The European Court of Justice (“ECJ”) has received a reference from Latvia’s Supreme Court seeking guidance on clauses in property leases in the retail sector. The ECJ has been asked to consider whether or not clauses in retail leases that limit the opportunities for competitors to establish shops in the same shopping centre are anti-competitive.
The outcome will have an impact on how such restrictions in UK leases are viewed by the UK courts and competition authority.
In 2012, the Latvian competition regulator fined Maxima, one of the top retailers in Latvia, for including a clause in its contract with property companies whereby the property companies could not allow Maxima’s competitors to set up premises in the same shopping centre without a prior consent from Maxima. The competition regulator considered these clauses to be anti-competitive as, according to it, they restricted the ability of smaller shops to enter the market, and possibly made the consumers even more dependent on large retailers like Maxima.
Maxima appealed against the fine and, recently, the case reached the Latvian Supreme Court. In July, the Supreme Court of Latvia referred the case to the ECJ seeking guidance on issues of EU competition law.
The issues referred to the ECJ appear to include:
- whether or not the competition regulator should have assessed the structure of the market along with the nature of clause in the contract;
- whether the market power of the companies involved in the agreement in question should be assessed in such a scenario. Moreover, is it sufficient that the parties had a potential to influence the market, or should the effects on competition also be assessed?
The key issue is whether (i) it is sufficient to say that the clause by its very nature restricts competition, or (ii) it is necessary to assess that the clause actually does so/has the potential to do so having regard to market conditions. If the answer is (i), this would set a low threshold for finding a lease restriction to be anti-competitive.
The Office of Fair Trading (the predecessor to the Competition & Markets Authority (“CMA”)) in its detailed guidance on the application of competition law to land agreements states that “where a land-owner leases land to a party and agrees not to allow a competitor of that party to operate on the land or other land that is owned by the land-owner, this may protect the lessee from competition and has the potential to foreclose competitors of the lessee in a related market”. However, the guidance further states that not all such clauses would be anti-competitive and it will depend on the scope of the relevant market where the land is being used and whether one or more of the parties to the agreement possess market power. According to the guidance, the CMA is unlikely to take further action if the parties to the agreement do not have a market share of more than 30%. Therefore, as per the CMA guidance, such clauses are not automatically presumed to be anti-competitive and require a further assessment in light of the scope of the relevant market, market power of the parties and the resultant effect on competition.
It will be interesting to see how the ECJ answers the questions raised by the Latvian Supreme Court. The Latvian competition authority seems to have adopted a very broad approach, which differs from that of the CMA and it appeared to have found the clause in question anti-competitive without considering the actual effects of the clause on the competition in the relevant market.
If the ECJ finds that the approach of the Latvian competition authority was correct, this will need to be taken into account by the UK courts and competition authorities, and will therefore impact on how such restrictions are viewed in UK leases.