Under the Competition Act 1988, anti-competitive provisions may be held to be void and therefore unenforceable, and penalties may be imposed, for anti-competitive behaviour. Before 6 April 2011 there was a specific exemption in place for land agreements, meaning that competition issues did not need to be considered in most property transactions. However, the exemption has been repealed and all land agreements are now subject to anti-competitive regulation.
We now have the first reported case on the application of the rules in relation to retail premises: in Martin Retail Group Limited v Crawley Borough Council the County Court held that a use restriction in a shopping centre lease was anti-competitive and did not meet the criteria for the general exemption. While County Court judgments are not binding, they are persuasive; if this approach is followed in the High Court, the decision could have significant implications for both landlords and tenants of retail premises.
Background: when will an anti-competitive agreement be void?
Any agreement which has the purpose or effect of preventing, restricting or distorting trade within a UK market is anti-competitive. Anti-competitive agreements are prohibited (this is known as the Chapter I prohibition) and are void unless an exemption applies. Clauses which restrict how property is used may well fall within the Chapter I prohibition. To be exempt from the prohibition, an anti-competitive agreement must satisfy all four of the following criteria (the Section 9 Exemption):
- Efficiency gains: The agreement must improve production or distribution, or promote technical or economic progress. Efficiency gains may include the creation of additional retail outlets, more efficient distribution of products or a greater range of products. For example, the anti-competitive effect of an exclusive right for a particular department store to operate in a shopping centre may be outweighed by the higher footfall that the department store brings to the centre, increasing the overall profitability of all the tenants: this increase in footfall and profitability is an efficiency gain.
- Indispensability of restrictions: The question here is whether the same efficiency gains could have been achieved by means of a less restrictive agreement. Using the example above, the department store may be unwilling to make the investment required to open the new store without a guarantee that it will be the only department store for a specified period; the efficiency gains could not be achieved without that exclusivity. Conversely this criterion may not be met in a situation where an exclusive right is being granted so as to achieve a particular mix of tenants (rather than attract an anchor tenant). The duration of the exclusivity or restriction will also be relevant here: it should only be imposed for so long as is necessary to achieve the efficiency gain.
- Fair share for consumers: The benefits passed on to the customers must compensate for the negative impact of the restricted competition; the overall impact must be at least neutral. For example, having two department stores in a shopping centre may be better for customers as the competition between them could improve price, range of goods and standard of service. However, if there is evidence that the increased footfall of the single department store is such that other retailers are able to reduce their prices, that customers value having that particular retailer in the shopping centre, and that the customers benefit from a greater variety of retailers as a result of the restriction, this may be sufficient to neutralise the restriction. The greater the restriction on competition, the greater must be the benefits passed on to the consumer.
- No elimination of competition: The restrictive agreement must not allow the parties to eliminate competition. This will depend on the degree of competition existing prior to the agreement: where competition within a market is already weak, a small reduction may result in it being eliminated. When considering this criteria it is necessary to look at the geographic market for the particular product: people will travel a lot further to buy a new car then to buy a bottle of milk, so the geographic market for milk is much smaller.
The decision in Martin Retail Group Ltd v Crawley Borough Council
Martin Retail Group Ltd was an existing tenant in a parade of shops owned by Crawley Borough Council. The shop was being used as a newsagent and tobacconist, together with a post office counter. When their lease expired, the tenant sought to extend the permitted use to that of a convenience store, including the sale of groceries. However, the landlord proposed a covenant which limited the use as before, on the basis that each of the shops on the parade should have a different use (in accordance with their letting scheme) and there was already a convenience store on the parade. The nearest alternative stores for convenience goods were a Tesco Express (about 1km away) and two convenience stores on neighbouring estates (1.2km and 1.5km away).
The tenant argued that the clause proposed by the landlord breached the Chapter I prohibition and the dispute was referred to the County Court, which tried the legality of the proposed user clause as a preliminary issue. The landlord conceded that the use restrictions could have the effect of restricting competition. However, they claimed that there was a benefit to the local community in having a wider range of shops and traders in the parade as a result of the letting scheme and argued that smaller businesses would not be able to operate in the parade without the protection offered by the restriction.
As the landlord conceded that the restriction had an anti-competitive effect, the court did not consider the application of the Chapter I prohibition (so the judgment does not consider the anti-competitive effect of the restriction or the letting scheme). Instead the focus was on whether the Section 9 Exemption applied. The court took the view that the burden for proving that the exemption applies lies with the party seeking to benefit from it. In this case it was up to the landlord to show that the criteria had been met. However, the evidence produced was the subjective opinion of the Council landlord’s own employee, which the court did not attach any weight to. While this was supported by correspondence and petitions from local residents and traders, they did not give oral evidence, so could not be cross-examined; the court indicated that members of the local community should have been called to give evidence in a case of this nature.
On an examination of the facts, the court was not satisfied that any of the Section 9 criteria had been met:
- Efficiency gains: The landlord argued that a choice of retailers is always better than a single supermarket as it offers more choice. However, they produced no evidence to show what the particular improvement was, so fell at the first hurdle. If the scheme was being set up from scratch and the restriction was designed to enable the participation of an anchor tenant, the court may have reached a different view, but in this case there was no evidence of an improvement to the distribution of products.
- Indispensability of restrictions: The landlord argued that without the restrictions the whole letting scheme would be swept away and small traders would not come to the parade. However, they failed to produce any evidence of this. In the absence of any evidence to the contrary, the court took the view that a good mix of retailers could still be achieved with less restrictive covenants.
- Fair share for consumers: An increase in the range of goods within the parade may be a benefit to consumers, but there was unlikely to be a price benefit from the restrictions in this case. The court took the view that there were no benefits which would outweigh the negative impact of the restriction.
- No elimination of competition: This criteria requires an examination of the relevant market. The market for the goods that that Martin wished to sell was relatively small. A customer would not undertake a weekly shop at the parade, so the market could not be extended to include larger stores nearby: a convenience store is somewhere you can go to quickly pick up a couple of items. The other convenience stores within a mile’s walk of the parade did not form a part of the same geographic market, as customers would not walk to these instead, so the restriction had the effect of eliminating competition in convenience goods in the market.
The court therefore held that the proposed user clause was void as it contravened the Chapter I prohibition and was not exempt.
While this case doesn’t look directly at the application of the Chapter I prohibition it does provide a useful insight into how use restrictions may be analysed by courts in the future. Points of particular note are:
- The advantages brought about by offering consumers a choice of retailers will not automatically outweigh the damage done by restricting competition between retailers. Restrictions should always be as limited as possible, both in scope and time.
- The geographic market for goods will be very small if consumers are not prepared to travel far to buy those goods; when imposing restrictions it is important to look at what competing goods are available elsewhere within the relevant geographic market. If no alternatives are available in the market, even fairly limited restrictions may be void.
- The burden of proof lies with the party seeking to impose the restriction. That party must be able to offer independent oral evidence in order to prove that the clause is not anti-competitive or that the exemption applies.