Brexit uncertainty fuels rise in demand for strategic warehouse space

Brexit uncertainty fuels rise in demand for strategic warehouse space

The draft Withdrawal Agreement was voted down by MPs in a historic defeat for Theresa May’s government yesterday (15 January 2019). This has only compounded the uncertainty surrounding the UK’s exit from the EU. What happens in the next few days and weeks will be a crucial indication of how the UK will leave the EU, but until then there is still a possibility that a no-deal Brexit will become a reality.

Since the announcement of the UK’s exit from the EU, demand for warehouse space has increased. The fear being (whether realised or not) that if the UK leaves without a deal, the ability to transport stock between the UK and EU may be impeded.

Many of these concerns stem from the fact that supply chains are often managed on a just-in-time basis, i.e. only holding stock for production in the immediate future. Brexit may cause delays and shortages which could affect the ability of businesses to trade.

In response to Brexit, it has been reported that warehouses which have the ability to stock refrigerated and frozen goods are currently fully booked, meaning that during what is usually a quiet time of the year for warehouse owners their businesses are thriving. So, it is not all bad news…..albeit this highlights a shortage of warehouse space in the UK to meet the current demand.

Although the advice from HM Government has been that the UK has a strong level of food security and that Brexit (deal or no deal) will not affect this, the Food and Drink Federation has noted that the reality is that with a no-deal Brexit, there may be severe disruptions to supplies which could restrict choice for consumers and levels of product availability.

As demand outweighs the supply of warehouse space, terms in warehousing agreements may be drafted more in favour of the warehouse owners, with less negotiating power for those wishing to rent the spaces. It is also worth considering whether any distribution and/or warehousing & logistics agreements in place may need to be amended in the light of a no-deal Brexit to reflect any changes in relationships and obligations between EU and UK businesses.

Suppliers considering their Brexit contingencies will need to be mindful about where ‘stockpiled’ goods and equipment are kept. As mentioned previously, there has been growth in the demand for storage space since the Referendum; particularly industrial units and warehouses. Landlords of such properties may anticipate would-be tenants requiring short, flexible leases which enable the tenant to exit the lease with ease if circumstances change. Landlords, for their part, are likely to want such leases to be outside the business tenancy protection provisions conferred by the Landlord & Tenant Act 1954. This will give them the whip hand on any negotiations for a renewal of the lease.

The boom in demand has unearthed wider fears of a shortage of storage space, with Savills Estate Agents describing the UK last year as an “underwarehoused country” (read more here). This, paired with a high demand for warehouse space, could lead landlords to increase rents. As an alternative, some companies have sought to construct underground storage space in their existing premises. If these are leased premises, then the occupier must consider the restraints in the lease, which is likely to prohibit significant alterations, (let alone the resultant planning issues).

For further information regarding commercial agreements with warehouse providers or distributors please contact David Thompson, Partner in the Commercial team.

For further information regarding property queries or agreements with warehouse providers please contact Richard Honey, Partner in the Real Estate team.