The revocation of the Competition Act 1998 (Land Agreements Exclusion and Revocation) Order 2004 (the Order) will come into force on 6 April 2011. The revocation will apply retrospectively to all land agreements, regardless of when they were concluded.
What does this mean?
The revocation of the Order will mean that, for the first time from 6 April 2011 onwards, UK competition law will apply in full to all land agreements. This will include transfers, leases and assignments, as well as the creation of easements, and interests not usually thought of as land interests, such as licences.
Terms in land agreements which may be subject to competition law include:
- freehold restrictive covenants;
- a landlord covenant not to let another unit in its development to a competitor of an existing tenant;
- a restriction on the assignment of a lease, which allows the landlord to refuse consent to assign to a particular assignee on the basis of preserving a tenant mix in a development; or
- an obligation on a tenant to purchase particular products and services from its landlord.
Existing and future land agreements which breach the competition rules may be declared void and unenforceable. In theory, this could also expose any parties to such agreements to the risk of financial penalties, as well as to claims for injunctive relief/damages by third parties affected by the restriction of competition.
What should I do next year when the revocation comes into force?
There is no need to wait for the law to change next year before you act.
You can take pro-active steps now to protect your current portfolio and evaluate how to utilise efficiently this change in the law to the benefit of your business.
This is all new to me... what's the current legal position?
The starting point is the Competition Act 1998. This contains a prohibition on agreements which may affect trade within the UK by restricting competition to an appreciable degree (the so-called Chapter I prohibition).
Restrictions which are in breach of the Chapter I prohibition will be void and unenforceable. However, where a restriction is so fundamental to an agreement that its strike out would result in the agreement failing for lack of consideration, the entire agreement will be void and unenforceable.
In addition, parties to such agreements will be exposed to the risk of:
- investigation by the Office of Fair Trading (the OFT) and subsequent financial penalties of up to 10% of worldwide group turnover
- legal action by third parties for damages and/or injunctive relief
- adverse publicity and harm to corporate reputation.
Against this background, the Order currently provides an exemption from the Chapter I prohibition for specific land agreements. Although the Order only applies to land agreements which satisfy certain limited criteria, the Government has acknowledged that the existence of the Order has given rise to a widely held assumption that all land agreements are exempt from the application of the Chapter I prohibition. The revocation of the Order is aimed at clarifying the current legal position.
How does the revocation of the Order affect this, and who will it affect?
The revocation affects all landowners, developers, landlords, tenants, and potentially any third party affected by land agreements.
Once the revocation comes into force, the Chapter I prohibition will immediately apply to all land agreements, even those entered into prior to 6 April 2011.
However, this does not mean that every land agreement which restricts competition will breach the Chapter I prohibition.
What agreements would breach the Chapter I prohibition?
The Chapter I prohibition will apply where a land agreement (which contains relevant restrictions) is capable of having an appreciable effect on competition which may affect trade in the UK.
This effect on competition/trade is measured by reference to a 'relevant market'. The relevant market will vary on a case-by-case basis, and will require consideration of the actual economic context of the agreement. Under competition law, it falls upon the parties to an agreement to self-assess both:
- the particular relevant market the agreement affects; and
- the effect of that agreement on competition within that relevant market.
Wragge & Co's competition specialists are on hand to talk you through what is likely to constitute a relevant market in the context of a particular agreement, and to provide you with any assistance that you may require to self-assess the impact of the agreement upon competition within that market.
While in certain circumstances a relatively detailed analysis of the relevant market will be required, this will not always be the case. It may be possible to rule out any competition concerns during a short phone call, or through a brief email exchange.
Even where a restriction is in breach of the Chapter I prohibition, if that restriction gives rise to demonstrable pro-competitive benefits (e.g. ensuring a commercially desirable tenant mix for consumers within a shopping centre), it may still be capable of exemption from the Chapter I prohibition. This will again require an analysis of the effects of a specific restriction in the context of the relevant market in each instance.
However, where an agreement contains a very serious restriction of competition (a so-called 'per se' infringement, such as price fixing or market sharing), it will not be possible to argue that the agreement does not appreciably affect competition so as to avoid the application of the Chapter I prohibition. Further, exemption from the Chapter I prohibition for a 'per se' infringement will only be available in very exceptional circumstances.
A clear understanding of the likely application of the Chapter I prohibition to an agreement will provide the parties with greater commercial certainty, and enable the amendment of any potentially problematic agreements to ensure ongoing compliance.
What would happen in the event of a breach?
Where a land agreement breaches the Chapter I prohibition, an immediate concern is clearly the possibility that restrictions within that agreement, or the actual agreement itself, may be declared void and unenforceable.
While the existence of other possible sanctions for breach of the Chapter I prohibition remain a potential risk, our initial view is that:
- absent some other egregious breaches of competition rules, it is unlikely that the OFT would seek to impose fines where land agreements have the effect of restricting competition
- it may also be difficult for third parties to bring damages actions or actions for injunctive relief, given the evidential hurdle to be overcome of adequately demonstrating the loss or harm suffered as a result of any breach.
So what can I do now to protect my land interests?
There is no escaping the fact that, from 6 April 2011, the current legal landscape will change dramatically. However, we can work with you to provide pragmatic commercial advice to safeguard your interests and empower your future negotiations within this fast approaching "brave new world".
- ensure that employees are trained to recognise potential issues in respect of competition law compliance when negotiating current and future land agreements and commercial terms generally
- require that any future land agreements entered into are subject to a proper risk analysis to assess the application of UK competition law and the commercial implications of any restrictions of competition within these agreements.
- conduct a full audit in respect of existing land agreements, so as to identify any agreements which give rise to specific concerns
- consider amendments necessary to existing land agreements to ensure they remain legally enforceable following the revocation of the Order
- review land agreements currently being negotiated to ensure future compliance with UK competition law
- provide training to employees and management to ensure ongoing compliance with UK competition law.