Overview

The Central London County Court has held that a user clause proposed in a lease renewal by a local authority landlord which would prohibit the tenant from selling convenience goods and alcohol would breach the prohibition in section 2 of the Competition Act 1998 (the Act). The landlord failed to demonstrate that the user clause would be exempt from the prohibition. 

Background 

The facts of this case should be viewed against the backdrop that the Act applied to property contracts from 6 April 2011 and therefore, pursuant to section 2 of the Act, property contracts cannot now: 

  • affect trade within the United Kingdom; or 
  • have as their object or effect the prevention, restriction or distortion of competition within the United Kingdom. 

The landlord owned and let a parade of shops within a residential area. Each lease restricted the user of the premises to encourage a variety of shops within the parade. On expiry of the lease before the Court, the tenant proposed a change to the user covenant which included the ability for it (a newsagent) to sell convenience goods and alcohol. The landlord rejected this proposal and put forward a counter-proposal which included an express clause prohibiting such use. 

The landlord accepted that the restriction could have restricted the competition or sale of convenience goods in the shopping parade and at trial sought only to rely on the exemption in section 9(1) of the Act, which applies only if the agreement:

  • contributes to improving production or distribution, or promoting technical or economic progress while allowing consumers a fair share of the resulting benefit;
  • imposes restrictions essential to attaining those objectives; and
  • does not eliminate the possibility of competition for substantial parts of the products in question.  

In trying to fulfill the criteria for section 9(1) of the Act, the Defendant argued that:

  • the letting scheme in the parade gave rise to greater diversity amounting to an improvement in the distribution of goods by increasing their diversity across the whole parade;
  • the letting scheme did not give the landlord the possibility of eliminating the competition which is geographically large enough to include supermarkets within 1,000 metres of the parade; and 
  • other smaller traders would be discouraged from coming to the parade.  

The Court was not satisfied by the landlord's argument and did not consider that it had adduced sufficient evidence, including the fact that it did not have any evidence from local residents in support of its position. 

Impact

The full impact of this judgment is yet to be seen. However, where a landlord proposes to restrict use by reason of the use of other shops on the landlord's estate, tenants are likely to have good grounds to argue that more flexibility should be afforded to their use so as to avoid competition within the locality being restricted. A landlord will have to make sure it has both sufficient reasons and evidence to demonstrate fulfilment of the criteria under section 9(1) of the Act to ensure that the exemption applies to the restriction in the lease. 

Where the locality is more densely populated with a variety of shops, including supermarkets, it seems likely that the Court may find more sympathy with a landlord's arguments and the criteria for the exemption may be more easily fulfilled. It is evident, however, that the outcome of any case will be highly fact-sensitive and it would be important for a landlord seeking to include a restriction on trade to be comfortable that the restriction does not fall foul of the prohibition in the Act or is otherwise exempt from the provisions of the Act.

There are clear implications for landlords of retail parades arising from the decision. However, there should be cause for concern for larger landlords of town centre and shopping mall premises who no doubt will be keen to preserve a tenant mix, but who will not wish to fall foul of competition. 

The issue may be less acute on first letting when the landlord will know the identity of its tenant and have a reasonable idea of what the tenant will use the property for. At first letting, the tenant will also be keen to take the space, so competition issues may not be immediately apparent. 

However, the issue may become problematic upon assignment, specific application or renewal, should the tenant be keen to widen the user clause in the lease. If competition would be restricted by the existing provisions (or more onerous ones proposed by the landlord), then the landlord may find itself faced with a challenge that it is in breach of the prohibition in the Act. The landlord should therefore approach any restriction on the tenant's user clause with caution and should seek specific advice if concerned that the restriction may amount to a breach of the Act.