The Impact of Brexit on UK Real Estate Law: Our Experience So Far
12 November 2021
The direct legal impact of Brexit for real estate has been limited, as property law is a matter for EU member states rather than for the EU as a whole. But other consequences have been felt.
The law governing real estate transactions has always been a matter for EU member states to determine, not the community at Union level. But Brexit has still affected real estate activities. Deals have stalled in the strange and uncertain environment created by Covid-19 and Brexit, and interruptions in the supply of both services and goods caused by the latter have undoubtedly delayed development projects.
2020/2021 will not be years that most businesses will recall with much satisfaction. The short-term impact of periodic closures and restrictions due to Covid–19, and the longer-term impact of home working, online retail buying and reduced business travel have caused many businesses to question the need for real estate, its use and value.
In our experience, it is our clients in retail and hospitality who have been most affected by lockdown restrictions and the move to home working, and also by the impact of Brexit on the timely delivery of goods and materials from EU nations. There are signs of recovery in this sector, as travel restrictions ease and vaccination levels rise, but the shortage of HGV drivers and the extra red tape around customs and excise continue to create problems. Conversely, the logistics sector has seen a surge in activity with the move to online shopping, though the impact of Brexit on supply chains and the availability of HGV drivers has been keenly felt in this area too.
Just how far UK GDP contracted in 2020 and 2021 as a result of Brexit (as opposed to the pandemic) is unclear. However, the UK economy, like many others, has seen a rapid recovery. In October 2021, ONS figures put GDP at only 4.4% below its pre-pandemic level at the end of 2019. Such economic growth may give rise to confidence amongst investors and developers, particularly those from overseas now that the post-Brexit weaker pound results in significantly discounted UK property. This confidence may serve to alleviate some of the anxiety about post-Brexit business but practical issues around the timely supply of goods and materials, and the limited availability of certain workers look set to remain. To date, such issues (along with impact of the pandemic) have resulted in:
- a knock to business confidence, and consequently transactional fluidity and some property values;
- attractive terms for tenants and buyers in some sectors/geographical areas (such as retail and offices - though demand for logistics facilities has continued to rise);
- funding arrangements being adversely affected (e.g. required loan to value ratios being breached as a result of falling values);
- changes to the availability or terms of finance for acquisitions and developments of certain properties; and
- impediments to the cross-border flow of EU-derived equipment, goods and services.
What actions can be taken?
- Parties with current funding arrangements should review their terms e.g. loan to value ratios; term dates.
- Anyone acquiring, or leasing, a property should (as always) consider how easy (or not) it may be to dispose of it in the future (however unintended that may currently be).
- Real estate contracts, development agreements and funding arrangements should be drafted so as to allow for as much flexibility as can practicably be accommodated.
- Developers, or those planning a fit-out project, should review any intended use of EU-derived goods or services and draft accordingly to provide for what happens in the event of delay or unavailability.
- Alternative uses of premises should be considered, especially in light of the recent planning changes, which have added flexibility around permitted development and through the introduction of Use Class E.
- Lease terms should be reviewed and variations sought where needed, particularly in light of the moratorium on forfeiture for rent arrears coming to an end in March 2022.
What are the other points to note?
Several areas of law relevant to real estate derive from EU law to varying degrees, such as:
- environmental controls and energy efficiency of buildings;
- public procurement;
- some health and safety controls; and
- human rights (e.g. ownership/renting of a person’s home),
though, presently, it seems unlikely that there will be material changes in the short term.
The UK left the EU at 11pm (UK time) on 31 January 2020, and the transition period came to an end on 31 December 2020. The Trade and Cooperation Agreement reached on Christmas Eve 2020 sets out the shape of the ongoing future relationship between the UK and the EU and provides some degree of certainty for UK businesses.