Category Archives: Legal

Does a Director need a Contract of Employment or a Service Agreement?

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A director of a company is one of the most senior members of the organisation. They are entrusted with key decision-making power and exercise substantial control over how the business operates. They have access to all the most sensitive information about the business.

There are various types of director positions within a private limited company and this will affect the type of contract they may have. Directors are responsible for the success and the legal compliance of the business.

The difference between Executive Directors and Non-Executive Directors

Directors can either be executive or non-executive.

Executive directors are those that fulfil a service role within the business and generally will have a contract of employment alongside – and separate to – their role of director. For those who are employed within the business, a service agreement is an essential contract in order to protect the interests of the company. In these scenarios, failing to clearly set out the relationship between a director and a company – their duties and liabilities – at the time of their appointment could leave the company vulnerable in the case of a breakdown in relationship further down the line.

Non-executive directors are on the board of directors but do not work within the company on a day-to-day basis. Their legal rights and responsibilities are still equivalent to an executive director with regards to their position as director.

Executive Director’s service agreement vs employment contract?

As with employment contracts for other members of staff, a contract should be drawn up between an executive director and the company in the form of a director’s service agreement. This will include all the contractual terms of employment, ensuring both company and director alike are aware of their mutual responsibilities.

Why is an Executive Director’s Service Agreement so important?

In situations where a director is also the majority shareholder and not an employee, there will be an intrinsic tie between the interests of the company and the interests of the director. This affords a level of protection for both parties.

However, when directors are brought in as employees to manage the running of the business, a director’s service agreement provides a framework for this relationship. It underpins the structure of management within the business, to avoid misunderstandings or conflicts of interest, in case the director does not perform their job role as required. 

Director, Employee or Shareholder?

In many cases directors are also shareholders within the company (and/or may receive share options as part of their overall compensation package), which can add to the complexity of their position. If there is a breakdown in relationship and a director leaves the company, it can be difficult to separate these different roles.

Without setting out provisions for unforeseen circumstances, a company could be left with the director continuing as a statutory director and/or shareholder after the termination of employment, giving them continued decision making power or influence even after a dispute. A director’s service agreement would define their duties as an employee, as well as setting out how termination of employment might affect their position as director or even their shares.

Protecting the company’s future

With regards to the restrictive covenants of a director’s service agreement vs an employment contract, the former are likely to be more onerous. Typically directors would be subject to longer notice periods and non-compete periods.

Since the director is an integral part of the business, their departure would have greater implications than that of an ordinary employee. It may take longer to find an adequate replacement and the impact of them working for a competitor in future would be more problematic, due to the access to information about the business that they will have had. Hence the importance of having adequate restrictions in place to safeguard the future of the business.

What does Director’s Service Agreement typically contain?

Like employment contracts, director’s service agreements cover all the basic provisions of the obligations of both the company and the director towards one another. Typically a service agreement may include the following:

Terms of employment:

The basic provisions including working hours, holiday and sick pay, pension scheme, place of work etc.

Remuneration and bonuses:

As well as salary, the director may be part of a bonus scheme or be entitled to share options, all of which should be outlined in the agreement.

Role and responsibilities:

Details of the scope of their role, including their duties and responsibilities as well as their areas of authority. A precise job description gives a standard against which the director can be held to account if they are not fulfilling their role as required. It can also set the limits for their decision-making powers, to avoid conflict with other directors.

Termination and notice period:

Provisions for how a termination of employment will be handled are vital to ensure a smooth transition. As mentioned above, an appropriate notice period will allow time for adequate hand over areas of responsibility.

Intellectual property

As with all service agreements, the contract will typically set out that any IP rights created by the director will be the property of the employer. This could protect essential elements of the business from being claimed and taken elsewhere by an individual within the business.

External engagements

There may be restrictions on whether a director is permitted to work for an external company whilst in their role, particularly in relation to any competing business.

Confidentiality and Non-compete:

The service agreement should include restrictive covenants around non-disclosure, confidentiality and not working for competitors. Due to the level of access a director has, this is a particularly important aspect to have a legally binding agreement over. It would also restrict them from poaching clients or employees if they were to leave.

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You can download a document template of the Director’s Service Agreement here, or order a fixed fee bespoke drafting of your Service agreement here.

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Declaration of Trust / Deed of Trust UK Property

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Buying a property is an exciting step – albeit a stressful one. Whilst some people can afford to buy a property alone, it is common for more than one party to be involved. Whether you are buying with a friend, moving in with a partner or receiving financial support from your parents, adding multiple individuals to a purchase can make it a lot more complex.

This is especially true where there is not a clear 50/50 financial split between the parties. Perhaps one person has a larger initial sum to invest, or another will be contributing more to the monthly mortgage repayments.

In these cases, it is important to have legal clarity around just how much each person owns. A Declaration of Trust – also known as a Deed of Trust – can help to avoid uncertainty and prevent disputes further down the line.

What is a Declaration of Trust?

In UK property law, a Declaration of Trust is a legal document stating that one person holds the property on trust for others.

Whilst there will be a registered owner of the property, the Deed of Trust establishes the true ownership and how it is divided between different parties. It sets out the financial arrangements between those with an interest in the property, for example in the case of cohabiting couples, joint tenants or tenants in common. It will specify exactly how much each person has invested and what each will get back if the property is sold or one person buys out another.

This clarification at the outset means that each party knows where they stand in terms of their initial or ongoing investment in the property. In a situation where parents are investing money into the property to enable child to afford the full deposit, the Declaration of Trust will set out how much money will be repaid and under what conditions.

When is a Declaration of Trust used?

Whether you are buying a property with someone else as co-owners, or receiving financial help from a third party, a Declaration of Trust is an essential document. Although the initial financial arrangements may be cordially agreed at the point of purchase, the long term financial picture may require more clarification:

What will happen if one person wishes to sell before another?

What if you split up with your partner – how will you ensure the property is split fairly between you?

Drawing up a Declaration of Trust sets clear boundaries that enable everyone to understand the agreed ownership position. It protects those who are investing more money from legal disputes if they expect to receive a larger portion of any future sale proceeds.

Why is a Declaration of Trust important for cohabiting couples?

Buying your first property with a partner can be a daunting commitment. It may make financial sense, but there is also an element of risk if things do not work out.

For example, what should happen if one party contributes a larger percentage of the deposit, but ongoing mortgage repayments will be split evenly? In this scenario, the Declaration of Trust may stipulate that when the property is sold, if the couple then wish to split their finances, they will each receive their initial deposit and then divide the remainder 50/50.

It may be the case that one of the couple’s parents are contributing a fixed sum to help raise enough for the deposit. In this instance, a Declaration of Trust could provide that those parents will receive that money back when the property comes to be sold, if the couple were to split up.

Considerations for joint tenants and for tenants in common

When buying a property with someone else, it is important to decide whether you wish to buy as “joint tenants” or as “tenants in common”. As joint tenants, each person owns the property as a whole, with neither party owning a specific share. Upon sale, the profit would be automatically split 50/50, regardless of each co-owners’ investment, and if one co-owner were to die, the entire property is automatically transferred to the survivor. This is a simple solution for a couple who wish to leave the property to the other upon death.

Conversely, as tenants in common, both parties own a specific portion of the property, as agreed between them. This may well be 50/50, but not necessarily. This arrangement provides more flexibility for complex situations, which may involve children from another marriage.

A Declaration of Trust is invaluable for both joint tenants and tenants in common. For joint tenants, it will set out how the joint tenancy can be severed, should the co-owners choose to go separate ways. And for tenants in common, it draws out exactly what investment each has made, what percentage of the property they therefore own, and how each will benefit from the sale of the property.   

How do I set up a Declaration of Trust?

Before setting up a Declaration of Trust, you will want to calculate the proportion of the property that will belong to each co-owner. Consider all the costs involved in the purchase and how these have been divided. Both parties must complete the Declaration of Trust, so it is vital you both agree on the particulars. The trust document will then be completed and dated on the date of completion of the property purchase. It will typically also be registered against the title of the property at the Land Registry, so that future buyers are aware of who the property truly belongs to (and to whom the sale price should be paid).

Financial disputes, especially over property ownership, can be complex and emotional, as well as being costly. By setting up a Declaration of Trust, each owner is therefore taking steps to protect their investment.