It may prove costly to change your service provider

In these economic times, commercial landlords are under increasing pressure from tenants to ensure that service charge costs are kept to a minimum, but there is a hidden danger.

Landlords need to shop around and decide whether it is cheaper for them to provide the services themselves or to outsource the provision of those services to external companies. Those who have outsourced services may consider switching to new service providers in order to get a better rate.

Although it may seem odd to talk about employment regulations in the context of service charges on buildings, landlords need to remember that TUPE regulations apply where staff have been employed to provide those services (eg security guards and cleaners). Otherwise, landlords and their service providers may be hit with unexpected claims and redundancy pay-outs.

The TUPE regulations apply whether the individuals are employed directly by the landlord, or by the management company to whom the services have been out-sourced. In practice, this means that where the landlord has up until now provided the services itself and employed staff to do so, following out-sourcing to an external service provider, the employees will transfer to the new provider. If the landlord then chooses, after a couple of years, to switch the services contract to a second company, those same employees will transfer to the new company. This is because although the company providing the services has changed, the ultimate client who has contracted to receive the services remains the same (ie the landlord).

There is, however, an exception to this rule. Last year the Court of Appeal confirmed that where there is a simultaneous change in the service provider and the client (ie the landlord), then TUPE regulations will not apply. In other words, if a building is sold to a new owner who decides to change the company providing the services then the employees will stay with the old service company, rather than transferring to the newly appointed company.

The importance of this ruling is that it clarifies who bears the burden of any potential redundancy costs. Where an investor acquires a property and changes the out-sourced service company, this is likely to result in additional redundancy costs for the outgoing contractors and the seller of the property who appointed those contractors.

As always, if you need commercial and pragmatic commercial property advice, we’re here to help so please get in touch.

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