Brexit...Real estate

Although real estate is one sector where the legal impact of Brexit is expected to be limited, this doesn't mean that it will be wholly immune from change.

We take you on a quick run through what we see as the likely impact on both commercial and residential real estate, and the key issues to watch out for.

If you have any questions about this topic or other Brexit related topics, please get in touch.

How will Brexit impact the ownership of real estate in the UK?

From a legal perspective, it will not make any difference. There are no restrictions on the ownership of real estate in the UK based on the prospective owner’s nationality or residence.

Of course, in terms of what will happen in the market, one would need a crystal ball to know: there are a great many factors in play at present with Covid-19 causing recessionary pressures and impacting demand for certain types of real estate. Brexit will add a further element of uncertainty with short-term currency fluctuations and perhaps longer-term market adjustments.

However, the fundamentals of owning, leasing, operating and investing in UK real estate will not change.

What about real estate taxes?

Again, there will essentially be no change. Tax policy is determined by the UK Government. The only tax applicable to real estate that derives from EU law is VAT. There is already divergence on VAT rates and even on the treatment of real estate as between different EU countries. The divergence may widen but it is not likely to impact on the fundamentals of real estate ownership and operation.

What impact will Brexit have on construction and fit-out works contracts?

Not surprisingly in the context of Covid-19, and with Brexit imminent, there is now a greater focus on who bears the risk of delay. In the case of Covid-19 it is all about staffing and site-access; in the case of Brexit it will be a range of issues.

The main areas of concern are

• the impact of changes in law and regulatory changes;
• the imposition of tariffs;
• exchange rate movements or other expenses relating to procuring labour, goods and materials; and
• the ability of the contractor to procure labour, goods and materials in time.

Where one of these ‘Brexit events’ occurs, contractors expect the employer to bear the risk of delay to the works and any financial loss that flows from it. Failing that, they at least expect to see the risk shared between them (i.e. the contractor is allowed more time but not additional costs).

In the recent low inflation economy, building contracts have tended to be on a fixed price basis. With the uncertain impact of Brexit looming, contractors are seeking to guard against increased risk. One way of doing so is to agree a specific list of items / materials sourced from Europe (with anticipated supply periods) and provide for suitable price adjustment in respect of them.

Where specialist materials or artisanal labour are being sourced from Europe, more advanced planning is required in respect of lead in periods for orders, with early identification where possible of potential shortages, particularly in relation to labour.

With the strong possibility of ‘no deal’, advanced identification of risk, planning for it, and addressing it in the contractual documentation is clearly very important.

Will the ability to enforce contracts and leases change?

Assuming that these contracts and leases are drafted under English law and English court jurisdiction, it is likely to be harder for a UK party to take enforcement action in the EU, for example under an EU parent company guarantee in a lease. This is because English court judgments will no longer be automatically recognised and enforceable in the EU. However, there are steps being taken which are likely to make this process of enforcement in the EU a little smoother if, for example, the contract is a commercial contract which makes clear that the jurisdiction of the English court is exclusive. As to enforcement against a UK landlord or other counter-party, this will be the same because it will be an English court decision being enforced in England.

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