Service occupancy or tenancy: the differences

Article reference: UK-IA-RES10
Last updated: September 2022 | 9 min read

Certain types of employment often provide accommodation as part of the employment. Such accommodation is sometimes referred to as tied accommodation or service occupancy. In law it is a residential licence. Examples are:

  • a teacher at a boarding school
  • a prison officer
  • a caretaker
  • a security officer
  • a live-in nanny, house keeper or carer
  • a hotel worker

Members of the armed forces and agricultural workers are also often service occupiers, but different rules may apply from those set out here.

Why does it matter?

If you provide accommodation to an employee, the legal arrangement is either a service occupancy or a tenancy. The difference between a lease and a licence is very important to both parties.

If you have a service occupancy, the occupier's right to occupy terminates when the employment terminates.

If you let property to an employee under a tenancy, that letting is regulated by the Housing Act 1988 and other residential law. When the employment terminates, in the first case, you have vacant possession of your property; in the second case you do not.

An employer may offer accommodation to an employee merely because it is convenient to do so, for any number of reasons. That does not create a service occupancy.

In that case, the landlord employer should use an assured shorthold tenancy agreement, templates for which are available from Net Lawman. That arrangement will best protect the landlord's interest. It is important to treat the relationship with the employer as for any other landlord and tenant relationship, drawing the agreement with the same care and detail as for any other tenant.

How do you know the difference?

What matters is the real essence of the agreement, not merely its title or the words you use. However, a carefully worded agreement which is followed in practice, is fairly certain to create the arrangement you want.

To qualify as a service occupancy, the service occupier must:

  • live-in, or locally, because they cannot otherwise conveniently do their job
  • work under a contract of employment that clearly states that they must use the accommodation available
  • pay no rent - because the occupation is essential to the job

Note that the employment contract is affected too. You should write into the terms of employment a specific condition that the employee will live in the service accommodation. That is critically important.

A service occupier need not necessarily have exclusive possession of all of the accommodation, though some private space would be usual.

The same conditions could be applied to a service occupancy licence as to a tenancy agreement.

The form of agreement would be a licence to occupy.

If the occupancy fails to qualify, the landlord should use an AST. They can obtain possession on the expiry of the term - usually six months, then continuing automatically. The precise forms and procedure are mandatory.

What sort of accommodation qualifies?

There is no specific requirement.

What matters is that living in that particular accommodation is essential to the job. A school teacher may have to live in a flat within the school buildings. A hotel worker may live in a flat or part shared accommodation in some part of the hotel building. A caretaker may live in a cottage 100 metres down the road.

What if there is accommodation locally, but the employee cannot afford it?

No problem. The employee is not obliged to look for accommodation to prove that they cannot find or afford it, whether to rent or buy. What matters, in the round, is that the employer reasonably insists that the employee should live locally, that is, near enough to do the job.

If we return to our example of a schoolteacher, they might be able to live in rented accommodation not far from the school, but if the school reasonably believes they can work better by being based in the accommodation they provide, then the teacher will be a service occupier.

We have twice used the word 'reasonably'. That means an average person on the street would agree with the proposition.

What about rent?

A service occupier will not pay for their service occupancy during employment. When the employment terminates, they are no longer entitled to occupy the property.

In any event, the word 'rent' implies a tenancy, so the term for any payment should be 'licence fee' or 'occupancy fee'.

However, there may be circumstances when an employer wishes to identify the element of benefit provided by the service occupancy. An example is a situation where pay is centrally negotiated or where negotiated agreements are informally followed. The employer may wish to take into account the increased or reduced market value of accommodation as a factor in assessing the total pay package.

Net Lawman has found no cases on this point, but gives the following opinion. It would not be prejudicial to the qualification of the arrangement as a service occupancy if the rent was treated as an element of pay both in the contract of employment and in the occupancy contract. From the occupier's point of view, tax and national insurance issues should also be considered.

The risk in this view is that a detailed agreement with formal provisions may tend to indicate a tenancy agreement rather than the licence essential to the character of the service occupancy.

What about the occupier?

Because no tenancy exists, the occupier does not have security of tenure once employment ends. When that happens, they no longer have a right to remain in the property. If they stay, they are a trespasser.

Most good agreements for service occupancy provide for a short period for the occupant to pack and leave. This may be by default (doing nothing) or by agreement. Agreement may be formal, documented, or informal, by a few words when they are due to leave.

The short period may be several days or far longer. If the employer has died in office, the employer may allow their family to remain in residence for a long period. This can be part of the deal, and in the agreement, or it could be a gratuitous offer when events unfold.

The termination of the service occupancy does not prejudice a claim by the former occupier to Housing Benefit.

When does a service occupancy end?

Ideally, the occupancy agreement should cover termination. But if termination is not covered in the agreement, the occupancy can end by either:

  • the employee voluntarily vacates the property without notice; or
  • the right to occupy ends automatically on the termination of employment.

It is good practice to give notice to terminate a service occupancy in circumstances when the termination of the employment are known. But it is not essential.

What happens if an ex-employee refuses to leave?

As the ex-employee will have no security of occupation, they will automatically become a trespasser if they remain in the property.

However, it is unlawful to evict a residential occupier without an order of the court. No form of notice is required. The judge's order for possession will usually provide for vacant possession within 14 days, but in circumstances of 'exceptional hardship', that period may be extended to 42 days.

It is important to accept no payment for unlawful occupation as it may be construed as rent, thereby creating a tenancy and entitling the 'tenant' to statutory protection.

However, the ex-employer can demand money for the continued use and occupation of the service accommodation after termination of the employment. The legal term for these charges is mesne profits. The charge is calculated on the basis of the open market valuation of the property.

To enforce payment of mesne profits, a 'money judgment' can be included as part of any County Court Possession Proceedings for both payment to the date of issue of the claim and continuing until the property is vacant.

What if the occupier is dismissed or leaves the employment but makes a claim to an employment tribunal?

The employer can obtain an order for possession despite all employment related proceedings. That applies even if the dismissal is unfair.

Moreover, no employment tribunal or court will consider any part of an application which claims to remain the service property.

Can the landlord move the service occupier to a different place?

If the different place is far from the place of employment, it may be difficult to continue to claim that occupation there is essential to the employment.

However, if provision has been made in the occupancy agreement to allow the employer to terminate the service occupancy without terminating the employment contract, then they may do that. Alternatively the agreement may provide specifically for the service occupancy to change. This would be both necessary and desirable if the place of work changed.

County Court Possession Proceedings

If the occupier (or any other person in occupation, whether lawfully or not) refuses to leave the property, application should be made to the County Court for possession.

Possession proceedings may be started at any time after the employee's last day of employment. The evidence that will be required by the court will be the contract of employment and the occupancy agreement.

The former employee, still in occupation, will be able to attend the hearing to give their reasons to the judge as to why they have not vacated the service accommodation. They may also tell the Court about personal circumstances that they wish the Court to take into account when making a possession order.

A possession order can be effective 'forthwith', meaning the former employee, or their spouse or partner, should vacate immediately, or may be for a longer period. The effective date of the Possession Order is at the discretion of the judge and each particular case is dealt with on the merits of the evidence placed before the judge.

Need an agreement?

Net Lawman sells a service occupancy contract that covers the situations and conditions described in this article. It is very flexible, with alternatives where appropriate.

We also sell assured shorthold tenancy agreement templates.

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