Brexit: what next for real estate?

Will withdrawal from the EU change UK real estate transactions?

06 July 2016

Whilst there will inevitably be a period of uncertainty around the implications for the real estate market, we look in brief at the impact – or not – of Brexit on aspects of the legal and regulatory environment relevant to those owning and investing in UK real estate.

Property law in the UK – reform delayed

UK land law derives from the common law and domestic legislation, not the EU. Although there will be some regulatory changes peripherally affecting real estate transactions, the basic system of land law will remain unaltered as a result of Brexit. Indeed that may be a problem in itself, as the capacity of the Civil Service to pursue previously anticipated law reform could be severely impaired by the need to divert resources to work on the consequences of Brexit. So for example the recent projects on reforming the system of Land Registration (including the rules on adverse possession or “squatter’s title”) and the proposed Law of Property Bill, intended to streamline and improve the law on easements and covenants, may be delayed further or even dropped altogether. The revision of the Electronic Communications Code governing the relationship between landowners and operators, which is to be included in Digital Economy Bill, may suffer the same fate.

Procurement rules

Any eventual relaxation in the public sector procurement rules as a result of Brexit may simplify or reduce the tendering process in real estate development projects involving public sector bodies.

Environmental regulation

The UK might not now adopt the changes in the new Environmental Impact Assessment directive which were due to be implemented in 2017. Brexit may give flexibility to make the process of applying for planning permission for development quicker, less expensive and with less scope for legal challenge on environmental grounds.

Minimum Energy Efficiency Standards (MEES) for let property in England and Wales are due to come into effect in 2018. MEES prohibit leasing premises with less than an Energy Performance Certificate, or EPC, “E” grading and are imposed under the Energy Act 2011, which is domestic legislation. MEES are part of the attempt to comply with the binding targets to reduce carbon emissions under the Climate Change Act 2008, which in turn reflect the UK's commitment to international targets in the Kyoto Protocol. By encouraging improvement in the energy efficiency of existing property stock, MEES are also intended to increase UK energy security and reduce energy costs for consumers. None of this is imposed by EU regulation. However, MEES depend on the EPC regime, which evolved to comply with EU energy efficiency regulations. So whilst Brexit need not inevitably impact on MEES, if the EPC rules were abolished it would be necessary to find some other means of grading a building’s energy efficiency before MEES could be implemented. This may be a reason for not abolishing the EPC regime even when the UK is no longer bound by other EU Directives on energy efficiency.

Competition law

Property transaction terms are sometimes affected by the need to comply with competition law in relation to restrictions on the future use or occupation of land (eg covenants against letting to competing occupiers). Any relaxation in those laws may give the parties to certain real estate transactions more flexibility in negotiations and the terms which can be agreed and enforced.

Stamp Duty Land Tax and VAT on property transactions

Stamp Duty Land Tax (and the Scottish equivalent, Land and Buildings Transaction Tax) is a UK tax on land transactions with no connection to membership of the EU so Brexit should have no direct impact on either the rules or the rates. However, VAT derives from EU law and so post Brexit the rates and how VAT applies could be altered unilaterally. Whilst it may be fanciful to suggest that the UK Government will voluntarily divest itself of or reduce such an income stream, it may be possible to realign the rules governing how VAT is charged on real estate transactions to correspond better with UK land law and avoid bear-traps.

For further information on any of the issues raised in this article or on how Brexit might otherwise impact the real estate sector or your property transaction please contact Richard Clark.

Key contact

Richard Clark partner

Richard Clark Partner

  • Real Estate Investment and Development
  • Real Estate Asset Management
  • Retail

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