Land agreements containing restrictions on use such as exclusivity clauses or restrictive covenants have traditionally been protected from the ambit of competition law. However, this is all about to change.
Retail Gazette caught up with Simon Child, a solicitor with Piper Smith Watton’s retail team, to find out what issues need to be considered in light of the pending changes in the law in April this year.
Land agreements between businesses containing restrictions on use have been excluded from the prohibition of anti-competitive agreements as set out in the Competition Act 1998. This protection is withdrawn from April 6th 2011.
The Office of Fair Trading’s (OFT) guidance from October 2010 suggests that the withdrawal of protection will not have retrospective effect but that it will apply to future and existing agreements (for example, licences, surrenders, easements, and transfers) from April 6th 2011. Businesses will be responsible for ensuring their own compliance with competition law.
This change does not mean the end of restrictions. A restriction on use is not automatically anti-competitive nor is there a presumption that it is. Much depends on context, and the economic and commercial effect of the agreement, rather than the exact wording of the restriction. A restriction designed to make it more difficult for a business to compete or to keep it out of a market is most likely to have an impact upon competition and, therefore, be problematic.
Crucially, the OFT expects only a minority of restrictions to be anti-competitive.
One indicative example given by the OFT of a possibly anti-competitive situation is that of a landlord of a shopping centre guaranteeing a tenant the right to operate the only coffee shop to be located in the shopping centre. In such a case the relevant ‘market’ is the people in the shopping centre wanting a cup of coffee, in which case, the effect of the exclusive right would be to provide the tenant with a 100 per cent market share. Another example is that of restrictions accepted by a buyer not to sell the property in the future to a competitor of the seller or allow it to be used in a certain way. One pertinent instance may be a restriction on assigning a lease to an assignee whose use upsets a prescribed landlord-tenant mix policy.
So what are the penalties?
If a restriction, such as an exclusivity clause or restrictive covenant, is successfully challenged, it (and/or potentially the whole agreement if not severable) will be void and unenforceable. There may follow an order for the restriction to be removed, followed by possible fines of up to ten per cent of worldwide turnover and/or the disqualification of directors. There is also the possibility of third parties seeking damages for loss and damage suffered. The OFT can conduct spot checks, impose interim measures to halt anti-competitive behaviour, impose the ten per cent fines for three years, and order parties to cease or modify their activities.
Unfortunately whether there is distortion, restriction or prevention of competition in the UK will vary from case to case depending upon:
- whether there is an ‘appreciable’ effect on the relevant market based on the aggregate market share of the parties;
- the extent of the market based on the relevant product and geography (local or regional);
- competitive conditions such as the availability of other suitable alternative land for that activity;
- the nature, size and location of the property;
- unique qualities and any planning restrictions;
- the length of the restriction since, if it is longer than five years, it is more likely to be deemed to appreciably affect competition;
- the market power of the parties; and
- whether in reality the restriction does genuinely hinder the market from functioning competitively].
There are exceptions, such as where a restriction brings economic and consumer benefits, provided the least restrictive solution for achieving the aim is adopted. This exemption is on the following basis:
- the agreement contributes to improving production or distribution or promoting technical or economic progress;
- consumers are allowed a fair share of any resulting benefits;
- no restrictions go beyond those indispensable to achieving objectives; and
- the restriction must not afford the parties the possibility of eliminating competition in respect of a substantial part of the products in question.]
Grocery retailing activities, especially in certain localities, are also subject to additional control under the Groceries Market Investigation (Controlled Land) Order 2010. We have already seen some supermarkets contacting occupiers in this regard.
New shopping centres, in particular, may be given the benefit of an exemption in favour of anchor tenants on a number of grounds, such as ensuring the viability of the scheme, especially if limited in time. This is on the basis of any pro-competitive benefits being passed onto consumers outweighing the anti-competitive effects. This same argument may save a number of provisions, which otherwise seem anti-competitive.
The OFT is currently holding a public consultation on its existing draft guidance which ended on January 14th 2011. Further guidance should be issued later in the year. The OFT will no longer offer clearance or specific advice to businesses on particular land agreements but its guidance does offer a starting point for advice and a few examples which may prove useful.
This is a complex area and specific competition law advice is needed in each instance where a restriction is desired or required since each case turns on its facts. All developers, land owners and landlords are responsible for and should now consider conducting their own reviews of their current and future agreements and dealings with property in readiness for April’s change. At the same time this may be a great opportunity for tenants and owners of property subject to such restrictions to review their position and potentially challenge prohibitive restrictions so as to maximise their trade and potential.
Time will tell as to whether parties will be cautious or bullish in the future in light of the changes and what approach the OFT will take in relation to assessments, enforcements, and penalties.
Simon Child, Solicitor at Piper Smith Watton LLP in the firm’s retail department. For further information, please contact Simon Child on +44 (0)20 7222 9922 firstname.lastname@example.org or Tricia Hart on +44 (0)207222 9906 email@example.com.
Further details on the full range of legal services offered by Piper Smith Watton LLP can be found at www.pswlaw.co.uk.
This published article may contain information of general interest about current legal issues, but does not give legal advice.