What is Service Occupancy?

A service occupancy arises where an employee is required to live at their place of work either because it is essential for the performance of their duties or where their contract of employment specifically requires them to reside in a particular property in order to better perform their duties. A service occupancy agreement grants an employee a licence to occupy the property and is usually required for positions such as teachers living at a boarding school, farm managers living on their farms or hotel managers living at their respective hotel. The contract of employment will usually refer to the arrangement to ensure that there is a clear connection between the employee’s employment and the service occupancy agreement.

How do Service Occupancy Agreements differ from a normal assured short-hold tenancy?

For the purpose of property law, service occupancy agreements are considered a unique type of licence. The agreement gives an employee a personal licence to reside in the premises for as long as they are employed for and as such is for no fixed term. An assured short-hold tenancy on the other hand is always granted for an initial fixed term and typically ends on expiration of the term. If the employee’s contract comes to an end for whatever reason, then provided they have a genuine service occupancy, once their contract of employment comes to an end they no longer have a licence to reside at the property. Of course, this means that there is a direct link between the employment and the occupation, which makes it unlike any other type of licence or lease.

An employer will typically grant a service occupancy agreement as opposed to an assured shorthold tenancy because service occupancy agreements are more flexible arrangements and employers don’t want to be left with employees residing in property after they are no longer an employee. This can cause issues for insurance purposes where the accommodation also has access to commercial trading premises with stock, for example. The main differences between service occupancy agreements and assured short-hold tenancies are rent, control and termination.

Rent

• A tenant of an assured short-hold tenancy will be liable to pay their landlord rent on designated rent payment dates. However, an employee who is party to a service occupancy agreement will usually not pay rent to reside in the property on the basis that the whole purpose of the occupation is that it is specifically required for the employee to perform their job (and therefore living in the employer’s property rent free, forms part of the overall package).
• If an employer does want to charge a ‘licence fee’ either at full market rent or at a discount, this is possible but it may call into question whether a genuine service occupancy arrangement. An employer can make deductions from the employee’s salary in lieu of a licence fee and this can be dealt with in the employee’s contract of employment. Employers will need to be careful when making deductions as such deductions cannot be made if the occupier is on minimum wage.

Service Occupancy or Service Tenancy?

• An assured short-hold tenancy is particular in that it grants to the tenant exclusive possession of the property (Street v Mountford 1985) and is usually granted under the provisions of the Housing Act 1988. The term ‘exclusive possession’ means that the occupier or tenant has control of the property to the exclusion of all others. Practical examples of this would exclude the tenancy of a whole house or flat occupied by one person, who can lock the door and prevent others from entering (save for specific inspection provisions usually contained in the tenancy agreement). Contrast this with a property which is occupied by more than one person, where the occupation is not consistent and which occupation flexes across different parts or dates – an example of this would be where a veterinary practice offers a flat above a practice for those employees working a ‘night shift’ to sleep when not on duty. The occupiers would change depending on the shift pattern and the flat would not be within the possession or control of one employee in particular. This latter example cannot be a tenancy under any circumstances, because of the lack of ‘exclusive possession’ by the occupiers.
• Employers do need to be careful when granting so-called ‘service occupancies’ that they do not, in fact, end up granting a ‘service tenancy’. A service tenancy arises where an employee lives in accommodation provided by their employer, but their occupation is not so closely connected with their employment as to create a service occupancy. If you also grant that employee exclusive possession of a house or flat then you may find that they actually have a service tenancy and the employer therefore loses the ability to remove the employee from the property simply because that employee’s employment comes to an end.

Termination

• Provided that you have a genuine service occupancy arrangement in place, the employee’s occupation can be brought to an end in one of three ways:

1. Termination of the employment contract is the most common way to terminate a service occupancy agreement. Such termination is automatic, arising without the need to serve a notice to quit.
2. The agreement might also be terminated when an employee moves out or;
3. If the employer serves a notice to quit. The flexibility of such a termination is preferable, particularly if an employer wants the service occupancy agreement to come to an end in the event that, for example, the employer wishes to move the employee’s residing premises but does not want to end the employment relationship. In these circumstances, although not legally required, it would be prudent to ensure that any notice to quit provides a minimum of 28 days’ notice to avoid falling foul of the Protection from Eviction Act 1977

• If however, you have inadvertently granted a Service Tenancy, then you will only be able to bring the tenancy to an end under the provisions of the Housing Act 1988 (either section 8 if the tenant is in breach of the terms of the tenancy agreement or section 21 which allows a landlord to retain possession of a property on non-fault grounds). In either case a tenant cannot be evicted without a court order.

What issues should Landlords be aware of when preparing a service occupancy agreement?

Linking the employment contract to the service occupancy agreement

At the heart of a service occupancy agreement is the employment contract, therefore it is important that the employment contract reflects the service occupancy agreement. For example, where living in the property is not essential, the contract should make clear that occupation of a particular property is required for better performance of the employees’ duties.

If it is likely that the employer will require the employee to move premises as part of their employment, for example to a different hotel, they should make an express provision allowing them to do so in the service occupancy agreement. As discussed, this will grant the employer the flexibility to terminate the licence without terminating the employment contract.

When drafting the service occupancy agreement, it is important to highlight that a licence is being created as opposed to a tenancy, which would for example automatically give tenants statutory rights under the Landlord and Tenant Act 1985.

If you have any doubt as to whether the occupation is genuinely linked to the employee’s employment you should seek legal advice from a property or employment law specialist.

Charities

If the employer is a charity, they may be required to obtain an order of court before they can grant a licence. Although a licence is not strictly a disposal of land as no interest is granted under s.117(1) Charities Act 2011, because the licence is granted to an employee, a potential conflict may occur  and therefore  the requirement of an order may arise. It is not always clear when this obligation arises and it is therefore essential for a charity to seek legal advice before entering in to a service occupancy agreement.

Early termination

A complication of service occupancy agreements may arise if the employer needs to take back possession of the property before the employee’s employment ends (for example, if it changes the employee’s role, or sells the property).  Although the agreement will usually stipulate that an employee must leave the premises on four weeks’ notice, this may not be appropriate in all instances as the employer may not be able to give notice in some cases. It might therefore be worth the employer including a clause in to the agreement for immediate termination without notice. However, if the employee refuses to leave the employer would still need to obtain a court order under the Protection from Eviction Act 1977 to evict them. Although for this reason it may be tempting to add early termination provisions in to the agreement, an employer should give this careful consideration before doing so. Early termination clauses can cause difficulties, for example, terminating a service occupancy agreement during maternity leave would be likely to amount to discrimination under the Equality Act 2010, even though the employee may not be working during this time. It is therefore important to ensure legal advice is sought before entering in to any such agreement.

Tax

If an employer has granted a service occupancy agreement, they will have to report and pay the expenses and benefits of the accommodation to HMRC unless the accommodation provided is exempt. This means that the employer must report on a form P11D and pay Class 1A National Insurance on the value of the benefit. The employer must also account to HMRC for expenses such as council tax, water, sewerage charges and floating charges such as furniture, heating, lighting and maintenance.