In the first judgment of its kind, a county court has held that a proposed user clause in a lease of retail premises constitutes an anticompetitive agreement under the Competition Act 1998. Tim Capel reviews the facts.
The case of Martin Retail Group v Crawley Borough Council 1 concerned the letting of a newsagent in a parade of 11 shops in a Crawley housing estate. When the lease came up for renewal, the tenant (Martin Retail Group), sought to extend the user clause to allow for the sale of convenience goods and alcohol. The landlord (Crawley Borough Council), rejected the proposed amendment because it wanted to maintain the existing tenant mix within the letting scheme. The restrictive user clause was challenged by the tenant as being anticompetitive because it gave a monopoly to the existing convenience store in the parade.
The judge heard the competition law challenge as a preliminary issue and it is not clear why the proceedings were not transferred to the High Court, as is required by the Practice Direction on Competition Law Claims.
Prohibited agreements under UK competition law
The 1998 Competition Act2 prohibits agreements between businesses that appreciably restrict competition within the UK. However, even if an agreement is found to restrict competition, it may be exempt if it meets the cumulative conditions set out in the Act3. These broadly require the restriction on competition to be outweighed by other economic benefits that are passed on to customers.
Land agreements have been subject to competition law since April 2011, following the revocation of the Land Agreements Exclusion Order. Detailed guidance on the application of competition law to land agreements has been published by the Competition and Markets Authority (CMA) (formerly the Office of Fair Trading). Put into context, it is noteworthy that the CMA’s guidance states that “in most cases… user clauses are unlikely to restrict competition” and there is a long line of decisional practice from the UK competition regulators on the relevant market definition for convenience stores.
The Court’s findings
Surprisingly, the landlord conceded (possibly for costs reasons) that the proposed user clause amounted to a breach of the Competition Act, so the focus of the Court was on whether the agreement met the conditions for exemption.
The judge had regard to the CMA’s guidance on applying the exemption conditions, which he described as “practical and sensible”. However, he considered that the landlord did not adduce sufficient evidence to prove that efficiencies were promoted by the existence of different retailers on the parade or that the local community would benefit from the restrictive user clause imposed. The judge was also not convinced that the restriction was indispensable for maintaining the letting scheme and took a narrow view on the size of the local market for convenience stores, finding that it was no larger than “a relatively short walking distance” and did not include a nearby Tesco store.
Even though the judge considered the landlord “rightly” conceded that the user clause was in breach of the Act, one would normally expect this issue to be hotly disputed. Not only is proving that an agreement has an anticompetitive effect a difficult burden for a claimant to discharge (usually requiring detailed economic evidence), but the CMA’s guidance anticipates that “generally” restrictive user clauses in leases are “unlikely to raise competition concerns”.
The judgment is not binding in future actions, but it serves as a clear reminder of the importance of ensuring that restrictions in leases are carefully considered from a competition law perspective and specialist advice is sought where necessary. The consequences of getting it wrong are potentially serious as agreements in breach of competition law are void and unenforceable, with parties at risk of facing regulatory fines or damages in more egregious cases.