Background

Chapter I of the Competition Act 1998 prohibits agreements between two or more businesses which have as their object or effect the prevention, restriction or distortion of competition within the UK. The law applies to all sectors, but land agreements are currently excluded from the general prohibition, by the Land Agreements Exclusion and Revocation Order 2004.

The land agreement exclusion is to be revoked, as of 6 April 2011. From that date, Chapter I of the Competition Act will for the first time apply fully to “land agreements”, which are defined as agreements between undertakings which create, alter, transfer or terminate an interest in land. Land agreements will therefore include leases, dispositions, deeds of conditions, deed of real burdens and servitudes, missives and many other agreements relating to property.

Crucially, the revocation will apply retrospectively, so that land agreements will be subject to scrutiny under the Chapter I prohibition, even when they were entered into before 6 April 2011. It will also apply to a restriction that may be perfectly legitimate when created, but which becomes anti-competitive in the future due to a change of circumstances in the relevant market.

Land agreements often contain provisions which restrict the way in which land can be used or how a right over land may be exercised. For instance, landlords commonly undertake to tenants that they will not let any other unit in a development to any tenant in the same line of business. Dispositions of land are commonly subject to title conditions preventing any future owner of the land from using it for a purpose which competes with the business of the seller, or which restrict the use of the land to a specified purpose.

Any land agreement which falls foul of the prohibition will be void, in whole or in part. If the offending provision cannot be severed from the agreement, the whole agreement may be at risk. Additionally, potentially substantial financial penalties can be imposed on the party or parties to the agreement.

Consequences Generally

Consequently, parties to relevant land agreements should already be considering whether the agreement (or any part of it) prevents, restricts or distorts competition in the UK.

The Office of Fair Trading (OFT) has issued draft guidance setting out some general principles to help parties to analyse and understand when a provision in a land agreement might be anti-competitive. However, the number of agreements which might be affected is unclear. Agreements will only be caught by the prohibition where they have an "appreciable" effect on competition. This will largely depend on the size of the relevant market (which may be national or only very local), the relative market shares of each of the parties, and the actual effect on the market. Consequently, this renders the question whether an agreement is, may be, or may become anti-competitive, in some cases a complicated one.

Consequences for Lenders

Although the change in the law may mean that some land agreements will fall foul of competition law, the OFT has indicated that they consider the majority of land agreements will not be in breach. However, lenders and their advisers should already be considering the effects of the revocation when assessing the suitability of a property that is to form the basis of a security where a land agreement affecting the property is subject to some form of restriction.