Much has been written recently about the Competition Act and the implications for exclusivity covenants following revocation of the Land Agreements Exclusion Order. However, there is another area of competition law which can also impact on the real estate sector.
Over the past 12 months the OFT has investigated two separate shopping centre acquisitions. The first, last summer, was Capital Shopping Centre’s purchase of the Trafford Shopping Centre. More recently in March 2012 the OFT cleared CSC’s acquisition of the Broadgate Shopping Centre in Nottingham.
The reason for the OFT involvement is the Enterprise Act 2002 which covers merger situations (i.e. where two or more enterprises are brought under common ownership or control). The term “enterprise” is very widely defined as the activities, or part of the activities of a business, and therefore a property such as a shopping centre, may in itself be an “enterprise”.
The OFT only has the power to review a merger where either the target’s turnover exceeds £70m or if a “share of supply” test is met (i.e. both the acquirer and the target supply the same goods or services and after the acquisition they would together supply at least 25% of that good or service in the UK or a substantial part of the UK). In some cases, depending on the size and nature of the parties involved, real estate transactions may also trigger requirements to seek merger clearance from the European Commission. And under both UK and EU merger control rules, certain joint ventures can also require merger clearance.
The Trafford Centre acquisition fell within the OFT’s remit because the annual turnover exceeded the £70m threshold. The Broadmarsh transaction fell well below the turnover threshold but satisfied the “share of supply” test because the parties together would account for 65-70% of the combined share of “shopping centre retail space” in Greater Nottingham – Greater Nottingham constituted a substantial part of the UK, in the OFT’s view.
In both cases the OFT did give clearance.
Sellers and buyers of shopping centres in particular (but also potentially other assets such as factory outlet schemes) need to make sure they fully consider the potential impact of the Enterprise Act before entering into purchase contracts. In practice the parties have two alternatives. The first is to make the transaction conditional on OFT clearance (with potential implications for timing depending on how long the OFT investigation takes). The second is to complete the transaction and take the risk that the OFT subsequently decides to investigate and refer the matter to the Competition Commission (and the Competition Commission have wide powers to order remedial action including potentially even unwinding the deal).
In the past we have seen a number of institutional investors and property companies pooling assets to create larger (and non-competing) retail schemes. The two best examples are probably the Birmingham Alliance and also more recently the Bristol Alliance which led to the development of Cabot Circus. Parties will need to ensure that they fully consider the potential implications of the merger rules on any such future project.