Real estate briefing note email
Earlier this year, the Court of Appeal confirmed in the case of Humber Oil Terminals Trustee Ltd v Associated British Ports that competition law would apply to the dispute at hand and, by extension, land agreements generally.
This was after the High Court's ruling on the same case concluded that competition law was not a present issue and that the competition law aspects of the claimant's pleading would be struck out. The High Court's position appeared to contradict the legislative position created by the revocation of the Land Agreements Exclusion Order, which made land agreements subject to the Competition Act 1998.
This ruling makes it clear that land agreements are capable of breaching competition law even those that have been in place for some time. In this note we take a look at the case and the commercial implications of this decision.
Background to competition law in relation to real estate
The revocation of the Land Agreements Exclusion Order on 6 April 2011 made land agreements subject to the provisions of the Competition Act 1998 (the Act). Land agreements are defined in the Office of Fair Trading final guidance as those agreements which create, alter, transfer or terminate an interest in land. They therefore include transfers of freehold interests, leases and assignments of leasehold interests. They also include agreements relating to easements and licences.
The application of the Act means that land agreements are subject to the Chapter I and Chapter II prohibitions:
- Chapter I prohibition - prohibits agreements between parties which may affect trade in the UK and which have the object or effect of restricting competition within the UK or a part of the UK.
- Chapter II prohibition - prohibits any abuse by one or more parties of a dominant position within the UK, or any part of it, which may affect trade in the UK.
The Guidance highlighted that two main areas in particular would be likely to give rise to competition concerns:
- An agreement with competitors that is aimed at sharing or carving up markets. This will almost always infringe Chapter I, but is also very unusual in the real estate sector.
- Other types of restrictions that could restrict, prevent or distort competition, e.g. by raising barriers to entry or restricting competitors' access to the market.
Examples of arrangements which could restrict, prevent or distort competition include exclusivity arrangements, leasehold restrictions (including permitted user or restricted user clauses) and freehold restrictions.
The Guidance does provide for various exceptions to the application of the Act. There is a general exemption from the application of Chapter I for agreements between parties that hold a combined market share of less than 10% (if competitors) or less than 15% (if non-competitors). The agreement may also be permitted if the parties can provide 'objective justifications' for the restriction on competition.
The OFT has jurisdiction to find infringement or impose penalties in relation to any agreements which were concluded after 6 April 2011. Its jurisdiction also applies to agreements concluded before that date provided that the agreement remains in force after it. The OFT has the power to fine the parties up to 10% of group worldwide turnover and disqualify directors from acting as directors for up to 15 years for infringement of Chapter I or Chapter II of the Act.
The case - Humber Oil v Associated British Ports
The Court of Appeal confirmed the application of competition law to land agreements in the recent case of Humber Oil Terminals Trustee Ltd v Associated British Ports. This was despite the High Court stating, at first instance, that competition law would not apply to the particular case, notwithstanding the revocation of the Land Agreements Exclusion Order.
Associated British Ports (ABP), the defendant, owns and operates the Immingham Oil Terminal at the Port of Immingham. In 1970 the predecessor in title of ABP leased the land on which the terminal was situated to the claimant, Humber Oil Terminals Trustee Ltd (HOTT), a JV company of Total and ConocoPhilips, for a term of 40 years. Having failed to come to an agreement on extension of the leases, ABP served notice on HOTT to terminate them in 2009. HOTT commenced proceedings in the County Court for the grant of new leases. ABP defended the claim. In the course of these proceedings, HOTT was given permission to serve amended particulars of claim raising new "competition law claims". HOTT alleged that ABP abused its dominant position in the provision of deep-water facilities in the Port of Immingham by demanding, in the course of negotiations, abusively high prices for the provision of those facilities by way of rent under the new leases and port access charges.
The matter was referred to the High Court, which struck out the elements of HOTT's claim that were based on competition law. Much of the case hinged on the interrelationship between the Act and section 30(1)(g) of the Landlord and Tenant Act 1954 (the "LTA"). Section 30(1)(g) allows a landlord to oppose a new tenancy on the basis that on termination the landlord intends to occupy the premises as a business or residence. HOTT argued that ABP's reliance on this clause to oppose a new tenancy was in itself an abuse of a dominant position, in breach of Chapter II of the Act. The court rejected this argument.
The court further held that putting forward a figure in the course of negotiation could not amount to the "imposition" of excessive prices for the purposes of the Act because HOTT had the ability to refer the matter to the County Court for adjudication. Thirdly, HOTT had not particularised any effect on competition and consumers. Finally, the court held that the competition claim was not a present issue because it could not arise unless and until ABP's defence to the claim for a new tenancy succeeded. Even if the competition claim were a present issue and it could be assumed that there would be no further negotiations, there was no proper pleading of the anti-competitive effect of the alleged actions. The competition claims would therefore be struck out.
HOTT appealed the High Court's judgment to the Court of Appeal. The Court of Appeal dismissed the appeal on a number of grounds and held that the High Court had been correct to reject HOTT's claim that ABP's reliance on section 30(1)(g) of the LTA was an abuse of dominance in itself. ABP was fully within its rights to rely on section 30(1)(g). If ABP subsequently attempted to impose terms of access to the terminal on HOTT which constituted a breach of Chapter II of the Act, then this could be dealt with in separate competition proceedings, but not at the present hearing.
The Court of Appeal determined that the High Court had not decided as a matter of law that competition claims will always be irrelevant to proceedings for a new lease under the LTA. It had merely found that, in the present case, HOTT's amended particulars of claim were inadequately and confusingly pleaded. The Court of Appeal also agreed with the High Court in relation to the irrelevance of the abusive nature of the rents proposed by ABP in previous negotiations. The issue of future rents would only arise if HOTT became entitled to new leases pursuant to the LTA. In the event, the court would fix the rent, which would be by reference to the rent at which the property might reasonably be expected to be let in the open market by a willing lessor to a willing lessee.
Conclusion and commercial implications
The Court of Appeal's decision makes it clear that, in accordance with the revocation of the Land Agreements Exclusion Order, competition law will apply to land agreements.
The OFT stated that only a minority of restrictions could infringe the Act. Nevertheless, in view of the potential and substantial penalties, businesses operating in England and Wales should be aware of how land agreement restrictions can fall foul of competition law.
Market-sharing arrangements, exclusivity arrangements and freehold or leasehold use restrictions are all particularly prone to breaching the Act, especially where one or more of the parties has or obtains some degree of market power.
Market power can arise in relation to a narrow market definition, both in terms of geographic scope and possibly even in relation to classification of premises. Therefore, arrangements which were acceptable until the revocation of the Order - and which may have persisted between parties for a number of years and assumed the nature of a "usual course of dealing" - should be reviewed to ensure compliance with the new regime.