Real estate and environment

Publication | June 2017

What is the effect of Brexit on the legal structure of, and the legal risks associated with, real estate transactions?

Real estate is governed by the law of domestic jurisdictions, with no significant intervention at EU level. As a result, legal formalities and requirements relating to land ownership, land registration, leases and tenancies, the conveyancing process, taking security over land and  property taxes such as stamp duty land tax and non-domestic rates, are largely unscathed by Brexit. (In fact, increasing devolution within the UK is likely to have more of an impact in some of these areas than  Brexit).

However, that is only part of the story as real estate transactions are not ring-fenced. Many of the associated legal risks stem from other areas that are heavily influenced by EU requirements. These include planning, public procurement, employment and, perhaps most significant, environmental regulation. As an example, obligations imposed on EU member states have led to compulsory measures to improve the  energy efficiency of buildings and to forthcoming restrictions on letting commercial and domestic private property that do not meet a minimum energy efficiency standard.

Any impact of Brexit on these related areas will potentially have repercussions for real estate transactions.  

What impact will Brexit have on real estate inward investment volumes?

As with all significant and structural change, the impact  of Brexit should be considered at two levels - effects in the short term and those in the medium term.

In the short term, Brexit will produce an element of uncertainty which is hated by all markets. Volatility is to be expected in liquid investments such as shares and listed debt in the capital markets and in the value of the pound sterling. Such effects will be far less severe upon demand in a relatively illiquid asset class such as commercial real estate, where an investment pause/breathing space, rather than severe volume or price falls, is the worst impact to be expected.

In recent years, levels of inward investment have been running at record rates. The reasons are various but foremost amongst them are the attractions of the UK real estate market – scale, transparency, longevity of income and political/economic stability. Many international investors, especially those from the Middle and the Far East, therefore consider their own markets and regions by comparison in an unfavourable light. This comparison will remain unaffected in the medium term and, when one considers too the quantum of capital presently seeking access to the UK market, maintenance of real estate investment volumes is assured.

What are the implications for the financing of UK commercial real estate?

Real estate finance post the recession has been available: banks returning to the market have been joined by a raft of new providers including insurers, fund managers and specifically raised debt funds. Competitive pricing has returned and loans have been provided within the “new normal” loan to value range.

However, the rejectionist referendum result is having a short term impact upon the value of sterling, putting corresponding pressure on inflation/UK gilt rates and therefore upon the cost of borrowing. It is the short to medium term cost of borrowing which is the most important factor governing the price at which commercial real estate changes hands.

Again, however, there is an argument that any distortions from the Brexit vote will be short lived i.e. only until the capital markets adjust to the new reality, with the UK economy and its real estate markets judged once more on the fundamentals of supply and demand rather than by short term spikes in the cost of borrowing. It is, of course, difficult at this range to predict the length of such interest rate volatility but it would certainly be measured in weeks/months rather than years.

Will there be significant changes to environmental and health and safety regulation in the UK following Brexit?

EU environmental Directives governing water, air, chemicals, waste, noise, climate change, energy efficiency, and technical regulations and standards   have been implemented into national legislation. It is not yet clear whether, and the extent to which, that legislation will continue automatically to apply on the repeal of the European Communities Act 1972, which is the likely starting point for legal change. EU environmental regulations (e.g. REACH Regulation), which are directly applicable and do not have to be implemented into national legislation, will cease to have effect in the UK. In each case, however, the UK Parliament could choose to retain such legislation and regulations in whole or in part.. The European Commission co-ordinates technical guidance, scientific and technical research which underpins EU environmental policy and legislation and promotes best practice. Following  Brexit, the UK may have to bear the cost of this itself. Exporters of goods into the EU will need to comply with any relevant legislation to place it on the market.

The UK has a robust and well established system of health and safety regulation with an experienced regulator in the form of the Health & Safety Executive. Key statutes such as the Health and Safety at Work Act 1974 are augmented by sector specific regulation and guidance. It is unlikely that the UK system will be adversely affected by Brexit but it may suffer from perceived lack of involvement in EU initiatives and information sharing.

For further information please refer to our detailed briefing on the potential implications of Brexit on UK environmental legislation and controls.

Will Brexit have an impact on the planning process for development projects?

The requirements for the environmental assessment of development projects and policies are derived mainly from EU law, including Directives on Environmental Impact Assessment, Strategic Environmental Assessment and Habitats Regulations Assessment.  They have already been implemented in the UK through domestic legislation and the assessment processes are well-established.

The impact of Brexit in this context depends, to some extent, on the terms reached with the EU as part of Brexit negotiations.

If the UK seeks to remain a member of the European Economic Area (‘EEA’) and the European Free Trade Association (‘EFTA’) in an approach similar to that taken by Norway, it is likely that it will be required to comply with most European legislation. For instance, EEA members are required to comply with the Environmental Impact Assessment and Strategic Environmental Assessment Directives but are not required to comply with the Habitats Directive. In the event that the UK seeks to remain only a member of EFTA in an approach similar to that taken by Switzerland, there will likely be more scope for flexibility.
Alternatively, if the UK chooses to operate outside these regimes and/or forges a bespoke relationship with the EU, it is anticipated that Parliament would need to take positive action in order to maintain the status of domestic legislation implementing the EU Directives.

Notwithstanding the possibility for repeal, it is likely that the Government will take steps to maintain a requirement for environmental assessment as part of the UK planning system. In particular, the UK’s international treaty obligations will continue after Brexit and include the Convention on Access to Information, Public Participation in Decision-Making and Access to Justice in Environmental Matters (“the Aarhus Convention”) which requires  public participation in environmental decision-making and access to environmental information. These obligations are, at least in part, met through the domestic legislation implementing the Directives on Environmental Impact Assessment and Strategic Environmental Assessment. Nevertheless, in this scenario, the Government would undoubtedly have more scope to change the approach to the assessment process to suit circumstances in the UK.

For further information please refer to our more detailed briefing on the potential implications of Brexit on UK planning law and practice.


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