services of certain existing staff. For example, cleaning staff of a unit in a shopping centre may. Once the lease of the business running that unit expires, transfer to a new tenant of the unit if that tenant requires cleaning services.
Alternatively, in the absence of a new tenant, they could transfer to the landlord, should there be a need for cleaning to be carried out on a vacant unit. Continuing the services would not relate to any business
previously operated under a lease but to maintaining the property. In addition, where the managing agent rather than the tenant engages the cleaning staff, a separate TUPE transfer may take place if the tenant
dismisses the existing managing agent and the new tenant appoints a new agent. In this case, the cleaning staff may transfer to the new managing agent, not to the new tenant.
If staff are to come within the scope of TUPE on a service provision change they must be assigned to the activities being carried out at the property. If, for instance, the security and cleaning staff work at various properties, the likelihood of them transferring will be debateable. The key issue is whether they are dedicated to the transferring activities. This will help in deciding whether the staff are assigned to a specific property and therefore fall within the scope of TUPE.
To answer this question, various factors must be considered. Employees' contracts should be checked to establish their place of work. In addition, it should be determined whether they work at other properties or rotate between properties, both of which may prevent a transfer from taking place.


Financial obligations

When leases terminate, the financial exposure with regard to TUPE is the same as for any other transaction, including the standard property sale.
Employees who are transferring should be identified and the liabilities in respect of those employees must be allocated appropriately. The contractual documentation should provide for indemnities in respect of liabilities for both pre- and post-transfer acts and omissions.
Both parties also have to comply with information and consultation obligations. A failure to do so can result in any affected employees bringing claims for awards of up to 13 weeks' pay. Both transferor and
transferee would be jointly and severally liable for such claims and the use of indemnities to cover costs arising from the other party's failure to comply with the obligations is advisable.
The transferor will also have to provide certain prescribed information on
transferring employees in the form of employee liability information. A failure to provide such information may lead to the transferee bringing a claim for breach of the obligation with a maximum penalty of £500
per employee.
Accurate employee information is notoriously difficult to provide in property transactions. Given the financial penalties, a transferor should seek a written assurance from the transferee that it will not pursue
such a claim.


This article was published in Estates Gazette on 2 August 2008

• Tas Voutourides