How could Brexit affect the Real Estate Industry?

There are many different ways that the real estate industry may be affected by the UK exit from the EU. Although we are not expecting any direct impact on UK real estate law, there are a number of areas that may be impacted:

Market volatility

The almost imponderable question is whether the UK will retain its status as a safe haven for inward investment and how this may impact on the availability of funding and flow of capital? The impact of exchange rate fluctuations and wider political and economic changes are also of material relevance. This has material consequential effects to demand and market pricing generally and specifically residential sales and the commercial letting market.

Goods/Materials

With the fall in sterling and the likelihood of further exchange rate volatility we are expecting cost inflation from goods/materials being imported from the Eurozone. There is the unknown impact of any future tariff arrangements and border checks which could impact on both availability and timing of supply, particularly if the UK were to leave the EU at the end of March without a deal and likely resultant default to WTO trade terms. The UK government has started to publish a series of guidance notes which sets out information to allow businesses and citizens to understand what they would need to do in a no-deal scenario. However, how the impact of a no-deal exit on the supply of goods and materials will be priced into contracts in terms of both cost and programme risk of delay and who bears that risk are increasingly pertinent topics. We are already starting to see some of this risk being reflected in tender pricing in the construction market.

Labour/Workers

A widely held view is that we could see a material impact on the supply chain and a skills shortage from impact on the flow of people from the EU. A large proportion of construction workers currently employed on projects, particularly in London and the south east of England are EU nationals, so if the UK leaves the EU without a deal and this results in the introduction of additional visa checks and restrictions on labour movement, then this is likely to impact on the ability of developers and main contractors to source the required levels of skilled workers for their projects and schemes in the UK and potentially hinder movement of personnel within EU member states for projects undertaken outside of the UK. The issue will be compounded by the current shortage of skilled UK national construction workers in the sector. It will be important therefore that the political settlement reached with the EU addresses this important issue, the UK government considers short term measures to deal with any immediate short-fall in labour and the UK government invests and commits appropriate resources in vocational training and construction skills programmes to increase the number of skilled UK national construction workers over the medium to long term. 

Contracts

For contractual arrangements such as Development Agreements, JV's, Building Contracts and Commercial Contracts, attention must be paid to how potential delays and cost implications arising from Brexit are catered for in both existing and future contracts. For existing contracts, parties should be analysing whether contractors would be entitled to extensions of time and additional money if they are delayed as a result of a no-deal Brexit. Whilst most major corporates have devoted significant thought to this issue and identifying their risk areas, it is in the sub-contracted supply chain where there appears most sensitivity with smaller businesses potentially materially exposed to labour and supply shortages, interruption and delay without the financial covenant strength to mitigate the same, even for relatively short periods. Contracts containing key performance milestones triggering payments (whether compensatory for breach or merely for contractual performance of specified activity) should be reviewed given the potential cash-flow impact. Similarly, it should be considered whether such a scenario would trigger any force majeure provisions. There may also be the potential for claims of contract frustration, but this will depend on the nature of existing terms of each contract. For new contracts which are going to be entered into, these issues will need to be considered carefully and the responsibility and risk for these items allocated appropriately.

Health & Safety

There is extensive UK legislation in place and we would not expect any major changes following Brexit. The Health and Safety at Work Act 1974, is the key Act - this is wholly domestic in nature and will not be affected by Brexit. As is the case in other areas, EU Directives on health and safety have mostly been implemented through domestic regulation and so we are unlikely to see any major changes following Brexit particularly where this would affect trade with the EU. The HSE may have to take on a greater role in defining the UK's health and safety law in the future, so as time passes there might be a divergence in approach to occupational safety.

In the construction sector, whilst the skilled labour market has tightened already, any restrictions on free movement of workers could exacerbate this further although what we hear from government on this topic has been geared more towards restricting non-skilled labour. Drawing that to its natural conclusion (if implemented), this does potentially raise the practical problem of ensuring that less experienced non-skilled construction workers understand and adhere to safe working practices, requiring enhanced employer vigilance.

Procurement/State Aid

For public/private contracts, we would expect similar principles to remain in place as government/local government will always require a competitive bid process and confidence that best value tests are met. The UK government has announced that in a no-deal scenario the UK will accede to the Government Procurement Agreement, the current agreement to which EU member states are bound under the WTO, regulating government procurement of goods and services based on the principles of openness, transparency and non-discrimination.

Contaminated Land/Environmental/Energy Efficiency/EIA

Much of planning law and policy is domestic in nature and the EU does not tend to legislate in this area, leaving this to the individual member states. The UK is, comparatively speaking, subject to stringent environmental regulation by virtue of its EU membership, but this status is in flux due to Brexit. Going forward, it is anticipated that environmental regulation will remain robust, but enthusiasm for this area of regulation may diminish over time as a result of political pressure to prioritise economic growth. In the case of a hard Brexit numerous environmental commentators have raised concerns in this regard, including the potential loss of co-operation mechanisms with the EU on transboundary environmental issues and a potential gap in governance between exit day and the date any replacement UK-based governance arrangements are established. The Prime Minister has stated that the UK would not reduce its environmental standards in the event of a no-deal scenario. Current proposals to establish an independent body to oversee the implementation and compliance of environmental legislation have attracted criticism. The UK Government is a party to a large number of international agreements both in its own right and by virtue of EU membership - so in the latter case the UK would need to apply for its own membership.

Enforcement of Judgements

Whilst it will remain the case that EU/UK Courts will continue to be bound to accept a contractual agreement between parties as to choice of law and jurisdiction for disputes to be resolved (through the Rome I and II Regulation and both the UK and EU (on behalf of member states) acceding to the Hague Convention), it is presently unclear as to how the EU intends to deal with the enforcement of a UK Court judgment in an EU member state. This could mean that an enforcing party may have to navigate relevant local laws of the member state in which it wishes to enforce judgment. As we head into a potentially more volatile market with challenges specifically in the management of commercial contracts and arrangements this sharpens the focus on governing law and enforcement.