In medieval London traders in particular goods used to congregate, often giving the trade’s name to the area, as in Shoe Lane and Leather Lane. In the modern environment traders often want to be segregated from their competition to monopolise the footfall, and restrictive covenants are one way in which segregation can be sought. This article looks at a pending change in the law regarding restrictive covenants and the impact that may have on retailers.

On 6 April 2011, a signifi cant change in the way the law treats restrictive covenants relating to land will occur. Until now, the United Kingdom’s competition law has excluded from its purview agreements that create, alter, transfer or terminate an interest in land. However, recent investigations into the grocery sector by the Competition Commission revealed how major supermarkets used their land holdings in places to try to buttress local dominance. Such local dominance reduces competition and choice for the grocerybuying public.

A statutory instrument made under the Competition Act 1998 is what gave protection to land agreement. A consultation on how to deal with the fi ndings in the grocery sector identifi ed a clear preference for a complete repeal of the land agreements exclusion rather than looking for a specifi c solution to the grocery sector problem. The existing protection under the statutory instrument will cease to have effect on 6 April 2011. At that point, all land agreements with restrictive covenants, including those already existing, will become subject to competition law.

This does not mean that all restrictive covenants will fall foul of competition law; far from it. The covenants that may be affected will be those designed to protect the business from competition. Where such covenants have a de minimis effect on competition or are between parties with a combined turnover of no more than £20m (a small agreement) competition law pretty much ignores them (although a restriction in a small agreement may be invalid). However, larger businesses will have to evaluate their restrictive covenants more carefully, particularly in retail businesses, where segregation may affect consumer choice.

Competition law prohibits agreements that affect trade in any part of the United Kingdom and have as their object or effect the prevention restriction or distortion of competition (with exceptions geared to promoting innovation, effi ciency and consumer benefi t). Many business restricted covenants have as their explicit object a restriction of competition. If a restrictive covenant also affects trade in a particular geographical market, then it will fall into the prohibition unless it fi ts within an exception. (See example).

A prohibited agreement is void and unenforceable as between the parties and can make the parties subject to signifi cant fi nancial sanction. It is our view that fi nancial sanctions will not be imposed at signifi cant levels for infringement of the Competition Act by anticompetitive land agreements for some time after April 2011. There are potentially hundreds of thousands of restrictive covenants to be considered and the nine month window allowed by the manner of repeal is not going to be remotely suffi cient for a comprehensive nationwide audit of restrictive covenants. Things may be different in the grocery sector given the fi ndings already made by the Competition Commission investigation.

Nevertheless, the fact that there may be an initial light touch approach to enforcement is no reason to be complacent in assessing potentially anti-competitive restrictive covenants.

Example

A developer creates a new shopping mall. A covenant for the benefi t of an anchor tenant that another similar business will not be allowed space in the development would need to be analysed for competition law purposes.  

If the local market allowed competitors equivalent premises with an equivalent draw, then there might be no signifi cant anticompetitive effect. On the other hand, if the development was a destination development, such a covenant might be signifi cant. In many cases, enticing in an anchor tenant by some exclusivity is likely to fall within an exemption, provided the exclusivity is limited to a reasonable time to allow the development to get established.