Date 12 May 2011
Until 6th April 2011 the Competition Act 1998 did not have effect with regard to agreements relating to land due to an exemption under that Act. This meant that the long established practice especially in shopping centres and larger developments, in particular, of entering into exclusivity agreements on sales and lettings continued unabated despite that Act coming into force. However a recent Order (The Competition Act 1998 (Land Agreements Exclusion and Revocation) Order 2004 to give it its full title) brings such agreements within the remit of that Act for the first time.
What is the effect of the Order?
The Competition Act 1998 prevents in general terms anti-competitive acts in the UK, including entering into cartels, price fixing, market sharing etc. Until the Order, all land agreements were exempt effectively meaning that most day to day real estate transactions including sales, leases and licences were not caught. The Order has revoked the exemption applying to land agreements entered into between businesses.
Restrictive covenants in property transfers as well as trading restrictions in leases will now be open to possible scrutiny as to whether or not the effect of that agreement makes it anti-competitive and thus subject to the enforcement regime of the Competition Act. It is the effect of the agreement on competition which is relevant; this makes it particularly difficult to get round the prohibition by the wording used.
The headline sanction of a business being found to be guilty of an infringement of the Act is a fine of up to 10% of worldwide turnover.
Can you still rely on an exclusivity clause?
Any such clause which has the effect of having a negative effect on competition would be legally unenforceable and therefore any provision negotiated into a Lease to the effect of the tenant being the only retailer of a particular type in the shopping parade is unlikely to be as watertight as either party to that agreement thought it was when entered into.
Whether or not the relevant provision would be caught though is not an easy question to answer, it’s a self assessment in which the party seeking to impose and rely on the provision needs to consider all the relevant circumstances of the case and consider what the effect on competition of imposing those restrictions are in the market.
The OFT, who have produced a series of overviews and more in depth guidance on the area on their website (www.oft.gov.uk), consider that competitors who enter into an agreement which restricts the use of land in order to carve-up or share the market is likely to be a serious infringement of the law. However traditional exclusivity clauses or trading restrictions in leases and restrictive covenants in sale agreements as to use are far less likely to be clear cut.
Given the draconian penalties that can be imposed many businesses are going to consider a review of there existing agreements and policies with regard to such matters as essential in the immediate future and should consider seeking legal advice on any agreements which may raise competition law considerations whether those be existing or proposed contracts.
Are there any exemptions?
Yes. If the restriction gives rise to benefits that outweigh competition disadvantages like making sure that there is a good mix of tenants in a shopping centre or providing jobs or a boost to the local economy then, despite the Order, the restriction may still be capable of exemption but the position is by no means cut and dry and needs to be looked at in detail on a case by case basis.
One area which will come under the microscope is an anchor tenant to a retail scheme where the benefits may well overcome the detriment if without that exclusivity the tenant would not have moved into the scheme and thereby potentially jeopardising the economic viability of the scheme as a whole. This does not mean, however, that exclusivity can be justified for either the whole of a long lease, or on a lease renewal.
The Act also does not apply to planning agreements or to individuals not acting as a business so that residential arrangements are not caught but it is possible that some individual landowners would still be classified as carrying out business activities for the purposes of the Act although contracting in their personal name.
Commentators have suggested that it will be easier to maintain restrictions in property agreements which produce a balance of occupiers in a shopping area than it will be to justify giving an occupier exclusivity in a centre as not being anti-competitive.
Where market share is less than around 10% there are exemptions under the Competition Act also, but this will depend on deciding what the relevant market is. An exclusivity agreement in a small precinct for a particular use may not be anti-competitive if the ‘market’ is the whole city centre and therefore there are other competitors to that business in the ‘market’, whereas exclusivity for the same use in an out of town shopping centre, in itself the ‘market’ may well be anti-competitive.
Are existing agreements safe?
Probably of most concern to retailers and other occupiers is that the Order applies retrospectively and therefore no doubt there are many leases in existence negotiated on the basis that exclusivity would be a key term of the letting, and perhaps the rental level agreed to an extent depended on that exclusivity. It would appear open for the landlord, having secured that rental on the basis that they would have to give the tenant exclusivity within their centre for that tenant’s use, to now at least try to allow another competing user to open up in competition with that first tenant.
With the voids that some centre managers and landlords are now facing with high profile tenants closing stores and a number of casualties of the recession falling into insolvency will the incentive now be there for landlords to renege on those agreements made in good faith by the parties?
We could also see businesses which have hitherto been excluded from a centre because a competitor has for some time had the benefit of an exclusivity provision in their agreement with their landlord taking that competitor to Court for compensation for the loss suffered by their business by not being able to get into that Centre as a result.
There is also the prospect of agreements being entered into which at the time they commence do not contain anti-competitive provisions but which may as a result of a change in external circumstances not within the control of the parties, nevertheless become anti-competitive during the life of the agreement, for example where there is suitable available accommodation available from another landlord at lease commencement which then is no longer available part way through a lease term and only the landlord’s accommodation is then suitable.
There will need to be an ongoing review of agreements during their life cycle to properly police the potential Competition Act implications of possible infringing provisions and perhaps the need for either party to have the ability to require the removal of such provisions from the agreement in the event that independent Counsel for example consider the provisions to fall foul of the Act during the course of the Agreement.
If you would like more information or advice relating to a specific matter, please do not hesitate to contact Gary Dunger on 01727 798020 or by email at gary.dunger@salaw.com.
© SA LAW 2011
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