Large Grocers and the Controlled Land Order

On 12 August 2010 the Competition Commission published the final version of the Groceries Market Investigation (Controlled Land) Order 2010, which seeks to address competition issues identified as part of the CC's market investigation of the groceries sector. In broad terms the Order restricts the ability of large grocery retailers to enforce restrictive covenants and exclusivity arrangements in certain local markets as specifically identified in the CC's market investigation, or which fail a prescribed competition test. The intention is to remove barriers to other parties entering or expanding their business in previously concentrated local markets with the end consumer benefiting from the increased competition that results (through lower prices and greater choice).
 
The Order was originally published in April 2010 but was subsequently withdrawn as it did not fully reflect certain intended exemptions from the obligations and prohibitions in the Order applicable to "operational land restrictions" (restrictions that prevent land being used other than as a car park, service yard or access road). However, the central provisions of the Order remain the same and are summarised below. 
 
Restrictive Covenants
 
Under the Order large grocery retailers (as specified in the Order and which include, for example, Asda, Tesco and Sainsbury's) are to use their best endeavours, within a specified time period, to release restrictive covenants (i) as are specified in the Order; or (ii) which are determined by the Office of Fair Trading, on application by the owner of the burdened land, to have failed a competition test. The relevant time period in relation to (i) is 6 months from the date of the Order and for (ii) within a minimum period of 3, and a maximum of 6, months of the OFT's determination (as specified by the OFT).
 
The competition test applied by the OFT is specified in Schedule 4 to the Order and, in broad terms, captures the case where the total number of fascias within a 10 minute drive-time around the burdened site is 3 or less and the large grocery retailer  benefiting from the restrictive covenant has a market share of 60% plus.
 
Release of the restrictive covenant must be done by entering into a deed of release with the owner of the burdened land, and procuring the removal of the entry referring to the restrictive covenant from the relevant land register. If the grocer cannot secure the release of the covenant (and the Order specifically states that the obligation to use "best endeavours" does not include an obligation to make any payment to obtain consent from another party) then it is to execute a declaration by deed providing that it will not enforce the restrictive covenant.
 
In addition, large grocery retailers must not (subject to certain specified exceptions) enter into new restrictive covenants that may restrict grocery retailing (that is prevent the land from being used for grocery retailing).This includes agreements which have an equivalent effect, such as a covenant that limits access to properties for certain vehicles that could prevent required deliveries. 
 
Exclusivity Arrangements
 
The Order also  restricts the ability of large grocery retailers from enforcing, or entering into, exclusivity agreements the effect of which are to prevent or restrict another grocery store operating from the same site. The Order identifies a number of specific exclusivity agreements which a large grocery retailer must not enforce after a period of 5 years from the date of the Order. In addition, as with restrictive covenants, an application can be made to the OFT for a determination that the competition test (as outlined above) is failed: should the OFT find this is the case the large grocery retailer cannot enforce the exclusivity arrangement after 5 years from 30 April 2008 or 5 years from the date on which the store began trading, whichever is later.  Further, large grocery retailers must not enter into new exclusivity arrangements with a duration of more than 5 years from the date on which the store in question began trading.
 
The Controlled Land Order is one of a number of measures that has resulted from the CC's market investigation, including the revocation, as of April 2011, of the Land Agreements Exclusion Order. The Exclusion Order currently operates to largely insulate land agreements from the full force of competition law. Its revocation means that the enforceability of common provisions of land agreements, such as restrictions on the type of commercial activity that a tenant may undertake, will require to be assessed with competition law in mind. The approach of the CC to restrictive covenants and exclusivity provisions insofar as large grocery retailers are concerned, in particular the application of the competition test, offers a useful insight as to when competition law concerns may arise in other areas in the property sector.