Brexit: Implications For Rail Rolling Stock Procurement, Leasing And Financing

Brexit will happen on Friday 29 March 2019 - one year from now - unless the Article 50 negotiations are extended. Even if a transition period is negotiated, the EC has announced that this should not continue beyond 31 December 2020. During the period since the referendum on 23 June 2016, much has been written about the progress of negotiations between the UK and the EU (or, more particularly, the lack of such progress) towards an agreement for the post-Brexit position and any transitional arrangements. Negotiations are about to begin in earnest, but already issues have emerged which need to be considered in the context of rail rolling stock, leasing and its financing.

THE CURRENT LANDSCAPE

The eminent English judge Lord Denning described EU law as "like an incoming tide. It flows into the estuaries and up the rivers. It cannot be held back". That was in 1974 and EU law has flooded into many areas. Brexit has been described by the World Trade Organization's former Director General, Pascal Lamy, as like "taking an egg out of an omelette, which is a pretty difficult thing".

Which metaphorical eggs do we need to consider in the context of rolling stock? By way of examples, UK rolling stock is often purchased and financed under EU procurement rules, frequently by operators owned by companies from other parts of the EU. Manufacturer prices reflect varying elements of Euro and other nonsterling costs. Importation from other parts of the EU benefits from the principle of free movement of goods, with limited concerns around customs clearances, quotas and tariffs. Value Added Tax (VAT) on acquisition, maintenance costs and rentals is fundamentally a European tax. Intellectual property rights are often protected under pan-EU laws. Manufacturing and leasing contracts include references to EU directives. Sales of rolling stock portfolios can benefit from securing single merger clearances valid for the entire EU. Judgments resulting from disputes are often enforced in other parts of the EU using the Lugano Convention.

The legal position until 29 March 2019 will not change, except pursuant to legislation which expressly comes into effect before such date. The lead times on rolling stock delivery are, however, significant. Rolling stock ordered now will generally be delivered after 29 March 2019 and therefore the post-Brexit implications need to be considered already, irrespective of ongoing speculation about an "Exit from Brexit".

EXIT FROM BREXIT?

There have been numerous calls for a second referendum and it is not known what will happen if the UK Parliament votes against the deal negotiated. There has been extensive speculation that Brexit will not actually happen. Having triggered Article 50 on 29 March 2017, could the UK still stop the process and instead decide to remain a member of the EU?

On 12 July 2017, the European Commission published its 'State of play of Article 50 negotiations with the United Kingdom'. This sets out their view and includes the following three statements:

--"Once triggered, can Article 50 be revoked? It was the decision of the United Kingdom to trigger Article 50. But once triggered, it cannot be unilaterally reversed. Article 50 does not provide for the unilateral withdrawal of the notification." --"What happens if no agreement is reached? The EU Treaties simply cease to apply to the UK two years after notification." --"Can a member state apply to re-join after it leaves? Any country that has withdrawn from the EU may apply to rejoin. It would be required to go through the accession procedure." If the UK did apply to re-join the EU, there are questions over the terms which would apply, including whether the UK could retain its advantageous budget rebate. It also seems unlikely that the UK would be permitted to opt-out from joining the Eurozone. Even if the EU did accommodate a revocation of the Article 50 notification, there...