Pamela Jones, from our retail property team, reviews a significant case on the application of competition law to shop leases.

A significant case?

Land agreements (including leases of retail premises) have been exposed to the full force of the Competition Act since 6 April 2011, but there has been uncertainty as to how the courts might apply it in practice. Martin Retail Group -v- Crawley Borough Council is the first reported case on the application of competition law to retail leases and suggests that the courts will perhaps be more sympathetic than anticipated to arguments based upon competition law.

A surprising context?

Restrictive covenants imposed by retailers on the disposal of surplus property and exclusivity agreements granted by landlords to anchor tenants are considered most vulnerable to competition law. Indeed, the seven largest supermarket chains are made subject to specific additional restrictions in these two areas through the Controlled Land Order. It is therefore somewhat surprising that the first reported case concerns a user clause in a lease and in the context of lease renewal proceedings.

What happened?

Crawley Borough Council owned a parade of eleven shops - the only shops serving the post-war housing estate at Furnace Green, Crawley. A long-standing tenant mix policy ensured that the parade included a selection of complementary retailers, including a bakers, a pharmacy, a hairdresser, a takeaway, a small supermarket and Martins the newsagent. The case arose on the renewal of Martins’ lease, because Martins wished to extend their user clause to become a convenience store which would effectively compete with the supermarket. The council wished Martins to remain solely as a newsagents and proposed a user clause for the renewal lease which would make it clear that Martins could not sell groceries or other convenience goods.

Who won?

The matter was listed for a preliminary hearing to deal with the competition law status of the proposed user clause. The council contended that the user clause fell within the ‘consumer benefit exemption’, which protects anti-competitive agreements that provide a benefit to consumers.

The judge held that the user clause proposed by the council infringed competition law and did not benefit from the consumer benefit exemption. Despite being only a preliminary hearing, it seems unlikely that any subsequent hearing to settle the terms of the renewal lease would impose on the tenant a user clause which has already been declared to breach competition law.

The wrong question?

It was always anticipated that a strong case would be needed to invoke the consumer benefit exemption, so it is not altogether surprising that the judge decided that the exemption did not apply. The council appears to have conceded that the proposed user clause did breach competition law, despite Government guidance that expects only a minority of land agreements to offend competition law and confirms that landlords have a legitimate interest in using user clauses in leases to manage their estates and ensure a good tenant mix. The council was presumably mindful that the housing estate was likely to constitute the ‘relevant market’ and that this parade comprised the only shops within that market.

Implications for retailers?

At first glance, this case is great news for retailers who can use it to argue against restrictive user clauses in leases and possibly even to obtain a wider user clause on lease renewal. It seems unlikely that the exemption will be invoked, unless in exceptional circumstances. However, competition law focuses on the potential impact of a particular restriction on the relevant market, rather than the wording of the restriction and few markets will possess a similarly complete absence of actual or potential competition. Virtually every shop lease in the country contains some limitations on the tenant’s use of the property and in the vast majority of cases these will not result in a breach of competition law.