Competition law is more normally associated with price fixing cartels, but will soon apply in much greater depth to restrictions contained in land agreements. This follows two new legal developments, namely the Groceries Market Investigation (Controlled Land) Order 2010, and the Competition Act 1998 (Land Agreements Exclusion Revocation) Order 2010.
The Groceries Market Investigation
Both developments follow the Competition Commission’s (CC) wide investigation into the competitive functioning of the groceries market in the UK generally. This concluded in April 2008 that certain large grocery retailers were using “land banking” to restrict competition and protect the positions of stores in areas where competition was sparse. The method was broadly to buy up and place restrictive covenants blocking likely sites that might be suitable for competing large grocery store development. This limited the potential for competing stores to develop in some places and in areas where there was little or no competition between supermarkets, the CC felt that this was anti-competitive.
This was, however, legal, given that the Competition Act 1998 – the law that regulates other types of agreements that restrict or distort competition (eg. price fixing cartels) - was dis-applied from land agreements by virtue of a 2004 exemption to that effect. The CC recommended changes in the law, which have now taken place. The Controlled Land Order deals with large grocery retailers only but the Land Agreements Exclusion Revocation Order potentially affects all business sectors.
The Controlled Land Order
The main effects of the order are as follows:
- It affects relevant restrictions imposed by defined large grocery retailers only, namely Asda, Sainsburys, Tesco, Morrisons, Waitrose and Co-Op. It requires the large grocery retailers to release a list of specified restrictive covenants or exclusivity arrangements deemed already (following CC investigation) to have anticompetitive effects. NB. certain other restrictions that were examined and deemed inoffensive are also named, and fall outside this requirement).
- Large grocery retailers will be prohibited from imposing anti-competitive restrictive covenants or exclusivity arrangements in future. Schedule 4 of the order sets out a complex test for when a given restrictive covenant will be considered anticompetitive. Broadly, this turns on an analysis of the immediate locality from the site(s) affected (known as a ten minute drive time isochrone) and the level of concentration of competing stores in that area. The law seeks to prevent large grocery retailers from protecting those stores in which they face little or no local competition.
- In future, interested parties will be able to bring to the attention of the OFT when they consider a given restriction breaches the “Schedule 4” test. If the OFT agrees, then following due consultation, parties benefiting from restrictions that fail the test will be given six months from being informed by the OFT that a restriction fails the test, to take whatever steps are necessary to remove the offending restrictions (normally to execute a deed of release).
- Certain types of restriction will be exempted from the general rules described above, such as restrictions in leases of land granted to tenants for a residential dwelling and specifying that such a leasehold property be used solely for residential purposes.
The Order makes plain that it has retrospective effect on restrictions that have existed for any length of time as well as having prohibitive effect against those that might be considered for the future.
The Land Agreements Exclusion Revocation Order
Competition Law is best known for high-profile cartel agreements fixing prices or sharing markets, sometimes on a global or at least pan-European scale. Competition Law is enforced at European level by the European Commission and in the UK by the Office of Fair Trading (OFT), via the Competition Act 1998.
Notable cases in recent times include the October 2009 decision which saw over 100 construction companies fined for bid-rigging, and in April 2010 when various tobacco companies and retailers were fined for colluding in respect of the resale prices of cigarettes. Both cases were in breach of Chapter I of the Competition Act which prohibits agreements or concerted practices which may restrict, prevent or distort competition in the UK.
Land agreements have long been exempted from this on the presumption that they were somehow different to other types of business arrangement. The CC Groceries Market investigation found that anti-competitive effects could be achieved through land agreements in certain cases and recommended that the competition law “safe harbour” be withdrawn.
Before worrying immediately it should be recalled that competition law is not literal but an effects based law and most restrictive covenants in land agreements will continue to be lawful and entirely benign.
Competition law governs relations between undertakings (not private parties acting in an individual and nonbusiness capacity) and the effects of given restrictions will flow from the nature of the restriction, the property and the parties involved and how they interweave in each case.
What might infringe competition law in one set of circumstances may not in another – it all depends on context. To infringe competition law in the context of land agreements it will be necessary to stifle competition between businesses in an appreciable way.
The Land Agreements Exclusion Revocation Order simply lifts the previous immunity that land agreements enjoyed, with effect from 6 April 2011. It will apply retrospectively, however, meaning that when the agreement was first concluded will not matter. Existing and future restrictions in land agreements will now therefore need to be considered in the same way as other types of commercial agreements between independent undertakings.
Breaches of the Competition Act 1998 can result in the OFT making an order requiring the termination or modification of restrictions, or potentially impose fines for the parties of up to 10% of turnover, and unlimited liability to third parties in damages. This is why it may really matter.
When does a restriction of competition arise?
A restriction is broadly any provision that requires a party to pursue a particular course of action to the exclusion of something else, or vice versa – in other words something that ties behaviour. Whether or not this appreciably restricts “competition” in a wider sense depends on the nature of the restriction(s) concerned and the context in which they are imposed.
For example, a prohibition on title of land against a particular business use has little effect if there are multiple alternative options nearby that are open to parties to go elsewhere, and there is no particular business imperative to be located on the restricted land in any event.
So it proved for the large grocery retailers: the Controlled Land Order only bites in areas where there is limited competition (between large grocery stores). In that context limited competition was defined by there being few alternative large grocery stores within a ten minute drive time radius. This is the land agreements equivalent of considering the market power of normal industrial suppliers of goods in relation to their market share across a given area.
Put another way, what will be important in determining whether a restrictive covenant will restrict “competition” is a variety of factors, including:
- The breadth of geographic area affected.
- The nature of the property affected (a large modern shopping centre is far more likely to be capable of creating competition distortions than one single retail space in a town centre).
- The length of time any restrictive covenant is imposed for.
- The market power of the parties imposing and benefiting from the restrictions.
- The all-round reality of the situation in the sense of what difference does the restriction really make and does it genuinely hinder markets functioning competitively – this emerges from considering all such factors in tandem.
Typical restrictions that may be covered would include large shopping centre leases where large anchor tenants and/ or specialist retailers may seek comfort that competitors will be denied access within the same platform. The questions that will then apply will includewhether or not any competing retailer (denied an opportunity to locate within that shopping centre) is damaged by this if still able to locate across the street and the advantage to be drawn from being within the shopping centre appears marginal.
Other sorts of restrictions that might be caught include:
- Requirements in leases that tenants obtain certain goods or services exclusively from one supplier.
- Restrictions on a landlord not to allow competing businesses within a certain perimeter or excluding them from the facility altogether.
- Restrictions on the type of activity a tenant may carry out from the premises (particularly when the restriction is to protect competing activity carried out by the landlord).
- Restrictions on a buyer not to allow the property to be used for certain uses (eg. the land banking example).
Restrictions in planning agreements should not be caught by the above provided the same are between the landowner and the local planning authority and genuinely conferred for planning purposes.
Will some sort of restriction on competition be exempted?
Yes. Chapter I of the Competition Act is characterised by the ability of apparent restrictions of competition to be exempted from the usual prohibition if (very broadly) the restrictions may be considered indispensable to the overall purpose of the agreements in question and the pro-competitive effects outweigh their anti-competitive effects, and the same may be clearly and tangibly demonstrated.
For example, on occasion large asset investments will not be made without comfort of some protection for a reasonable period to depreciate those assets. Without such protection investments will not be made, and so advancements will not be made and consumers will ultimately lose by this.
Competition law recognises the need to be sensitive to this and whilst again this does not aid legal certainty for parties having to self-assess particular restrictions before entering into them, it does offer some comfort that common sense regarding restrictions of competition is important.
Will further guidance be issued?
Yes, and this will surely be hugely welcomed. The OFT has undertaken to issue more detailed guidance before the Land Agreements Exclusion Revocation order takes effect in April 2011.
Clearly the application of competition law to land agreements is going to be a new area and good and clear guidance, with examples of the sort of restrictions described above and their likely treatment in different market scenarios, will be very important.
Conclusions – what to do now
6 April 2011 is not that far away. Let alone considering the new law for all future deals, those with significant land interests (landowners, landlords and tenants, retailers, restaurant chains, events sites) should consider their existing portfolios and the respective arrangements and whether or not the same have ever been configured with spurning competitors in mind.
This will be the best quick gauge of anti-competitive effect, as that is what the law is designed to combat. The safe approach is to look at these more closely to see if any exposure arises. If these restrictions are central to particular business models or standard agreements those will need revising in particular.
Otherwise, as noted, many restrictions will be benign but there may be a few that are not and which could in time lead to difficulties in competition enforcement.
Equally, anyone aware that they are being stifled by one or more restrictions held over land may wish to reflect on those restrictions in the context of the changes to the law, and consider reminding those that maintain those restrictions of their responsibility and potential liability under the new law.
There are already plenty of disputes that are brewing!