"The UK Competition Act prohibits agreements that have the object or effect of restricting competition within the UK . Currently, land agreements – such as freehold, leasehold and rental agreements – are exempt from the prohibition, but that is all about to change. With effect from 6 April 2011, land agreements will be fully subject to competition law in the UK. Companies have until then to ascertain whether their land agreements are competition law compliant and, if not, to bring them into line. This change will affect the large majority of companies that are party to real estate deals in the UK.
The change: land agreements no longer exempt from UK competition law
Currently the Land Agreements Exclusion Order 2004 ("the Exclusion Order") exempts from the prohibition of anticompetitive agreements, all "land agreements" that "create, alter, transfer or terminate an interest in land," together with certain obligations and restrictions that are treated as part of the agreements. The Exclusion Order exempts virtually all major real estate transactions.
Revocation of the Exclusion Order will have retroactive effect. As a result, with effect from 6 April 2011, all land agreements – old and new – will be fully subject to competition law in the UK.
The effect of the change
In response to the impact assessment conducted by the UK government on the effect of the revocation, concerns were expressed that (a) the retroactive effect of the revocation would tie the sector up in unwarranted and burdensome due diligence; and (b) existing agreements and investments based on exclusivity arrangements would cease to be legal under the new regime, and if the exclusivity arrangements could not be enforced, the value of investments would be reduced. In return, the UK government acknowledged that (a) whilst the retroactive effect of the revocation "may require a large number of parties to undertake a certain amount if work to assess whether or not their agreements have any substantive effects on the market" the benefits outweigh the burdens; and (b) "if an exclusivity arrangement does have anticompetitive effects, it is right that the parties should cease to benefit from it."
Sanctions for non-compliance
It is anticipated that the change in the law will make the vast majority of land agreements in the UK fully subject to competition law. There then will be serious consequences for agreements that are not competition law compliant:
- Infringing provisions may be automatically unenforceable. The whole land agreement could be void and unenforceable in its entirety if, as a matter of English law, the infringing provision is not severable from the agreement.
- The possible competition law violation may be investigated by the Office of Fair Trading ("OFT").
- Agreements found to violate competition law may result in fines of up to 10% of the total turnover of the respective parties.
- Private actions for damages for loss alleged to have been suffered as a result of the infringing agreements may follow.
Whether the competition law risk is material will depend on the circumstances of each case. However, some general guidance can be drawn from EU case law.
Types of agreement likely to raise a material risk
Generally there is less risk that land agreements will have an anticompetitive effect, compared with agreements between competitors on price, for example. For most land agreements, a competition law risk will only arise only if there is some degree of market power at the level of the landlord or the tenant or both. The OFT normally will regard a market share that is greater than 30% as a first indication of market power. However, in its assessment, the OFT will take into account a variety of other factors, including the extent of the geographic area affected, the number of existing and foreseeable alternatives within a geographic area, the nature of the property affected, and the duration of any restrictive provision.
Typical restrictions that may suggest a competitive issue include:
- requirements in leases that tenants obtain certain goods or services exclusively from one supplier
- limiting the landlord’s ability to let other premises to competitors of the tenants from the facility or within a certain distance of the facility
- restrictions on the type of activity a tenant may carry out from the premises, especially if intended to protect the landlord or other tenants from competition
- limiting a property buyer’s ability to use the property for certain uses
- long term exclusivity periods
- limiting a developer’s planning freedom, unless the restriction is contained in a planning agreement with a local authority.
Even if a provision is found to restrict competition, it may still be enforceable if the economic efficiencies arising from the overall agreement outweigh its negative effects on competition and the restriction in question is indispensable to the attainment of the efficiencies.
The OFT will be issuing guidelines to assist companies in their assessment of whether their agreements are competition law compliant. We will provide a further update as soon as the OFT has published its guidelines.
How to mitigate the risk
It is advisable, especially for landowners, landlords and tenants who suspect that they may have a market share of above 30% to review the relevant market to ascertain their likely market share. If they are in the danger zone, the restrictive provisions typical to their agreements should be looked at, to assess the extent to which they are competition law compliant. Subject to the outcome of that review a strategy can be devised for dealing with any non-compliant provisions.
The Competition Act 1998 Land Agreements Exclusion Revocation Order 2010 can be found here.