The UK Government has recently repealed the antitrust exemption that applied to land agreements, such as leases. In addition, the Competition Commission (“CC”) ordered seven supermarket chains to release restrictive covenants contained in their land agreements. In light of these developments, market players should reassess the compatibility of their existing land agreements with UK competition rules.
Prohibition of anti-competitive agreements will apply to land agreements
Chapter I of the Competition Act 1998 prohibits agreements which have as their object or effect the prevention, restriction or distortion of competition within the UK. Shortly after the Competition Act was adopted, the Secretary of State issued an Exclusion Order which exempted land agreements from the Chapter I prohibition. This exemption was renewed in 2004.
The Exclusion Order defined a land agreement as “an agreement ... which creates, alters, transfers or terminates an interest in land.” A land agreement includes, for example, transfers of freeholds, leases or assignments of leasehold interests and easements.
On 29 June 2010, the Secretary of State made the Competition Act 1998 (Land Agreements Exclusion Revocation) Order 2010 (SI 1709/2010). This Order revokes the Exclusion Order which exempted land agreements from the Chapter I prohibition. The revocation will take effect from 6 April 2011. From that date, Chapter I of the Competition Act will apply to all land agreements (whether entered into before or after that date).
Ensure that your land agreements comply with competition laws
The consequences of violating the Competition Act 1998 are severe:
- The offending provisions – and possibly the entire agreement – are invalid and unenforceable.
- The UK’s Office of Fair Trading (“OFT”) can impose a fine of up to 10% of group worldwide revenue.
- Other businesses harmed by anti-competitive behaviour can recover damages.
- The most serious violations of UK competition rules can also lead to individual criminal sanctions (including jail) and/or disqualification of directors.
Property firms and other market operators should take advantage of the transitional period to review their existing agreements. In particular, they should consider whether the following restrictive covenants comply with competition laws:
- Covenants imposed on the sale of freehold land that limit the future use of that land (e.g., a covenant that prohibits certain commercial uses of the land).
- Covenants included in leases (e.g., a restriction imposed on the tenant prohibiting certain commercial uses of leased property or a restriction imposed on the landlord preventing the latter from leasing other premises to the tenant’s competitors).
The revocation of the exemption is the result of the CC’s investigation
In April 2008, the CC published a report regarding retail distribution of groceries in the UK. This report presented the findings of the CC’s two-year-long market investigation. The report addressed, among other things, restrictive covenants that prevent or restrict the use of land for grocery retailing. The CC concluded that, in highly-concentrated local markets, such covenants could act as a barrier to entry, protecting the beneficiary of the covenant from competition.
However, as these restrictive covenants were included in land agreements, they were exempted by the Exclusion Order from the Chapter I prohibition. Moreover, as UK land agreements typically do not affect cross-border trade, so the equivalent prohibition of anti-competitive agreements under Article 101 of the EU Treaty (formerly Article 81 of the EC Treaty) has not applied.
The CC recommended that the Exclusion Order be either amended (so that restrictive covenants which impede grocery retailing would no longer be exempted) or removed altogether. Following the publication of the CC report, the Government conducted a consultation seeking views on the future of the Exclusion Order. Most respondents agreed that the exclusion was no longer necessary. Therefore, the Government repealed the Exclusion Order.
The CC ordered seven supermarket chains to release restrictive covenants
On 12 August 2010, the CC published the Groceries Market Investigation (Controlled Land) Order 2010. This Order is part of a package of remedies that address the adverse effects on competition identified in the CC’s groceries market investigation. The Order requires seven large grocery retailers (Asda, Co-op, Marks & Spencer, Morrison, Sainsbury, Tesco and Waitrose) to release, by 10 February 2011, existing restrictive covenants listed in a schedule to the Order. Large grocery retailers identified by the Order must not enter into any new restrictive covenants that may restrict grocery retailing or have an equivalent effect.
The OFT may, at the request of the owner of the burdened land, identify additional restrictive covenants to be released by large grocery retailers. In its Order, the CC established the test that the OFT should apply to restrictive covenants. The OFT is required to assess the intensity of competition in the catchment area around the site burdened by a restrictive covenant. If three or fewer competitors are active in this area and the retailer benefiting from the restrictive covenant holds a market share of 60% or greater, the covenant must be removed.
The OFT intends to publish antitrust guidance on land agreements
The OFT has announced that it intends to publish guidance on the application of competition law to land agreements as soon as practicable. In its guidance, the OFT is likely to use an approach modelled on the test adopted by the CC. In order to determine whether the restrictive covenants included in their land agreements comply with competition laws, the parties will probably be required to assess the intensity of competition in the local market in which the beneficiary of the covenant is active. If competition is weak and the relevant party holds a high market share, the restrictive covenant may be in violation of the Chapter I prohibition.
Under the Competition Act 1998, an agreement that produces economic and consumer benefits that outweigh its anti-competitive effects may qualify for an exemption from the Chapter I prohibition. In its upcoming guidance, the OFT will likely specify the criteria that should be met by land agreements to qualify for such an exemption. For example, a restrictive covenant may be exempted, at least for a limited period of time, if the land agreement that contains the covenant contributes to urban regeneration.