Brexit Impact on Commercial Property
Regardless of which side of the Brexit debate you sit on, there is no doubt that uncertainty is not the friend of property investors. As events play out over the next few weeks and months, it is impossible to say with any certainty what will eventually happen, but there are a number indicators we can look to, and a range of actions commercial landlords can take which will offer increased protection. We discuss your options in our latest article below.
Brexit Impact on Commercial Property: The Story So Far
Real estate investment trusts (Reits) were hard hit immediately following the Brexit referendum result in June 2016. Many funds shut up shop for a number of months, meaning some investors had their cash frozen in animation for that time, unable to access it. Investors were further impacted by the addition of “fair value adjustments” by fund companies (Legal and General implemented a 15% adjustment), dropping the value of commercial properties they held and reducing the several of investor holdings in turn. Funds did reopen after many months after shoring up their positions and selling investments. As a further sign of the commercial market restabilising, more recently, FTSE 350 Reits have continued to perform in-line with the general market.
From the perspective of performance, according to Savills, there is a general trend towards the prime market, with the average prime yield now at 4.90%, the highest since November 2016. At the same time, transaction volumes are at near-record lows.
Savills also report that regional cities have seen positive office occupancy demands, especially in the areas of technology, media, and telecom (TMT). Despite this, commercial property construction has been declining since December 2017, and returns in the retail property sector, in particular, have declined, due in large part to struggling retailers seeking rent reductions to balance the books.
In all, it’s something of a mixed bag; some areas of commercial property are confounding Brexit predictions somewhat, but others are showing less positive signs. It is difficult to determine exactly what the Brexit impact on commercial property actually is or will be.
Commercial property in the post-Brexit UK
It is one thing to review the impact on the commercial property market before we have left the EU, but what will happen when we actually leave? In answering this question, it is important to understand that wider market trends will assist the growth of some areas of commercial property, in spite of Brexit. For example, given the shift towards increasing levels of online retailing, logistics, and warehousing should continue to see relatively strong demand, both in terms of large-scale storage and local ‘last-mile’ logistics. However, this may be affected by the state of the logistics industry in the wake of any potential customs and tariff changes which we are subject to.
A similar story is expected for office space, with some in the industry forecasting that this sector will continue to grow even in the event of a hard Brexit, especially if the government “creates a favourable regulatory and tax environment”, according to real estate firm, Colliers. The decline in sterling, which is likely to occur in the event of a no-deal Brexit, may also become a driver for a further inflow of overseas commercial property investment in the UK.
High Court rules tenants cannot cite Brexit as a basis for breaching lease
Commercial property landlords will have been watching the recent high-court case of Canary Wharf (BP4) T1 Limited (‘Canary Wharf’) v European Medicines Agency (‘EMA’) with some anxiety. In this case, the Courts were asked to decide whether the EMA could use Brexit as a basis for legal termination of its commercial lease with Canary Wharf, treating the event as a “frustration of the lease”. The EMA had signed a 25 years lease with the owners of 25-30 Churchill Place, Canary Wharf in 2014, before the Brexit vote occurred. The High Court considered the two elements of the doctrine of frustration; that of supervening illegality and common purpose. For the former, Mr Justice Marcus Smith stated that there had been no supervening illegality as the law did not prevent EMA from continuing to use or dispose of the property. And in terms of ‘common purpose’, he stated he believed there was no such arrangement between the parties as they were essentially ‘counterparties’ within the terms of the commercial contract.
What does this mean for UK landlords? This case should provide a large degree of confidence to landlords that the Courts will not easily permit Brexit to be used as a reason to quit a commercial lease and avoid their contractual obligations. While such events may pose a challenge to commercial tenants, such political events will not be enough to give reason to quit a commercial tenancy. If you have any concerns, our lawyers for landlords or lawyers for tenants will be able to help.
Final words: Brexit impact on commercial property
As we look ahead to the 31st October 2019 deadline for potentially leaving the EU, with or without a deal, much is set to happen in a very short period – the impact of which no one can state with any confidence. As a commercial landlord, it is important to understand your situation, including the contents of your lease agreement, your legal options and any upcoming legal changes which may affect you. As such, it is imperative to speak to a commercial property lawyer as soon as possible. They will be able to review your existing contract and recommend actions to provide additional protection. The window of time before Halloween is closing rapidly; take action now and save yourself from potential nightmares.
Guillaumes LLP are a full-service Weybridge solicitors, specialist in all aspects of commercial property law. To speak to a commercial lease solicitor about the impact of Brexit on your business property, book an appointment with us today. Our property dispute lawyers and residential property services may also be of help to you. Contact us for more information and discuss your circumstances in confidence.