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Employment law tips for buyers of commercial real estate

23/11/2021

At a glance

When considering the purchase of commercial freehold or leasehold property as a stand-alone property transaction, employment law issues may be the last thing on your mind. But the cost, both in time and money to deal with, for example, a caretaker or receptionist who ‘comes out of the woodwork’ just before (or after) completion, can be avoided with some advanced planning. We have set out below some key TUPE issues to consider for buyers of commercial real estate.

  1. Due diligence: Firstly, you should find out who currently works at or for the property and who may be employed by either the seller, the landlord, or by a business that services the property. Their contracts of employment may automatically transfer to the buyer, or their future service provider under TUPE. For example, the seller or managing agents of an office block may employ receptionists, security staff, gardeners, and cleaners. There may even be staff who are based elsewhere, such as the seller’s head office, but if their job involves spending significant time working on issues for the property, they could still TUPE transfer.
  2. Who does the seller expect to transfer? At an early stage of negotiations, ask the seller or landlord who they expect will TUPE transfer. If it later turns out that additional people (or maybe fewer people) will transfer, this may give you scope to negotiate concessions as part of the transaction.
  3. Who is ‘assigned’ to transfer? TUPE will automatically transfer, to the buyer or their service providers, the employment contracts of anyone who is ‘assigned’ to work for the property. This is determined based on several factors, including the percentage of time that the employee spends working for the property being sold.
  4. Alternative arrangements: It may be possible for all interested parties (seller, buyer, and employee) to arrange that, in practice, the individual remains employed by their current employer rather than transferring. As an alternative, their employment could be terminated, but this will likely give rise to employment-related claims against the buyer and seller.
  5. Information and consultation: Certain information about the transaction must be given to employees who may be affected by a TUPE transfer. Consultation, with a view to reaching agreement, must then take place over any ‘measures’ that it is envisaged will be taken that may affect the employees. Make sure to allow sufficient time to complete the information and consultation process before completion; usually this is dealt with immediately after exchange, provided there is a sufficiently long gap between exchange and completion.
  6. The automatic transfer of liabilities: On a TUPE transfer most employment-related liabilities will transfer to the buyer (or a business that it engages to provide services for the property after completion). This automatic transfer takes place even though the buyer may have not been involved in the liability causing event. So, for example if, before the transaction completes, a transferring employee has not been paid their salary or suffers a form of prohibited discrimination, then liability for that omission or act will transfer. The transfer of liabilities may even apply to any employees who are dismissed before completion. This means that the buyer should seek suitable indemnity protection in the transaction documents.
  7. Circumstances where TUPE may not apply: TUPE may not apply to the transfer the employment of those people who are employed by a service provider, where the provider’s servicing of the property ends at the same time as the property sale completes. Although this is a complicated issue and subject to caveats, it may help the buyer to avoid liabilities transferring to it.
  8. Cherry picking employees: Finally, be aware that pre-completion, a seller, or their service provider could try to reallocate employees within their business, so that poor performers are moved to work for the property with the intention that they will TUPE transfer, while good performers are moved away from the property to avoid them transferring. The risk of this cherry picking can be reduced by carrying out due diligence at an early stage in the process, and by including suitable warranties and/or indemnities in the transaction documents.

Please get in touch with the authors below in case you have any queries or require assistance on employment matters around a commercial property transaction.

Disclaimer: We at Memery Crystal (and our parent company RBG Holdings plc) support and encourage free/independent thinking in relation to issues which are sometimes considered to be controversial subject matters. However, the views and opinions of the authors of articles published on our website(s) do not necessarily reflect the opinions, views, practices and policies of either Memery Crystal or RBG Holdings plc.

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Mark Rose
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    Stephen Ravenscroft
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