TUPE or Not TUPE: That Is the Question (When Switching Property Managers)

When Does TUPE Apply to Property Management Transactions?

On a change of property or asset manager, you may inherit more than just a new service provider—you could also inherit employees. TUPE is designed to protect employees when a business or service changes hands. TUPE typically applies to two types of transfer:

1. Business Transfers. Where an entire business (or part of one) situated in the United Kingdom is sold, assigned, or transferred, and keeps operating in essentially the same way afterward.
2. Service Provision Changes. Where activities previously carried out by one party are taken over by another. This includes outsourcing work to a contractor, switching from one contractor to another, or bringing outsourced services back in-house. In property management, TUPE is most commonly triggered under this category when a client terminates one management agreement and appoints a new manager, while the underlying property and client remain the same.

What Does This Mean in Practice?

Where TUPE applies, the consequences are significant:

Automatic Transfer of Staff. Employees assigned to the outgoing manager's work at the property automatically become employees of the incoming manager who is taking over the services. They transfer on their existing terms and conditions, which can make it difficult to align their pay and benefits with the new employer's (i.e. the incoming manager's) existing workforce. Often, the solution is to "ring-fence" these employees temporarily until changes can be made in compliance with TUPE.

Information and Consultation Duties. Both the outgoing and incoming managers must inform and consult with affected employees (or their representatives) before the transfer takes place. The outgoing manager must also provide key employee information to the incoming manager at least 28 days before the transfer.

Enhanced Dismissal Protections. Dismissing an employee simply because of the transfer will automatically be deemed "unfair". There are limited exceptions—known as "ETO reasons" (economic, technical, or organisational reasons entailing changes in the workforce—but these must be genuine and properly applied.

Due Diligence: What to Check

When there is a transition of property or asset manager on a transaction, the incoming manager should investigate:

• Which employees are connected to the property or services and whether they are likely to transfer;
• The terms and conditions and any other liabilities attaching to their employment; and
• Whether any subcontractors or other service providers have employees who might also argue they should transfer.

Contractual Protections

Who Transfers. The agreement with the new property/asset manager should set out which employees (if any) are TUPE transferring across to the new provider on commencement of the agreement. It should also deal with the possibility of unexpected TUPE transfers of employees who are not necessarily on that "agreed" list, but who assert that they have automatically transferred to the incoming manager by virtue of TUPE. TUPE applies automatically by law—parties cannot contract out of its application—so there is always a possibility it applies to a broader group than originally perceived and/or contractually agreed. Therefore, the agreement should set out what the process will be (and who bears liability) in this situation.

Pre- and Post-Transfer Liabilities

Under TUPE, as the transferee (i.e., the incoming manager) automatically steps into the outgoing manager's shoes as employer and inherits all employee-related liabilities, it is market standard to see an apportionment of pre- and post-transfer liabilities between the incoming and outgoing manager:

Pre-Transfer Liabilities. Usually, the incoming manager will want to ensure it has contractual protection for any liability that the outgoing manager has incurred prior to the incoming manager inheriting the employees.

As an agreement between the outgoing and incoming manager will not typically exist, the incoming manager will look to the property owner (which is often the client receiving the services under the property/asset management agreement) to provide protection (usually in the form of an indemnity) for such pre-transfer liabilities. The reason is that the transfer has often resulted from a broader property acquisition and so should be a buyer/property owner risk.

In turn, the property owner client will usually want to ensure it has back-to-back protection from the outgoing manager under its existing management agreement and/or termination deed for any liabilities relating to the outgoing manager's employees.

Post-Transfer Liabilities. The client receiving the services should ensure it has contractual protection for any employment-related liability that the incoming manager incurs on commencement and during the term of the management agreement. Sometimes it is negotiated that this protection covers the client and any successor manager.

As the various counterparties will often seek a clean exit from the property, you can expect to see strong pushback on such requests. W&I insurance options are increasingly being explored to fill this liability gap through the coverage of TUPE-related liabilities on such service provision changes.

Top Tips for a Smooth Transition

Transaction deal teams should prioritise early engagement with TUPE-related issues, allowing sufficient time in the transaction timetable for consultation processes. While TUPE does not prescribe a fixed consultation period, allowing adequate lead time is critical to a transaction's success.

The same applies to contractual allocation of liability between the incoming/outgoing manager and/or buyer/seller. These should be discussed at an early stage, so contractual solutions can be found and W&I insurance explored if necessary.