LONDON (Reuters) - Some commercial property buyers are invoking “Brexit clauses” written into contracts agreed before Britain voted to leave the European Union, allowing them to walk away from the deals.
In other cases buyers have yet to exercise such get-out clauses but are keeping the option open to try to renegotiate the price down, according to property lawyers and managers.
A third group is playing for time in the hope that the effect of the June 23 referendum result on values becomes clearer, they say.
British commercial real estate - from office blocks to shopping centres - has been particularly hard hit by uncertainty surrounding Brexit. Transactions fell sharply before the referendum and a number of property funds have been suspended since then as retail investors try to bail out.
Some buyers demanded contract provisions before the referendum allowing them to pull out if the decision was to leave the EU. It was unclear how widespread they were, but some are now being exercised following the result, although the overall number is unknown.
“Brexit clauses have been invoked across the industry including some by our clients,” Paul Firth, head of real estate at law firm Irwin Mitchell LLP told Reuters. “We have had at least three.”
Before the vote, Firth said a significant percentage of the firm’s “bigger investment deals” with values ranging from 10 million to 80 million pounds either included Brexit clauses, or purchasers had sought to negotiate that they be included.
The economic effect of Brexit is beginning to be felt. British consumer confidence suffered one of its biggest drops in 21 years, a survey showed on Friday, clouding the prospects for retail property.
Doubts also surround the ability of the British financial services industry, which employs more than two million people, to continue serving clients on the continent. Under an EU “passport” system, banks, asset managers and clearing houses have access to the single market only if the country where they are based complies with the bloc’s regulations.
This may mean moving jobs from Britain to countries that remain in the EU, heightening uncertainty over demand for office space particularly in London.
Shares in British-listed companies that invest in commercial property, which own large amounts of office space in the capital, have already fallen sharply.
"It is likely that the uncertainty created by the EU referendum result will have a negative impact on economic growth in London," Toby Courtauld, chief executive of Great Portland Estates GPOR.L said in a statement on Thursday. "As a result, we can expect London's commercial property markets to weaken during this period of uncertainty."
The Bank of England also said that commercial real estate transactions by overseas investors had fallen by 48 percent in the first quarter of 2016.
Investors in retail property funds are already trying to get out in such numbers that a number have now suspended redemptions, freezing more than 18 billion pounds.
BREXIT CLAUSE LEVERAGE
In some cases, investors are using Brexit provisions as a leverage when trying to renegotiate deals on better terms.
“We had one acquisition that was subject to a Brexit clause and we are currently renegotiating some financial terms of the deal,” said Mike Sales, head of TH Real Estate. “It is unclear at this stage whether we’ll progress with the deal,” added Sales, whose firm manages property assets worth $96.3 billion.
Negotiations can be conducted either before a Brexit provision is invoked or informally after a deal has been cancelled, as buyers try to secure better terms.
Imogen Moss, head of real estate group at law firm Allen & Overy, said Brexit clauses tended to have very short timeframes - typically five or 10 days - in which the right to terminate the deal can be carried out.
“While a purchaser may have exercised that right, it doesn’t necessarily mean that the dialogue it had with its seller has ceased,” Moss said. “In some cases negotiations continue around price and there may still be a deal to be done, albeit on slightly different terms.”
She said her firm had also worked on deals where purchasers had invoked Brexit clauses and terminated contracts.
Some investors are trying to lengthen the time they have to decide whether to invoke the Brexit termination option.
Melanie Curtis, a real estate partner at law firm K&L Gates LLP, said that before the vote she had worked on a commercial property transaction with a Brexit clause worth more than 10 million pounds.
The overseas buyer, on whose behalf her firm was acting, had not yet invoked the clause but was negotiating a six-week extension to the deadline by which they have to make a decision to see if the market improved or better financing terms could be agreed.
“They had a finance deal lined up which was very satisfactory before (the vote),” Curtis said. “The terms have gotten harder now, they are not particularly keen on them. I don’t think they would go ahead on that basis.”
One silver lining for the sector could be that the sharp fall in the pound may entice foreign bargain hunters.
“With sterling devaluation, overseas buyers from the U.S., or other currency-backed buyers from overseas, may see opportunistic value in buying UK real estate assets again,” said Don Rowlands, head of real estate at law firm Herbert Smith Freehills LLP.
“One of the opportunities that they ... are actively looking for is situations where there were Brexit termination clauses, so that if they are triggered by the buyer and the sale contract falls over, then they would offer to step in into those positions.”
Howard Meaney, head of UK real estate at UBS Asset Management, said he had heard of U.S. investors turning their attention to Britain. “They’ve seen an appreciation in their exchange rate and what is potentially going to be a drop in asset pricing, so they could possibly get in 20 percent cheaper than they could have done pre-Brexit.”
Esha Vaish reported on this story from BENGALURU; Additional reporting by Simon Jessop; Editing by Guy Faulconbridge and David Stamp
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