In this week’s Estates Gazette a lawyer explores the possible impact on real estate if the UK base rate were to drop below zero.
Simon Keen, a counsel in the London real estate team at Hogan Lovells, points out that many jurisdictions around the world have central bank base rates below 0% – including Japan, Switzerland and other countries in Europe and South and Central America, amounting to about 25% of global GDP.
While the governor of the Bank of England has ruled out a negative base rate in the UK for the moment, were that ever to change there could be a major impact on leases and other real estate contracts.
Writing in the Practice & Law section, Keen explores the possible repercussions for landlords, tenants and property purchasers – including on interest payments or penalties due under them.
Keen writes: “Unless negative interest rates plummet, penal rates for late completion of a purchase, or a late rent payment, would probably be unaffected as they are usually two, three or four percentage points above base.
“But if the negative base rate is low enough, it might mean that the landlord pays the tenant for late payment of rent, or the seller paying the buyer for late completion – which would be surreal.”
Keen discusses possible drafting fixes for scenarios such as these, but warns that practicalities mean they won’t help all existing leases: “They will therefore need to be re-interpreted in the context of negative interest rates. That would require legislation (which is unlikely), guidance from the courts (which might, possibly, be forthcoming in time), or just a commercial approach recognised by the market (the most likely solution).”
According to Keen, there are many questions and few answers – but it’s a scenario well worth thinking about.
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