From 6 April 2011 UK competition law will apply to all new and existing land agreements in the UK for the first time. In short, this means that any restrictions contained in commercial property agreements, including restrictive covenants, will also require assessment for compliance with the Chapter I prohibition of the Competition Act 1998. Failure to comply potentially means that the agreement will be void, unenforceable and leave the parties open to the possibility of significant regulatory fines, damages actions and even individual sanctions.
What is the Chapter I prohibition?
Chapter I of the Competition Act 1998 prohibits agreements between companies which have as their object or effect the prevention, restriction or distortion of competition in the UK. Before 6 April 2011, all land agreements such as leases, transfers or other property-related contracts benefited from an exemption excluding the application of the Competition Act.
However, following conclusion of a Competition Commission investigation into the supply of groceries in the UK, the Government has decided that certain restrictions commonly used in land agreements (such as restrictive covenants in transfer agreements on the use of land) have the potential to restrict competition and that the land-specific exclusion should consequently be removed altogether.
What is the effect of the removal of the exclusion order?
In short, land agreements will face the same scrutiny and challenges as any other commercial agreement. This means self-assessment by the parties as to the nature of any restrictions and the potential impact on competition within the UK. The Office of Fair Trading has published draft guidance on the application of competition law in the property sector. However, there is no provision enabling companies to seek prior approval or clearance of particular provisions.
Does this apply only to agreements entered into after 6 April 2011?
No, the change applies to all agreements entered into or which remain in force after that date. In other words, historic agreements which contain restrictive clauses might no longer be enforceable after that date. A review of existing and future agreements is recommended.
What kind of restrictions could be caught?
No list can be exhaustive and any restriction which has the potential to impact on competition will require careful assessment. However, the following are likely to be of particular interest:
- Restrictions imposed on a sale or lease of land preventing sale/lease of adjacent property to competitors of the buyer/tenant
- Restrictions on the nature of business which a tenant may undertake
- Restrictions imposed, eg in a lease of a retail unit within a shopping centre giving a particular tenant exclusivity (eg landlord agreeing not to let to any other coffee shop operators).
What are the implications of getting it wrong and what should I do now?
Agreements which contain restrictions which breach the Chapter I prohibition risk being unenforceable and void – it may not be possible to argue that the offending provision can be severed from the remainder of the agreement. In addition, there is the risk of fines (up to a maximum of 10% of group world-wide turnover) and private damages actions brought by parties who have suffered loss as a result of the breach. Individual sanctions such as disqualification orders for company directors may also apply.