Last Thursday saw the publication by the OFT of the final form of its Guidance relating to how competition law applies to land agreements following the revocation of the Land Agreements Exclusion Order, which comes into effect on 6 April 2011.
The OFT has gone some way to taking on board comments made by various groups within the real estate sector. However, the Guidance remains written in a form which is not particularly user friendly for the real estate industry. Its focus is on a number of technical competition law related definitions.
For anyone in the real estate sector reading the Guidance for the first time, the best place to start is actually the new section 4, together with the scenarios in section 9.
Section 4 sets out the main factors which the OFT believes are relevant in assessing whether a land agreement falls foul of the Chapter I prohibition and whether it does so to an appreciable effect.
Section 9 has been expanded from the original six scenarios to a total of nine different examples where the OFT gives guidance as to the types of restrictions which may or may not infringe the Chapter I prohibition. The inclusion of new scenarios relating to more basic restrictive covenants on disposal of land, collaboration arrangements between house builders on major development sites and student accommodation are to be welcomed. These go some way to dealing with questions which were raised of the OFT.
However, it is disappointing that the OFT has not taken the opportunity to give general guidance as to the duration of exclusivity covenants in leases which they regard as not being of sufficient appreciable effect to take action. The OFT repeats the previous assertion that the longer the duration of a restriction, the more significant the impact on competition is likely to be. However, there remains no general rule of thumb published by the OFT, that the real estate sector can rely on – although some might regard the uncertainty as helpful!
The OFT remains of the view that only a small minority of land agreements will infringe the Chapter 1 prohibition. The two main areas where it thinks land agreements may be in breach are:
- Where competitors in a particular market agree restrictions aimed at sharing or carving up that market between the parties – this is very unusual in the real estate sector; and
- Other types of restriction which have the effect of restricting competition by either raising barriers to entry (or expansion) and a restriction that makes access to that market by competitors more difficult. For example, a restrictive covenant imposed by a seller on the disposal of surplus land which is designed to protect its business operations and prevent competition is likely to fall foul of Chapter I. Conversely, a restriction that is imposed for other reasons (for example because particular uses might adversely affect the use and enjoyment of the seller’s adjoining land) should not infringe Chapter I. The example given by the OFT is a restriction put in place to prevent noisy activities on adjoining land because they may interfere with the use of the seller’s retained land as a theatre.
All in all, the final form of the Guidance is certainly an improvement on the draft Guidance issued earlier this year and the OFT has tried hard to take into account comments on the draft Guidance. At 70 pages long it is one of the most detailed Guidances issued by the OFT recently. Unfortunately, it still leaves unanswered a number of the questions which the real estate sector raised. For a copy of the Guidance please click here.