As of 6 April 2011 the property sector will be subject to the full application of competition law.
Until now, restrictions on competition contained in land agreements have benefited from a specific exemption. This exemption has been withdrawn so that from 6 April 2011 the rules on restrictive agreements apply in full to existing and new agreements.
Restrictions which are now potentially caught include covenants in commercial property agreements relating to user clauses and alienation, as well as restrictions placed on tenants impacting on the use of premises.
A breach of the competition rules can result in the restriction or the entire agreement being found to be invalid and, in certain circumstances, fines (of up to 10% of a company's worldwide turnover). Particularly serious breaches of competition law can also result in imprisonment and director disqualification. However one person's sword can be another person's shield: for some the application of competition law will mean that they will no longer be able to rely on clauses in their leases and will not be able to insist on similar terms upon their renewals. For others competition law will create an opportunity to no longer be bound by certain restrictions.
How is competition law enforced in the UK?
Competition law is principally enforced by the Office of Fair Trading (the OFT). The OFT has wide powers of investigation and the ability to impose substantial penalties and other requirements on companies and individuals that have infringed competition law. It often proceeds with enforcement action further to a complaint from a market player. Competition law can also be enforced in private litigation in the UK courts, which now have considerable experience of dealing with competition law issues.
When do agreements fall foul of competition law?
In broad terms competition rules are engaged where restrictions on the use of land operate to protect a business from competition or to prevent competitors from entering a market.
Competition law covers agreements between any business such as sole traders, partnerships, a company or a group of companies and it also applies to the activities of a trade association. It does not generally catch agreements involving private individuals.
The OFT's focus will be on two types of arrangement:
1. Agreements between competitors
Agreements that are aimed at sharing or carving-up markets are generally viewed as hard-core infringements of competition law and are likely to result in substantial fines and other penalties.
Example 1: A company leases land to a competitor on terms that require the competitor not to undercut the landlord's retail prices.
Example 2: Two tenants agree that one will sell only 'premium quality' goods and the other will only sell 'value quality' goods.
2. Restrictions between landlords and tenants
It is often the case that either landlords or tenants require specific covenants in leases that have the effect of restricting what the tenant (or the landlord or, indeed, other tenants) are allowed to do. Going forward the following agreements, for instance, will engage the competition rules:
- Exclusivity arrangements where a landlord agrees not to let other parts of a site or sites to competitors of the tenant;
- Lease use restrictions (permitted or restricted user clauses) that restrict the commercial activity that a tenant is permitted to undertake on leased premises;
- Restrictive covenants in the context of a sale of land where a restriction is imposed on the future use of that land e.g. a restriction accepted by the purchaser of a property not to sell the property to a competitor of a vendor; and
- Supply agreements between the landlord and the tenant and where the tenancy includes conditions regarding the supply.
Whether such restrictions are problematic will depend on the context of the restrictions and, in particular, who competes within which geographic region (e.g. a shopping centre, the entire town or a region).
Even if a restriction negatively affects competition this may be justifiable, in certain circumstances, if the restrictive effects are outweighed by identifiable benefits. This will need careful consideration in the light of the facts of each case. For example, it may be possible to justify an exclusivity provision in relation to a shopping centre on the basis that it secures an anchor tenant thereby attracting other retailers to the shopping centre.
Examples of problematic restrictions
Tenant granted exclusivity
The landlord of a shopping centre grants a lease over a coffee shop. In the lease the landlord agrees that there will be no other coffee shops in the centre in exchange for a higher rent.
This is likely to be regarded as appreciably restricting competition. It is unlikely that the relevant market would extend beyond the shopping centre itself as most customers of the shopping centre are unlikely to leave the centre for their cup of coffee. Although customers may benefit from a shopping centre containing a mix of retailers, it might be difficult to argue that the exclusivity clause is necessary to facilitate investment in the coffee shop or for the landlord to ensure the presence of at least one coffee shop in the centre.
The position may be different where exclusivity is granted to a larger tenant. First, competition for the products of larger stores is unlikely to be limited to the centre itself. In that case one would need to examine the geographic limits of competition. For example large metropolitan areas such as London, Manchester or the Scottish central belt will differ from shopping centres or retail parks in rural areas. Moreover, in certain circumstances, if a large anchor tenant is needed to make a centre or retail park viable this could justify exclusivity at the outset but might have to be revisited upon tenancy renewal if the centre is well established.
Covenants restricting the use of land
Example 1: There are two petrol stations in Townville, within a 10 minute drive of each other, and both are owned and operated by A. There are no other petrol stations within a 10 minute drive from either of A's petrol stations. A decides to close one of these petrol stations and to sell the land to a company without any interest in the petrol business. A also wants to prevent the land being sold in the future to potential rival petrol stations. Therefore, it includes a covenant in the transfer that the land cannot be used as a petrol station.
Whether this restriction appreciably restricts competition depends on the scope of the market for the sale of petrol and the extent of competition in that market. It is unlikely that the covenant will have an effect on competition if there are many other suitable sites for use as petrol stations, as this would mean that new entrants could establish a petrol station in future. If there are no other suitable sites, it is more likely that the covenant will be held to restrict competition.
Example 2: A restrictive covenant prevents land adjacent to a theatre from being used for certain industrial purposes for so long as the theatre remains in place. The restriction has been put in place to prevent noisy activities being carried out next to the theatre, which may impact on performances. This restriction is unlikely to infringe the prohibition as: (i) it does not prevent competitors of the party which owns the theatre from entering the market; and (ii) it only lasts for so long as the theatre remains in place, and so is no wider than is necessary to achieve its objective of avoiding interferences with use of the theatre.
Additional specific rules apply to large supermarkets. For an overview of these special rules please see our E-bulletin of 31 August 2010, Large Grocers and the Controlled Land Order.
Mitigating and managing the competition law risk
There are a number of steps that can be taken to mitigate the risk of breaching competition law. These include:
- ensuring relevant persons (particularly those negotiating current and future agreements) are adequately trained on competiton law.
- carrying out a risk assessment/analysis of the terms of current and future land agreements, which may result in the need to re-think (and re-negotiate) the terms of the agreement.
Our competition law team has extensive experience of advising clients on competition law and representing clients before the authorities (either as complainant or defendant), including in the property sector. We are able to assist with document reviews ranging from a full audit to a more high level risk analysis of existing and future land agreements. We are also on hand to provide training to employees and management to ensure ongoing compliance with UK and European competition law.
Please contact John Schmidt, Sebastian McMichael or your usual Shepherd and Wedderburn contact should you be interested in discussing our services in greater detail or have any queries on the subject matter of this E-Bulletin.