When the Government announced its decision to repeal the Competition Act 1998 (Land Agreements Exclusion Order) 2004 (the exclusion order) with effect from 6 April 2011, removing the current protection for land agreements from the Chapter I prohibition on anti-competitive agreements, the OFT indicated that it would publish some high-level, principles-based guidance on the application of the competition rules to land agreements. The OFT has now published its draft guidance for consultation, with comments from interested parties requested by 14 January 2011.
The draft guidance sets out both the general competition law framework under which land agreements are to be assessed and the more specific factors to be taken into account for restrictions contained in land agreements. It also provides a number of worked examples to demonstrate how the OFT will assess particular agreements. The OFT's guidance should assist businesses with amending existing agreements or drafting new agreements in order to ensure they comply with the UK competition rules by April next year.
The Chapter I prohibition applies to agreements between undertakings. Although the concept of undertaking is very wide and can include individuals, the prohibition does not apply to individuals who are not acting as a business. Agreements regarding the use of residential property, or transfers of leasehold or freehold interests in residential property will therefore not be caught by the prohibition.
In addition an agreement will not fall within the scope of the prohibition unless its actual or potential impact on competition is 'appreciable'. In order to determine appreciability and to assess the impact of a land agreement in general, both the relevant product and geographic markets must be taken into account. The wider the relevant geographic market is, the less likely it is that a restriction on the use of the particular land will impact on competition in that market. In many retail markets however the relevant scope will be local, as the majority of consumers will only be prepared to travel for up to 20 minutes for example to get to a supermarket.
It will also often be necessary to take into account a related market, which is the market on which the land affected by the agreement is used to carry out an economic activity.
The draft guidance provides more detail on how to define the relevant markets and also refers to the OFT's existing Guidance on Market Definition (OFT403).
The draft guidance focuses on restrictions that affect or limit the way in which the land may be used, or how a right over land may be exercised. Examples of the types of restriction the OFT considers likely to have an appreciable impact on competition are:
- an agreement that grants one party exclusivity or protection from competition more generally
- an agreement between competitors in the relevant market restricting their ability to behave independently in the market
- an agreement that restricts the commercial freedom of a trading partner, for example a distributor or supplier
A land agreement is more likely to have an appreciable impact on competition if one or more of the parties involved have market power. Where an agreement forms part of a series or group of similar agreements, it is necessary to consider the cumulative impact of those agreements.
Agreements which fall within the scope of the Chapter I prohibition may nevertheless be exempt from the prohibition if the parties can show that the agreement contributes to improving production or distribution, or to promoting technical or economic progress. Examples of possible efficiency gains, which may apply in the context of a restrictive land agreement are:
- the creation of one or more new retail outlets
- more efficient distribution of products
- a greater range of products available to consumers
- preserving the character of a building
In order to demonstrate the use of the efficiencies regime in practice, the OFT uses the example of an 'anchor tenant' in a newly created shopping centre. The exclusive rights granted to that tenant may be anti-competitive but the aim is to attract other tenants in order to make the specific project economically viable as a whole, which may not have been possible without that restriction.
The draft guidance also contains a section on abuse of a dominant position and provides examples of conduct that could be an abuse of a dominant position in relation to land:
- charging excessive prices for land (significantly above the competitive level)
- unjustified discrimination between tenants
- vertical restrictions that fix the resale prices of goods and services provided by occupants of the land
- limiting access to an essential facility
- the use of restrictions in land agreements as part of a strategic campaign to exclude competitors from a market, in particular where regulatory constraints such as planning or licensing limit the supply of suitable land for the competing activity.