Understand Your Rights. Solve Your Legal Problems
Last week the motion passed agreeing agreed to firmly limit the scope for the UK Government to allow itself powers to shift legislation through ‘Henry VIII’ powers, and lock-in the utmost Parliamentary oversight of powers given to ministers. This is set to affect people, businesses and sectors all across the nation.
Here Lawyer Monthly benefits from specialist insight from Anna Rogers, Senior Partner at ARC Pensions Law, on the potential impact of the bill for pensions and human rights.
Brexit. This single word immediately serves to polarise opinion. To some, it represents economic liberty and the restoration of national sovereignty. To others it means undermining peace, prosperity and legal protection. The reality is likely to be complex as contrasting, and perhaps unforeseen, consequences emerge for different sectors of the economy and in different parts of the country.
The British constitution is on the verge of a transformation of historic and unprecedented proportions, but if we focus on the world of pension schemes, what can we foresee?
Pensions law has been heavily influenced by European law for more than 40 years. That influence has been exerted by the direct effect of assorted Treaty Articles (primarily equal pay), decisions of the European Court (such as Barber, Coloroll etc) and the impact of relevant EU Directives which have been translated into English law.
As far as the future is concerned, beyond the terms of any deal yet to be negotiated, the only certain piece of legislation we are promised is a Great Repeal Bill. The very title provokes the question: so what are we going to lose?
Arguably, the Great Repeal Bill, which will become an Act in 2019 or 2020, will do quite the opposite of repealing: although the Bill will remove the 1972 European Communities Act (ECA), which gives EU law authority, first it will adopt EU law lock stock and barrel into UK law. The plan is that parliament will then have the power to dispense with those parts of EU legislation it no longer wants. It will be able to amend existing laws using secondary legislation, while major restructuring or new laws will be put forward in separate bills.
The vast majority of pension-related legislation that originated from the EU has already been written into UK law. Two questions arise; first, might the Great Repeal Bill unwittingly go further than UK law currently does in complying with EU law, and secondly will there really be no constraints on the rights that parliament will be able to take away?
Writing the entire acquis communautaire or body of EU laws into UK statute will mean nothing “falls away” on Brexit. That could have consequences in connection with the few remaining issues of sex discrimination in pensions, relating to GMPs and gender based annuity rates. It also leaves some things unclear, such as what it means to adopt a Directive in UK law. At the moment, the UK decides how to implement a Directive and until it is implemented it has limited effect. The IORP II Directive governing pension schemes is due to be implemented before the UK can leave the EU. Will it be implemented? Including the governance requirements and fit and proper person rules for trustees? Or will there simply be a UK law requirement to implement it, that is then quickly abolished?
We do know that the UK Government will be able to remove some requirements that were originally driven by European law or amend them to moderate their impact, subject to approval by Parliament. However, the Government’s desire to do so is unknown and, critically, pension benefits have been earned and so making changes could raise questions as to whether any application of new law would or could be retrospective.
Clearly equal pay earned in the past cannot be recouped. When it comes to taking away earned rights, the post-Brexit world will depend on the boundaries of protection offered by UK law. The extent to which the Government will seek to pursue whatever opportunities exist will depend on political considerations; the removal or reduction of individuals’ rights is unlikely to be attractive.
The UK is a signatory to the European Convention on Human Rights, although withdrawal is occasionally mooted. The ECHR is not part of the EU and will not change on Brexit. We also have the Human Rights Act 1998. Judges can and do declare legislation to be incompatible with human rights, though that is not the same as overruling it. In the public sector, we have seen from the Supreme Court’s recent ruling in the Brewster case that pensions can be protected as property rights. The Human Rights Act may be replaced by a British Bill of Rights. That would theoretically give an opportunity to extend the carve-outs on property law, though expropriation tends to be tightly controlled. English common law may protect property rights too, though this is untested.
So Brexit may well have a significant impact on pension schemes insofar as it affects the economy, investments, and sponsor covenant. However, there are few areas of UK pensions law where immediate and significant post-Brexit reform is likely. The legal constraints on accrued benefit changes within UK law remain to be fully explored; whether there is a real desire to explore them will ultimately depend on the prevailing political climate.
“Big isn’t necessarily beautiful – in fact things can get quite ugly.” Michael Siebold is chair of elite global legal network Interlaw, and here Lawyer Monthly benefits from his expert opinion on the impact of social and political anti-establishment shifts on the structure and effectiveness of the legal sector.
2016 was undoubtedly a year of political and business shocks. From the unexpected Brexit vote in the UK, to the surprise result of the US election, the anti-establishment challenge to the so-called political ‘elite’ will have ramifications across the world, including in upcoming European elections.
No matter what your political allegiance, challenging the status quo appears to tap into the current zeitgeist, and the corporate world hasn’t been immune to this movement either, with established norms being challenged by developments in technology, as well as shifting social attitudes and expectations. Change is the new normal, and businesses who view disruption as a negative are unlikely to be at the forefront of innovation. This year is already shaping up to be a period of uncertainty for businesses in all parts of the world, as the full impact of the shifting political sands start to hit.
I have worked in the legal sector for almost three decades and, during this time, have witnessed wholesale change in the way lawyers operate and interact with clients. However, throughout this period, the established international law firm model has continued to dominate the sector – until now.
Large law firms seem to be suffering from growing pains. Increasingly, we are seeing established law firm brands review their international footprint, with high profile office closures hitting the headlines. Similarly, there have been a number of failed merger attempts and a preference for less committed ‘combination’ arrangements which allow multiple firms to create the façade of a single brand, when the reality is quite different. The demise of KWM Europe is perhaps the most compelling case for calling time on the big corporate law firm model. It shows that big isn’t necessarily beautiful – in fact things can get quite ugly.
Too often in large global law firms, collaboration between countries is difficult and often forced because there isn’t the investment in the necessary infrastructure to make it work. For clients, this can impact on the consistency of service, which negates the biggest perceived benefit of buying into a single legal services provider.
General counsel are looking for genuine local expertise in every jurisdiction in which they operate, and are starting to see through the 'emperor’s new clothes' approach from global law firms who take little more than a logo to some parts of the world. It is becoming increasingly apparent that the international law firm model isn’t agile enough to respond to the fluctuating needs of the new breed of multi-national client.
While many of the largest law firms have spent the past decade jostling for position in a flag-planting exercise of expansion, the elite legal networks have evolved into a viable alternative for multi-national clients – offering the consistency in service and expertise that clients are seeking in each of their geographical markets.
As the chairman of the one of the leading networks, I’ve had a ring-side seat to watch this transformation, and would be the first to admit that the network model needed to shed its club-like status and grasp the opportunity to respond to the changing needs of global clients. Today, Interlaw has successfully grown to an elite global legal practice with more than 7,000 lawyers in over 140 cities, thanks to the commitment and investment of our member firms, combined with the strength of our selection process. In the past year alone, we increased our presence in China, and in Central America with the addition of BLP – with offices in Costa Rica, El Salvador, Honduras and Nicaragua – and also expanded to new territories through Rokas law firm in Greece and Tohme law firm in Lebanon, with further expansion set to come in the year ahead.
Once a new member comes on board, we are ready to hit the ground running. Unlike the multiple post-merger issues global firms face or the ‘bedding in’ period of organic growth, networks can respond more rapidly and confidently to client demand in new and emerging markets. We are infrastructure-light, but efficient and focus our investment on training and technology to create the best possible client experience.
The way the corporate world operates is evolving at an unprecedented rate, and professional services providers have to keep pace and be willing to work in a different way. This is particularly true for the legal sector, which has held on to established norms for too long at the expense of client need. In a more uncertain world, clients have become braver and are increasingly willing to try something new. The very best of the networks are already reaping the rewards and will continue to do so as they successfully challenge the ‘old school’, big firm approach.
As the Government presses ahead with plans for online and virtual hearings, the Bar Council has warned that the quality and the reputation of our system of justice must not suffer.
Chairman of the Bar, Andrew Langdon QC said: “Appropriate safeguards must be put in place to ensure that the quality of justice and the high regard in which our system is held are not undermined.
“Technology has the potential to enhance our system of justice and to provide greater convenience to some court users. If used correctly, it can also save unnecessary expenditure. But we must ensure that convenience and cost do not override other important considerations.
“Virtual hearings in criminal cases should remain the exception rather than the norm. Criminal proceedings are generally better conducted when the participants are together in one place. It is essential that there is no diminution in the quality of open justice.
“As to some of the envisaged on-line procedures, defendants must be offered a genuine choice. They must also be made aware of their right to consult a lawyer.
“Inviting defendants to use an on-line procedure to indicate a plea, or to opt for a summary trial instead of a Crown Court jury trial, risks trivialising potentially serious consequences for those accused of committing offences.
“Although certain witnesses benefit from being able to give evidence by way of a remote link to court or by way of pre-recorded testimony, generally speaking, the physical presence of victims, witnesses, juries, defendants, judges, lawyers and the public, is fundamental to our innate sense of how justice should be delivered.”
In a briefing to MPs ahead of the Second Reading of the Prisons and Courts Bill, the Bar Council also warned that:
The Bar Council’s parliamentary briefing on the Prisons and Courts Bill is available here.
(Source: Bar Council)
Communicating for America (CA) recently called on Congress to provide "stabilization funds" in the recent Republican-introduced American Health Care Act reform legislation. As noted in a study released by the Council for Affordable Health Care (CAHC), an increase of $9 billion in stabilization funding could reduce health insurance premiums by 25% for consumers in the next open enrollment period.
The CAHC report on the Impact of Stabilization Funding on ACA Premiums and Subsidies outlines how added funding could eliminate or greatly reduce the cost of health insurance, bringing the price of premiums back to 2016 levels or lower.
Earlier this year the Department of Health and Human Services (HHS) announced health insurance premiums rose 25% for 2017. But when premiums increase, so do tax credits, also known as subsidies, to help curb the cost of health insurance for those who qualify for income-based cost assistance. For individuals and families that make above the income threshold to qualify for cost-relief, the increases in insurance costs hit nothing but their wallets.
The CAHC report outlines that federal costs of Affordable Care Act (ACA) tax credits are projected to total $38 billion in 2017, $48 billion in 2018, and $56 billion in 2019. The analysis suggests that funding state-based innovation grants at the cost of $9 billion could bring the price of the benchmark silver plan down by nearly 25% and reduce subsidy outlays. This reduction in premiums would correspondingly reduce the outlay for tax credits or subsidies.
"Although the Republican proposal is far from perfect, it is a good start that demonstrates health insurance costs could go down dramatically for individuals if a new law creates the right level of premium stabilization funding," said Jeff Smedsrud, Chief Executive Officer of Communicating for America.
He noted that if insurance companies are able to reduce rates because of increased stabilization funding, it would mean more consumers would buy health plans, and the insurance companies would return to normal profitability margins.
"Lower premiums reduce the amount of federal subsidies individuals receive, proportionate to their income - nearly a one-to-one offset of the $9 billion that would be spent. For those who do not qualify for premium subsidies, a 25% reduction in premium would lead to real economic savings. A more robust marketplace in the upcoming Open Enrollment Period could create the needed stability for individuals to restore confidence. The most important thing that can happen for consumers and insurance companies in 2017 is for both to regain confidence," said Smedsrud.
(Source: Communicating for America)
Legal chiefs say the Government should give EU citizens unrestricted access to UK jobs in post-Brexit Britain and claim that British workers do not lose out to EU migrant labour.
But they agree that the UK Government, not the EU, will now call the shots.
In a comprehensive and easy-to-read legal guide on Brexit, the Bar Council also tells the Government it should defend employment rights of UK workers, make a strategy to keep London as the global centre for financial services, and write up a solid ‘Plan B’ in case no deal is reached with the EU two years after Article 50 is triggered.
Migrant Labour
The Bar Council’s proposals for a worker registration system would allow EU citizens into the UK without a visa, let them seek work without restriction, and give free movement to students, the self-employed, and those with means to be self-sufficient.
Chair of the Bar Council’s Brexit Working Group, Hugh Mercer QC said: “Our post-Brexit immigration policy must be able quickly and efficiently to fill gaps in the labour market, facilitate the supply of services, and stimulate entrepreneurial activity.
“The evidence shows immigration does not reduce the number of jobs available to British born workers, and it doesn’t lower wages, but the big worry for many people is that as a member of the EU, the UK has been unable to set its own rules.
“The Brexit Papers outline a legal scheme that will give the UK complete sovereignty and autonomy over immigration policy and allow the Government to control how EU citizen workers access UK benefits. It will also help the Government to identify the parts of the economy that benefit most from immigration and to set its own rules for refusing or granting admission to the UK where that is necessary.
“This is straight-forward legal solution that is capable of meeting the needs of British business and making sure that, on immigration policy, it is the elected UK Government that makes the rules.”
Protect rights of UK workers
The Brexit Papers also claim that key employment rights currently enjoyed by British workers could be scrapped if the Government does not transfer them when the UK leaves the EU.
Hugh Mercer QC said: “The Great Repeal Bill will bring EU regulations that protect UK workers into UK law, but that is only part of the story. Some employment rights are already part of English Law but have been interpreted in the European Court of Justice, and if we want to give UK workers the same rights as they have now, the effect of the judgments must be incorporated in to UK law too.”
“These include preventing employers from rolling up holiday pay with normal pay, which can discourage workers from taking annual leave. There could also be changes to discrimination law and the rules on compensation for workers who have been discriminated against. At present, EU judgments put an obligation on employers to justify pay gaps between men and women where they do work of equal value, but this too could be at risk.
“We don’t want UK workers to lose out.”
Financial Services
The UK’s top spot as the global hub for financial services is also at risk unless the Government creates a bespoke agreement with the EU to deal with the loss of the financial services “passport”, according to the Bar Council.
Hugh Mercer QC said: “Financial services make up 7% of UK GDP and directly employ 1.1 million people, two-thirds of whom work outside of London. Larger, firms cannot wait until the conclusion of the Article 50 negotiations to know what will happen. Many are in the process of developing their contingency plans on the basis that the UK does not remain a member of the single market and will no longer benefit from the existing passporting regime.
“Other mechanisms used by countries outside the EEA to access financial services markets, such as the equivalence regime and the emergent third country passport, will not fill the gaps created by the loss of the passport, and WTO terms, will not suffice.
“What we need is a bespoke agreement with the EU, replicating the status quo as far as possible and covering the gaps created by the loss of the passport regime.
“Any such agreement must also grant legal and other essential services sufficient rights so that they can continue effectively to support the financial services sector.”
Plan B: The ‘no deal’ scenario
The UK businesses face a cliff-edge if the Government does not agree a deal with the EU before the two-year deadline, the Bar Council warns.
Hugh Mercer QC said: “A ‘no deal’ scenario will have serious consequences for UK citizens and businesses. Legal rights will disappear overnight and it would cause serious economic damage.
“Our trading relationship with the EU would be under WTO terms, which would mean an increase in tariffs on goods and services and uncertainty for millions of UK citizens living abroad about their rights to residency, work, healthcare and state pensions.
“The possibility of a ‘no-deal’ scenario is sufficiently real that we must have a ‘Plan B’.”
(Source: Bar Council)
The House of Lords EU Justice Sub-Committee recently published its report Brexit: justice for families, individuals and businesses?
This House of Lords report finds that:
However, the Committee found that as Brexit takes effect:
Chairman of the Committee, Baroness Kennedy of The Shaws said: "Unless the Government can agree a replacement of the existing rules on mutual recognition of judgments, there will be great uncertainty over access to justice for families, businesses and individuals.
“The Committee heard clear and conclusive evidence that there is no means by which the reciprocal rules currently in place can be replicated in the Great Repeal Bill. Domestic legislation can’t bind the other 27 member states.
“We therefore call on the Government to secure adequate alternative arrangements, whether as part of a withdrawal agreement or a transitional deal."
Within the report the Committee consider examples of how EU regulations work in everyday situations:
Case Study 1: An unmarried couple are living in Wales with their four-year old daughter. The father has parental responsibility. The relationship breaks down and the couple split up, One day, the mother fails to return the child to the father when expected. It is discovered that the mother has fled with the child to Poland with her new partner. Having failed to persuade the child’s mother to return the child, the father knows that he needs to go to court to get his daughter back to Wales—but which court to go to and what is the most effective route to use?
Case Study: A clothes manufacturer in Manchester orders and pays for cotton from a supplier in Greece. When the order arrives, the manufacturer discovers that the quality of the cotton is not of the standard agreed in the contract. The supplier refuses to accept any liability and the manufacturer decides to seek redress through the courts. Where should the case be heard?
It is expected the Committees will complete this work in early 2017, ahead of the Government’s potential triggering of Article 50 of the EU Treaty, which would signal the start of the formal negotiations on UK withdrawal from the EU.
(Source: House of Lords)
From overly nude content to sexualised images of children, social media platforms such as Facebook are being heavily criticised for not doing enough to tackle the stream of unwanted content, and moderate the sharing of particular groups and the images therein.
According to the BBC, Chairman of the Commons media committee, Damian Collins said he had "grave doubts" about the effectiveness of Facebook’s content moderation systems.
"Nudity or other sexually suggestive content" it states are not allowed on the platform, and following an ordeal with BBC reporters it issued the statement: "It is against the law for anyone to distribute images of child exploitation."
But are online platforms doing what they can to eliminate the need to emphasize such illegality? Here Lawyer Monthly hears from Phil Gorski at Blacks Solicitors, on what the law says and what the solutions might be.
What does the law say on the subject?
The primary piece of legislation, put in place to deal with this type of content, is the Protection of Children Act 1978. It says that it is a criminal offence to take (or to permit someone to take), to distribute, to show or to possess an indecent photograph of a child. A child is a person under 18 but what is considered indecent is unsurprisingly more difficult to define. The test is imprecise – it is up to the court to decide whether something is indecent “in accordance with recognised standards of propriety.” Importantly, the circumstances in which the photograph came to be taken and motive of the taker are not relevant; it is not the taker’s conduct which must be indecent but the photograph of the child which results.
Information on convictions specifically for offences under the Act is not publicly available.
What do the social media platforms do?
All prominent platforms provide some form of system which can be used to report material which is considered to be indecent. The recent reports surrounding Facebook’s apparently lacklustre response to the BBC’s reporting of 80 images containing indecent material of children has been used to support the argument that these systems don’t work and there is some weight to that argument. Reliable data is hard to come by but anecdotal evidence suggests that they are slow and ineffective. The counter argument is that social media platforms such as Facebook face an almost impossible task. The sheer volume of posts means that human checking of images is practically speaking an unrealistic option and computer intelligence is notably poor at interpreting the content of images.
Is there a solution?
There certainly isn’t a quick fix. It should go without saying that social media platforms should devote as much time and resources to developing systems which can prevent the dissemination of these images as possible – as with cyberbullying the effects can be severe, they can shape a child’s future development and physical boundaries are irrelevant. However, there also needs to be an increased awareness on the part of parents and children alike of just how easily images put online can obtained by people who were never intended to see them and how quickly they can proliferate. A report of a few years ago found that a very large proportion of indecent images of children found online appeared to be self-generated.
Approximately 900 million -- or just over one in four -- people living in 16 countries in Asia Pacific, including some of its biggest economies, are estimated to have paid a bribe to access public services, according to a new public opinion poll from the anti-corruption movement Transparency International.
Transparency International spoke to nearly 22,000 people about their recent experiences with corruption for People and Corruption: Asia Pacific, part of the Global Corruption Barometer series.
The results show lawmakers across the region need to do much more to support whistleblowers; governments must keep promises to combat corruption, including their commitments to meet the Sustainable Development Goals.
In China, nearly three-quarters of the people surveyed said corruption has increased over the last three years, suggesting people do not see the major offensive on corruption is working.
Only one in five people surveyed thought the level of corruption had decreased, while half of people polled said their government was doing a bad job fighting corruption.
"Governments must do more to deliver on their anti-corruption commitments. It's time to stop talking and act. Millions of people are forced to pay bribes for public services and it is the poor who are most vulnerable," said José Ugaz, chair of Transparency International.
Thirty-eight percent of the poorest people surveyed said they paid a bribe, the highest proportion of any income group.
"Without proper law enforcement corruption thrives. Bribery is not a small crime, it takes food off the table, it prevents education, it impedes proper healthcare and ultimately it can kill," Ugaz said.
Police top the list of public services most often demanding a bribe; just under a third of people who had come into contact with a police officer in the last 12 months saying they paid a bribe.
People said that the most important action to stop corruption is speaking out or refusing to pay bribes. But more than one in five said they felt powerless to help fight corruption.
Transparency International recommends:
(Source: Transparency.org)
Almost half of UK voters believe that the European Union will collapse if France votes in a right-wing Government later this year that takes the country out of the EU, according to a YouGov poll conducted on behalf of BE Offices, a leading independent serviced offices provider.
The survey polled a representative sample of 2060 people across a range of voting habits, age, gender, class and region.
In addition to the 49% of those polled that believed the EU would collapse in these circumstances , a further 29% felt that, although the EU would survive, there would be sweeping changes made to the organisation. Only 5% thought that the EU would survive in its present form.
These results form part of a wide ranging poll that sought the views of the British electorate on the likely impact of a hard Brexit as well as people's views of the Trump administration and its policies.
The poll demonstrates very clearly that almost four out of ten people (37%) believe a hard Brexit will have a negative effect on the UK economy with only one in five (21%) believing it will have a positive effect. A further 16% felt a hard Brexit would have neither a positive or negative effect and the remaining 25% didn't know.
As might be expected, almost one in seven "Remainers" (69%) regarded a hard Brexit as likely to have a negative effect on the economy along with 55% of Labour voters and 54% of LibDems . While 51% of the 18-24 age category also believed that a hard Brexit would be detrimental.
The broad consensus among those who believed a hard Brexit would negatively impact the economy, said: prices and inflation would rise; we would lose manufacturing jobs as companies moved operations away from the UK and into Europe to access the single market; and, Sterling would fall as the UK struggles to conclude advantageous trade deals with other countries.
One respondent commented: "we lose access to the single market and customs union. We also have to negotiate many bilateral trade agreements, taking an unknown time to conclude.
"We may lose the interest of big businesses in investing in our country, with London potentially losing its status as a financial hub of the world. This is not helped by Theresa May's poor handling of Brexit negotiations so far. It does not look good for our country at the moment."
There was also genuine concern that Britain would lose its ability to bring in the necessary migrant labour to fulfil the many low-paid and unskilled jobs in sectors such as agriculture. It was also felt that it would negatively impact on Britain's ability to attract highly skilled people.
Those believing a hard Brexit would have a positive effect on the economy generally felt, as might be expected, that we would have greater control over our economy through the freedom to negotiate trade deals with other major countries.
Freedom was a constant theme among respondents, whether it was the ability to establish our own trading partners, create our own rules and be free of perceived restrictive practices imposed by the EU.
Many thought a hard Brexit would be good for jobs and create greater opportunities for business.
As one respondent commented: "A hard Brexit will remove red-tape and allow the UK to negotiate trade deals without having them first agreed by 27 other nations. By leaving the EU there will be money saved through not paying a EU contribution and investing it in the UK.
"The EU is a failing, undemocratic and corrupt behemoth and it can only benefit the economy if we remove ourselves from it."
Saving money was a prominent thread in people's views on the positive impact of a hard Brexit. Some respondents regarded EU payments as little more than welfare support for poorer member states.
Interestingly, almost 6 out of 10 respondents (58%) stated they had a good understanding of what the term "hard Brexit" with less than one in three (27%) saying they had a bad understanding of the term.
Perhaps not unsurprisingly understanding was high among UKIP voters (73%) and men generally (70%). It was lowest among women (47%) and 18-24 year olds (48%). Among the older age group category (65+) almost two-thirds claimed a good understanding of what a hard Brexit meant.
People were also fairly dismissive of President Trump's policies with 56% declaring that they were wrong for the US with only one in five (20%) believing they were good for the country. Interestingly 80% of those who voted Remain thought they were wrong for the US as opposed to only 33% of "Brexiteers" and 76% among 18-24 year olds.
When asked whether people thought Trump's policies would be right or wrong to implement in the UK nearly two-thirds (63%) thought they would be wrong although it was even higher among "Remainers" (86%), Labour voters (79%) and 80% among 18-24 year olds.
David Saul, Managing Director of BE Offices, commented: "This survey demonstrates that perception of the EU among Britons is that it has probably reached a tipping point and a successful election campaign by the right-wing in France could topple it over the edge, or at best could force sweeping changes in its structure and powers.
"The survey, I believe, also highlights the fears held by many in the UK that a hard Brexit will have a seriously damaging impact on our economy with rising costs, higher inflation and job losses and that it may take much longer to negotiate trade deals with other countries than we think.
"On the other hand, those believing a hard Brexit will have a positive impact on our economy point to a reduction in red tape, the ending of EU payments and regaining our sovereignty as being the key issues going forward.
"However I am not sure the Government appreciates the depth of feeling in the country for the impact of a hard Brexit and all that it entails."
(Source: BE Offices)
You would think increased scrutiny and more rules would be bad for business, but that’s not always the case. Here Dan Montagnani, Managing Director at Groundsure, looks at the commercial property sector and explains to Lawyer Monthly how fresh regulations could cause potential shifts in the real estate markets, but surprisingly not for the worse.
In our time at Groundsure we have supported a range of clients to meet their needs around understanding environmental risk. In this time the topic of environmental risk has gone from a somewhat exceptional item to a mainstream thread of general property due diligence.
Most professionals in the property ecosystem are now familiar with the broad topic of environmental risk and it is accepted as part of the overall due diligence process. However, it remains helpful to stop and consider some of the more commercial aspects of why we assess environmental risk and remind ourselves of the cost of mistakes.
We have statutes in law that consider contaminated land legacy issues and present day operational environmental liabilities that might arise on or in the vicinity of a property under consideration. Both of these carry potentially significant costs, should a landowner or operator be caught out, but are regarded at low frequency of occurrence. In other words, these are low probability but high-risk issues.
A far more frequent series of costs can arise in the course of development or even partial redevelopment. Costs in these scenarios are generally regarded as an add on to the overall cost of development. This approach is entirely reasonable and is something most developers are very familiar with. Indeed, the informed developer approaches these schemes looking to gain leverage where there may be tax advantages for dealing with legacy contamination. Incorporation of flood mitigation measures can also help developers actively inform a design, and provide for an evolution of a scheme whilst retaining positive engagement from the local planning authority.
However, unforeseen costs can still arise where the issues were not entirely known at the point of original consideration. Land acquisitions from some time ago may not have evaluated environmental risks or only considered headline issues relevant then for a purchase. Alternate land use or new ideas about redevelopment may introduce requirements to consider the significance of environmental risks in this new context. A lender taking possession of loan security without the benefit of environmental risk assessment at the point of lending is another good example. These are often areas where unforeseen costs can be incurred with a degree of surprise, as somewhere along the line it was assumed these had been considered to an appropriate level of detail.
Of course, some environmental risks may only have manifested themselves in the intervening period between acquisition and a development plan being brought forward, such as Japanese Knotweed. Aside from the surprise factor from a redevelopment perspective, some of these risks can place significant time schedule burdens on schemes and therefore impact cash-flow for a developer.
An area of more recent progression has been the interest in environmental risk from mainstream lenders. With increasing scrutiny around their general lending processes – environmental risk issues and costs arising from these have become a real feature on their agenda. With sophisticated processes in place to screen for problem secured lending scenarios, it is often the case that a lender’s standard credit risk process, can in actual fact be the trigger for a purchaser to actually identify the need to consider these issues further. Lenders are therefore, in certain cases, providing significant value add to customers that might otherwise walk into unforeseen costs that could render a project unviable.
Lenders have the ability to consider and manage environmental risks in a number of innovative and indirect ways. Clearly the term and nature of the loan can be flexed to ensure the lender remains within their comfort zone for any given scenario. With an established relationship between property owner and developer, the bank can see innovative models used, security portfolios can be manipulated to ensure the lender satisfies their own risk appetite while continuing to support the borrower who is able to press ahead with the required and necessary financial support.
Insurance can have a role to play in providing for financial redress to certain environmental liability situations. Insurance can also be a useful tool in helping funders and investors to get comfortable with their exposure. However, insurance does not prevent the risk from materialising in the first place, nor does it address the inconvenience and some of the consequential outcomes that might arise from a certain set of circumstances. Insurance is a useful tool, but should not be mistaken for a complete fix solution. For example, what is the forward sale position where insurance is a factor, will the insurance remain valid in the future? What if actions are undertaken at the property that invalidate the cover?
As an industry, we are significantly better at identifying environmental risks than we were 20 years ago. Surveyors, lawyers, lenders, developers and planners all have environmental risk identification strategies within their workflows that allow the majority of scenarios to be identified, examined and addressed. However, it would be careless and complacent of us to assume that these standard checks and balances take account of all scenarios.
It is important that changes and adjustments to projects and the reawakening of dormant projects include a degree of “refresh” in order to avoid costly mistakes. Approaching all scenarios considering whether more, (not less) environmental due diligence is required, is a sensible approach and one that may indeed prevent the next costly mistake from happening.
Increasing not decreasing regulation and visibility generally means costs for such issues are only heading in one direction. Evaluating environmental risks and mitigations better and at a more in-depth level than the next person will often lead to commercial advantage.
