The crime

The Competition Act 1988 prohibits agreements which:

  •  may affect trade in the UK, and
  •  have as their object the prevention, restriction or distortion of competition within the UK.

Until recently land agreements had not been seen as capable of having an anti-competitive effect and received the benefit of a specific exemption to the prohibition. However, following a review of the groceries market in the UK, the Competition Commission found that the major supermarkets were “land banking” to prevent the development of competing stores around their premises. As a result the Commission recommended a change to the law and on 6 April 2011 the exception for land agreements will be withdrawn. Importantly, as at that date, Competition Act will apply not only to all new land agreements but also to all agreements already in existence.

Examples of the types of agreements most at a risk include:

  •  Exclusivity clauses in leases
  •  Use restrictions in leases
  •  Title conditions limiting use of the property.

The definition of “agreement” in the Competition Act is interpreted very widely and can cover written or oral agreements and even situations where there is merely a “gentleman’s agreement”. Consequently, agreements documented in leases, subleases, assignations, dispositions, missives and deeds of conditions will all be caught. However, planning obligations will continue to benefit from specific exclusion from the Competition Act and are not covered.

The penalties

Provisions which contravene the prohibition will be void. In some cases this will render individual clauses unenforceable and in others (where the clauses are not severable from the rest of the agreement) the entire agreement will be void. The Office of Fair Trading may also impose a fine of up to 10% of a firm’s worldwide turnover for infringements and even apply for disqualification orders against directors in certain circumstances.

The defences

Many land agreements which would otherwise be liable to enforcement action will be covered by one of the two main exceptions:

  1. That the restriction does not have an appreciable effect on trade

Agreements will not be subject to competition law where they do not have an “appreciable” impact on competition. In deciding whether the effect of an agreement is appreciable the OFT will apply de minimus criteria originating in European Commission guidance- i.e. the agreements will not be deemed to have an appreciable effect on trade if:

  • The aggregate market share of either of the parties to the agreement does not exceed 10% on any of the relevant markets affected by the agreement where the agreement is between competing undertakings.
  • The market share of each of the parties to the agreement does not exceed 15% of any of the relevant markets affected by the agreement where the agreement is between non competing undertakings.

Neither of these criteria apply where the agreement contains a restriction deemed by the European Commission to be “hardcore” (for example agreements to fix prices or allocate customers). Agreements in which these thresholds are breached will not necessarily be unlawful but will be considered on a case by case basis.

  1. That the positive benefits outweigh any customer disadvantage wrought by the restriction.

Agreements will be eligible for exemption if the restriction also imparts benefits which outweigh the negative impact on competition. In deciding whether this is the case there are four criteria to be assessed:

  • Efficiency gains -The agreement must contribute to improving production or distribution, or to promoting technical or economic progress.
  • Benefit to customers- The agreement must also result in the customers receiving a fair share of the benefits.
  • Indispensability – The restrictions must go no further than necessary to achieve the benefits (e.g. an exclusivity agreement for a limited period may be necessary to secure an anchor tenant which makes a development viable but continuing that exclusivity indefinitely may not).
  • No elimination of competition – The agreement must not provide the parties with the opportunity to eliminate competition in respect of a substantial part of the products in question.

The market

The larger a firm’s share of the market the more likely it is that its agreements will be capable of having anticompetitive effect. The way in which the market is defined will be crucial to deciding whether agreements fall foul of the rules. The extent of the market will be an important consideration both when determining whether the agreement distorts trade and also when assessing whether the exemption criteria are satisfied.

There is detailed guidance on determining the extent of market available from the OFT (see below) but it is likely to considered geographically at a local level and will depend on the circumstances. For example, the market for a coffee shop in a shopping centre is unlikely to extend beyond the centre itself, whereas the market for a large department store in the shopping centre may extend to other shopping centres or developments in nearby. (I.e. the extent of market would be determined by the distance customers are likely to travel in pursuit of an alternative.)

What happens now?

Landowners, landlords and tenants will require to ensure that future agreements are drafted so as to be compliant with the legislation. They would also be well advised to review existing agreements to assess compliance and if necessary consider taking action towards removal of anti-competitive restrictions.

Further information

The OFT have issued draft guidance for consultation (responses are invited by 14 January 2011) which is available at: http://www.oft.gov.uk/OFTwork/consultations/current/land-agreements/

The OFT guidance on market definition is available here: http://www.oft.gov.uk/shared_oft/business_leaflets/ca98_guidelines/oft403.pdf