User restrictions in leases can fall foul of competition law and, unless the offending provision can be severed, render the rest of the lease void and unenforceable. Those operating in the commercial property arena (ie landlords, tenants and their advisors) need to be alert to this possibility. Until the recent County Court decision in Martin Retail Group Ltd v Crawley BC , the only advice available to the property industry was the 2011 guidance published by The Office of Fair Trading, Land Agreements. The Application of Competition Law Following the Revocation of the Land Agreements Exclusion Order. The OFT stated in that document that it expected ‘that only a minority of restrictions’ would infringe competition law. Maybe such comment had lulled the property industry into a false sense of security. Be warned - the user restriction in the Martin Retail Group case was held to contravene the Competition Act 1998.
The case demonstrates the importance of:
- assessing all ‘land agreements’ for competition law compliance on a case by case basis;
- knowing your market; if the market is limited, it is more likely that competition issues will arise;
- obtaining and retaining robust evidence to prove that a particular restriction falls outside the Chapter I prohibition or falls within the section 9 exemption;
- including a severance clause in documents; and
- obtaining specialist advice early.
THE CHAPTER I PROHIBITION
An agreement between undertakings is anti-competitive if it has as its object, or effect, the prevention, restriction or distortion of competition. As well as this, the effect on competition in the United Kingdom must be ‘appreciable’. However, even if the agreement falls within the Chapter I prohibition, it may qualify for exemption under section 9 of the 1998 Act. That section provides that an agreement is exempt if the following four cumulative conditions are met:
- the agreement gives rise to identifiable economic benefits - the benefits of the agreement must outweigh (or at least match) its negative impact on competition;
- consumers will share in these - the net effect of the agreement must, at least, be neutral from the consumers standpoint;
- the restrictions in the agreement do not go beyond what is necessary to achieve the benefits claimed - the restriction must be indispensable and the benefits incapable of being achieved by means of a less restrictive agreement; and
- they do not eliminate competition in relation to a substantial part of the market - ie consideration has to be given to the degree of competition that existed prior to the agreement and the extent of the reduction of competition as a result of the restrictive agreement.
Since 6 April 2011, the Chapter I prohibition has applied to ‘land agreements’, being ‘an agreement between undertakings (parties that carry out commercial activities) which creates, alters, transfers or terminates an interest in land, or an agreement to enter into such an agreement’. In practice, this means that competition legislation needs to be considered when dealing with the following documents relating to commercial property:
- leases (both new leases and lease renewals);
- transfers of freehold interests/assignments of leasehold interests;
- exclusivity agreements.
Martin Retail Group Ltd (the tenant) occupied a unit in a parade of 11 shops in the centre of a residential housing estate in Crawley. Crawley Borough Council was the landlord. As part of lease renewal negotiations, the tenant wanted to widen their existing user clause so that they could sell alcohol and convenience goods, effectively to operate a convenience store. The landlord, in order to preserve the letting scheme it operated, objected to a wider user clause. They wanted an express prohibition on the sale of ‘alcohol, grocery, convenience goods and other uses falling within Class A1 of the Use Classes Order’. The tenant argued that such user restriction was unlawful on the grounds that it was prohibited by competition legislation.
The parties accepted that the user restriction fell within the Chapter I prohibition. As a result, the county court was only asked to consider whether the landlord could bring the user restriction within the section 9 exemption. As such, the burden of proof fell onto the landlord to show that the exemption criteria applied.
The court found in favour of the tenant. The landlord failed to prove that the user restriction would give rise to identifiable economic benefits. HH Judge Dight commented: ‘I am not satisfied that, as a matter of fact, the distribution of goods is improved or economic progress promoted … The defendant has not adduced evidence to prove what the particular improvement or progress is.’
The limited evidence was particularly relevant to the judge’s decision. It was also relevant that the landlord did not have a written policy document relating to its letting scheme nor any data or analysis of the effects of the scheme. Since the first limb of the exemption was not satisfied, the section 9 exemption (being cumulative) could not be made out. In relation to the other limbs of the exemption, the judge:
- did not accept that the community would benefit from the user restriction and letting scheme; there was unlikely to be a price benefit from the existence of the restrictions;
- did not consider the user restriction as indispensable to the working of the letting scheme; a mix of retailers could be achieved by the use of less restrictive covenants;
- concluded that the ‘relevant market’ had to be considered by reference to the scope of products affected and the geographic scope over which those products competed. Given that the affected products were ‘convenience goods’, the geographical scope was limited to a relatively short walking distance from the parade. As the market for convenience goods was narrow, the user restriction would ‘eliminate competition in convenience goods on the parade’. The judge did also comment that, had the market been geographically bigger, the Tesco Express (which is 1000 metres from the parade) would have fallen within the catchment area and there would have been no such possibility of elimination.
This article was published in The Landlord & Tenant Law Review in August 2014