Section 2 of the 1998 Competition Act prohibits agreements which may affect trade within the UK and have as their object or effect the prevention, restriction or distortion of competition within the UK unless such agreements are exempt – commonly called the Chapter 1 prohibition.
Leases are land agreements for the purposes of the Competition Act and clearly restrictions which are commonly contained in leases can prevent, restrict or distort competition and affect trade. Land agreements were originally exempt from the Chapter 1 prohibition, but this exemption was revoked with effect from 6 April 2011. Around the same time the Office of Fair Trading published guidance to assist firms in understanding how the general principles of competition law apply to land agreements. The guidance focuses on restrictions in land agreements which restrict the way in which land may be used, or how a right over land may be exercised. Echoing the original rationale for the exemption from the Chapter 1 prohibition, the guidance makes the preliminary observation that there are many legitimate reasons why a person or business may impose or agree to restrictions which affect or limit the way in which land may be used or how a right over land may be exercised in a land agreement. Paragraph 1.5 of the guidance states that ‘[s]uch restrictions do not necessarily infringe competition law and the OFT expects that only a minority of restrictions will do so.’
Until recently, in the case of Martin Retail Group Limited v Crawley Borough Council (Central London County Court, 24/12/13), the courts have not been asked to consider the relationship between lease user restrictions and the Competition Act. In the absence of any reported decisions dealing with the application of the Chapter 1 prohibition to land agreements, the judgment in this case represents the first judicial application of the approach set out in the OFT guidance.
This case was brought before the Chancery Court on a preliminary issue under the Landlord and Tenant Act 1954 renewal proceedings. The parties had been unable to agree the proposed user clause in the renewal lease. The tenant wanted to extend the permitted use from the previous lease so as to include the sale of convenience goods and alcohol (as well as other uses). Although Crawley Borough Council, as landlord, was prepared to extend the previous permitted use, they wanted to expressly prohibit the sale of alcohol and convenience goods.
The premises were located within a parade of 11 shops owned by the Council all occupied by different businesses including an existing grocery business which was permitted to sell alcohol. This was one of 11 parades currently owned by the Council and in respect of which they had operated a letting scheme since the 1950s. There was no written letting scheme but an established policy. The scheme focused on ensuring that there were a range of different traders and retail outlets available to local residents on each parade with no parade dominated by a larger supermarket.
The key issues that arise from the Court’s decision are:
- At the trial of the preliminary issue the Council conceded that the proposed user clause would be restrictive of competition. Despite the statements the OFT has made in its guidance that only a minority of land use restrictions would be caught by the Chapter 1 prohibition, the Court does not appear to have considered in detail whether the proposed user clause would have an “appreciable effect on competition” such as to fall within the scope of the Chapter 1 prohibition. There is, for example, no recognition from the Court that the OFT guidance states that “[i]n most cases, permitted user and restricted user clauses are unlikely to restrict competition” (at paragraph 4.11).
- Here the judge decided that the relevant market was, in the context of convenience goods, an area within a relatively short walking distance from the parade - the parade was unlikely to be a destination for potential customers making a weekly shop (customers would be prepared to travel a greater distance for this). There were other convenience stores within a distance of 1,000-1,500 metres from the premises but the Court determined that these were outside the market. However there appears to have been no detailed assessment of whether the proposed user clause would have an “appreciable effect” on competition on that relevant market such as to fall within the scope of the Chapter 1 prohibition.
- Having accepted the proposed user clause did on the face of it breach the Chapter 1 prohibition the Court sought to apply the tests for individual exemption under section 9 of the Competition Act. Applying the approach set out in the OFT guidance the Court considered the four accumulative exemption criteria which need to be satisfied:
- the agreement must contribute to improving production of distribution or to promote in technical or economic progress;
- it must allow consumers a fair share of the resulting benefits;
- it must not impose restrictions beyond those indispensable to achieving those objectives;
- it must not afford the parties the possibility of eliminating competition in respect of a substantial part of the products in question.
When applying the exemption criteria, the Competition Act is quite clear. The onus is on the party claiming the benefit of exemption to prove its case and it is generally very difficult to argue that all four conditions are met. Here the Court felt that the landlord had not produced sufficient evidence to establish that any of these four criteria had been established. Not only had no written policy been produced to the court but there was no evidence provided by the Council or data or analysis as to the effects of the “letting scheme”. The judge was not satisfied that the distribution of goods was improved or economic progress promoted by the operation of a scheme which lead to a number of different retailers rather than a single large supermarket or a number of similar retailers. The judge accepted that an increase in the range of goods available and the provision of a social hub might constitute a “fair share” for the purpose of the second criteria if evidence could be produced showing the benefits arising from restriction of competition but there was no such evidence here. As to the third criteria, the Council argued that the restrictions were necessary to the letting and without them the scheme would be swept away and small retailers would not come to the parade. However no evidence was produced in relation to this. In relation to the final criteria, when assessed in the context of the market referred to earlier, clearly the restrictions here did eliminate competition.
The Court therefore determined that the Council’s proposed user restriction did breach the Competition Act and did not qualify for an individual exemption. The judge emphasised that this decision was on this pure preliminary point and in relation to the specific wording which had been proposed. If the approach adopted in this judgement is followed in other cases there is clearly a risk that many letting schemes and other arrangements involving land use restrictions will be found to fall foul of the Competition Act.