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Brexit: What is the impact on UK Real estate?

19 December 2016

Not more on Brexit, you may think. Please, no more. But this item is written as the Supreme Court considers what may be its most significant case in its history, and one which may have profound consequences. Brexit, in almost any form, will have material legal and commercial consequences. How material might they be for real estate?

It’s been almost six months since the result of the referendum, and legally nothing has yet changed. The UK has not yet given notice to leave the EU. Assessing what will change in relation to UK real estate, and how, and when, is not much easier than peering into any opaque crystal ball, but we offer some thoughts below.

But we start with a few comments about the current position generally. We hope these may bring a little more clarity on some legal issues currently confused by inaccurate comment.

Article 50: when does Brexit happen?

The real Brexit date?

First, “Brexit” has not actually happened yet. The UK remains a full member of the EU. It may currently be excluded from certain EU discussions relevant to the exit process, assuming the withdrawal notice is given, but EU laws, as previously applied to operate in the UK, remain in full force. Any new EU law coming into force before actual exit will similarly apply.

On 2 October, the Prime Minister, Theresa May, announced that Article 50 will be triggered by March 2017, but Brexit does not take place on the giving of that notice. Under that Article, a state that wants to leave the Union must give notification “in accordance with its own constitutional requirements”. Once it has given due notification, the state and the Union is to negotiate and conclude a withdrawal agreement. By Article 50(3), “The [EU Treaties] shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification …, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period”. So, in the absence of any postponement agreement, Brexit will take place automatically two years after the notice. That is true whether or not any withdrawal agreement is in fact concluded. If you see comment that Brexit may take longer than two years, depending on how long the withdrawal negotiations take, that is incorrect, unless postponement is expressly agreed.

Can it be postponed?

Will the date of Brexit be postponed? Who knows. In principle, it can. But it would need unanimous agreement from all the other 27 members. That agreement should not be assumed – some in the UK appear to regard the withdrawal process as a practical matter of commercial common sense; the EU may see it as a fundamental matter of principle going to its own existence.

Can the Brexit notice be withdrawn?

Next, what if, however improbably, the UK wanted to change its mind and cancel its withdrawal notice? Can it? There has been much argument on that. Article 50 is silent, suggesting that it can’t. But the Vienna Convention on the Law of Treaties has something that may be relevant: under Article 67.2: “Any act…withdrawing from…a treaty pursuant to the provisions of the treaty…shall be carried out through an instrument communicated to the other parties”, and then Article 68 says: “A notification or instrument provided for in article…67…may be revoked at any time before it takes effect.” Does the EU Treaty override that position?

Will it all end up with the European Court of Justice?

Whether the EU Treaty does indeed override the position about withdrawal of the notification is a question that might end up with the European Court of Justice. It seems unlikely that that outcome would be attractive to the UK Government, so any cancellation of the notice would presumably be through a negotiated agreement.

Then, might the UK’s notification itself end up with the ECJ? A party losing in a UK court cannot “appeal” to the ECJ: instead, the Supreme Court may refer an issue of EU law to the ECJ, and must do so, unless it thinks the point is clear enough not to need that referral. It seems from previous decisions of the ECJ that damages may be claimed from the highest court in a member state if it wrongly refuses to refer an issue. If the Supreme Court reverses the High Court decision (see below) about due notification under Article 50, would it refer the issue to the ECJ?

The Current Court Challenge

Government or Parliament to decide?

The Government has taken the view that it can, by exercise of the royal prerogative, decide to give the Article 50 notification without the need for any Parliamentary approval. The High Court decided on 3 November that that was wrong, and the Government appealed to the Supreme Court. Despite comment to the contrary, this is a purely legal argument: it would seem odd to suggest that notification should be given whether or not the decision to give was lawful. It is perhaps ironic that an underlying principle of law for the High Court’s decision – the sovereignty of Parliament - was established in the early seventeenth century as a safeguard to protect people from an over-mighty executive, namely King James I.

The referendum was held in June 2016 pursuant to the European Union Referendum Act 2015. The Government argues that while that Act simply provided for the referendum, without any indication that the result would be binding, nevertheless it was implicit that the outcome would be followed - presumably regardless of the margin of success to the winning side, or the level of turnout.
The Supreme Court’s decision is presently expected in January. If it upholds the earlier judgment, it is also expected to confirm whether an Act of Parliament is necessary, or if just motions in (presumably) both Houses are sufficient.

Can the Scottish Parliament say no?

An additional angle is that the Court allowed submissions from the Scottish Government that in any event notification may not be given without the approval of the Scottish Parliament. That is based on, in particular, the Scotland Act 2016, where says: “it is recognised that the Parliament of the United Kingdom will not normally legislate with regard to devolved matters without the consent of the Scottish Parliament”. It seems “devolved matters” are matters on which the Scottish Parliament could legislate: the Scottish Government says that includes matters derived from membership of the EU. Some comment bases the argument simply on a constitutional convention, known as the Sewell Convention, but in fact that has now been translated into law by this year’s Scotland Act.

If the Scottish argument is upheld, it may not be easy for the Westminster Government to get the necessary approval.

Further Proceedings?

Now it appears a new court case is being launched, to challenge the assumption that if the UK leaves the EU, that automatically terminates its participation in the single market. That rests on an interpretation of the European Economic Area Agreement, and Articles 126 and 127 in particular. Under that Agreement, only 12 months’ notice is required; but if statutory approval is necessary, that may be harder to obtain in Parliament than approval to leave the EU.

Effects of Brexit on Real Estate

But assuming Brexit goes ahead, what might be the impact for real estate?

Direct consequences on the procedures for the transfer, leasing and mortgaging of property are unlikely. This is outside the area for EU competence. But consequences may appear in other areas or in other ways. There is an ever-growing mountain of argument and counter-argument about what those consequences might be – some technical, some commercial, almost all speculative. The terms of the “Great Repeal Bill”, and whether there are transitional arrangements, may affect the position.

Here are some possible areas with brief comments:

Funding

No-one yet knows the impact on the financial services industry, or whether there will be any migration of finance providers to the EU post-Brexit. But any contraction in the range might affect the choice, and possibly the terms, of available funding for investment or development projects.

Some projects may be adversely affected by the non-availability of EU funding grants, if not replicated by UK replacements.

Tax

Generally, tax policy lies within the domain of each member state, so direct consequences may be limited; competitive tax cutting to attract business might, however, have a knock-on effect on real estate values and activity.

But VAT is very much within the ambit of the EU, so departure from the EU would in principle give the UK the ability to rethink any aspect of VAT, should it so desire. Given the importance of VAT in raising a significant level of revenue (about 17% of all government receipts), and that the great majority of countries around the world have VAT or a similar tax, abolition and replacement seems extremely unlikely. However, a government anxious to stimulate activity might consider adjusting some aspects – either trying to reduce the burden of compliance, or perhaps changing how and when it applies (any chance of an extension to zero rating?).

Environmental controls

Both the EU and member states can legislate in this area, and in principle the UK could reduce or adjust the control regime in the future without direct regard to specific EU requirements. But other continuing international agreements to which the UK is party would need to be complied with (including the EEA agreement if the UK remained a party), there is broad popular support for environmental controls, and indeed it has been the UK that has pushed for many elements of the EU legislative regime. And stability and consistency to enable businesses to plan ahead is an important factor. So significant change seems unlikely.

Health and safety controls

In 2014, the Department for Work and Pensions highlighted by way of a wish list in a report some areas for EU deregulation in this area, which may give some clues about how the regime could be adjusted in the future. Reducing the burden on small low risk businesses was one. Minimising the requirement for safety signs so that they are required only where there is significant hazard was another. The theme post-Brexit might be more risk based and proportionate

Development

The timing or cost of development projects might be affected by price increases (including perhaps more volatile currency fluctuations), or tariffs, on imported materials, shipping delays or possibly labour shortages (depending on how the immigration debate unfolds). Developers on some, particularly larger, projects may be more cautious about committing to dates and costs without scope for adjustment for post-Brexit effects.

Compliance may become easier – at least in theory – by projects needing to follow just UK codes, standards and practice, rather than their EU equivalents as well.

It remains to be seen whether there will be any relaxation in the current regime for the procurement of supplies for public sector projects.

Contract/lease enforcement

At present, there is relatively clear route to enforce contractual obligations against a party from another member state – for example, a guarantee against the parent of a UK subsidiary as tenant of an English property. Depending on whether the revised Brussels Regulation applies to the UK after Brexit, that process might become harder, less predictable and possibly more costly. Whether that leads to greater use of cash rent deposits, which would be easier for a landlord to access, or some other security, will no doubt emerge in due course.

Overall, the impact of Brexit on UK real estate is likely to take some considerable period to become clear. (But not centuries, we hope: during President Nixon’s visit to China in 1972, premier Zhou Enlai was widely thought to have commented that it was “too early” to assess the impact of the 1789 French Revolution. But he was probably misquoted: in all likelihood, Nixon was referring to the French unrest of May 1968, which is how he would have been understood by Zhou).

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