The Central London County Court has found that a proposed permitted use restriction in a lease infringed the prohibition on anti-competitive agreements in the Competition Act 1998, and is therefore void and unenforceable.
The case highlights the importance of ensuring all land agreements, including joint ventures, real estate transfers and leases, are fully competition law compliant. It will be of interest to landlords, retail tenants and anyone involved in transfers of freehold or leasehold interests.
Background - the legislation
The Competition Act 1998 (the Act) prohibits agreements which have as their object or effect the prevention, restriction or distortion of competition within the UK (the Chapter 1 prohibition).
The Act provides four cumulative criteria which must be satisfied for a party to prove that an agreement benefits from exemption. The agreement must:
- contribute to improving production or distribution, or to promoting technical or economic progress (referred to as 'efficiency gains');
- allow consumers a fair share of the resulting benefits;
- not impose restrictions beyond those indispensable to achieving those objectives; and
- not afford the parties the possibility of eliminating competition in respect of a substantial part of the products in question.
Any restriction which breaches the prohibition, and does not benefit from exemption, is void and unenforceable. The effect on the rest of the agreement depends on whether a court considers it possible to sever the restriction without modifying the rest of the agreement or distorting the overall commercial arrangement. This 'blue pencil' test has been interpreted narrowly in recent cases. Any breach also exposes the parties to the risk of enforcement action, fines and private damages actions.
All land agreements have been subject to competition law, in the same way as other types of agreement, since 6 Apri12011 when a special exclusion order was revoked. The Office of Fair Trading published detailed guidance on how competition law applies to such agreements, and that guidance has since been adopted by the Competition and Markets Authority, but there has been a lack of cases either before the authorities or courts.
Key facts of the Martin Retail Group case
The case of Martin Retail Group Limited v Crawley Borough Council arose from a dispute on the terms of a use restriction clause in a retail lease. The lease restricted the property to use as a newsagent. On renewal, the landlord wanted expressly to prohibit sale of various goods such as groceries and alcohol However, the tenant wanted to extend the permitted use of the property to allow the sale of other goods, including groceries and alcohol.
The property was one of 11shops in a small parade, each restricted by its lease to a different specific use. The landlord said its aim in restricting the use of the property was to maintain variety within the parade of shops. It also wanted to prevent the claimant (a large national retailer) competing with, and possibly undercutting and putting out of business, a small family-owned local convenience store in the same parade.
The landlord conceded that its proposed use clause would be restrictive of competition within the meaning of the Act. The issue left for the court to determine was, therefore, whether the agreement benefitted from exemption. In applying the OFT/CMA guidance, the judge held:
- Efficiency gains. The Council had not adduced sufficient evidence to prove that efficiency benefits derive from maintaining a range of different retailers, providing choice and enabling new traders to enter the market, instead of allowing a supermarket or a number of similar retailers to be present. In fact, the judge supported the claimant's submission that the restrictions contributed to a particular model of distribution determined by the local authority rather than the market.
- Fair share of the benefit. An increase in the range of goods available and the provision of a social hub might provide a 'fair share of the benefits', if the evidence were to show such benefits arose from the restriction. In addition, any such benefit must be balanced against the negative impact of the restriction on competition. On the evidence adduced, the judge did not accept that the community would benefit from the use restriction in this case.
- Indispensability of restrictions. The Council had not proved their argument that, without the restrictions, the letting scheme would be 'swept away' and small traders would not enter. Hearsay evidence from traders and local shoppers fearing a 'free-for-all' was not evidence that new traders would be discouraged from setting up business .The judge decided that a mix of retailers could be achieved by using less restrictive covenants.
- Possibility of eliminating competition. The restriction provided a means of eliminating competition in convenience goods on the relevant market, namely the parade and within a relatively short walking distance. However, the judge did recognise that, on a wider geographic market and catchment area, there would be no such possibility of elimination.
The Council conceded that the use restriction amounted to a breach of the Chapter 1prohibition, and the judge agreed with that view. In most cases, we would expect this key issue to be heavily contested. However, in this case, the court did not consider the factors relevant to assessing whether this type of restriction appreciably prevents, restricts or distorts competition on a relevant market.
Unusually, these matters were determined as preliminary issues without oral evidence or cross examination. Nor is it clear why the County Court heard this matter since issues relating to the Act should be transferred to the Chancery Division of the High Court. Nevertheless, this case is a timely reminder of the importance of:
- Compliance. Ensuring all agreements which restrict use of land are assessed for competition law compliance. Such assessments involve looking at the relevant markets for the economic activities affected by the restriction, the position of the parties on those markets and the overall effect of the restrictions on competitors, potential competitors and customers; and
- Advice. Taking specialist competition law advice on any agreements where, because of the markets, parties or restrictions involved, there is a risk of the prohibitions being breached. Clear and persuasive evidence must be adduced if the parties want to prove that the agreement benefits from exemption.