In one of the first rulings of its kind since real estate agreements became subject to the full scrutiny of UK competition law in 2011, the Central London County Court has held that a use restriction in a lease infringed the Chapter I prohibition of the Competition Act 1998 and did not meet the criteria for exemption under Article 9(1) of the Competition Act. This ruling could have widespread potential implications for commercial landlords and the real estate industry as a whole if the County Court’s approach is followed by the High Court.

In this case, Martin Retail Group Limited (MRG), an existing tenant of retail premises on a parade of shops in a housing estate, sought to extend the permitted use of retail premises to enable it to sell groceries. On expiry of MRG’s lease, a dispute arose as to the terms of the user clause in the new lease. The landlord, Crawley Borough Council (the Council), proposed that MRG give a covenant limiting use of the shop premises to the “business of newsagent, tobacconist, sweet confectioner, stationer, bookseller and for the sale of toys, CDs, fancy goods, greeting cards and the installation and use of an ATM and Lottery sales terminal” (“the proposed user clause”). However, MRG wanted to use the shop as a convenience store, selling groceries, spirits and household goods and sought an extension of the proposed user clause accordingly.

The dispute was referred to the County Court for resolution under the Landlord and Tenant Act 1954. In these proceedings, MRG claimed that the proposed user clause breached the Chapter I prohibition of the Competition Act 1998. The Court tried the legality of the proposed user clause as a preliminary issue. The Council opposed the amendment of the user restrictions on the basis that each of the shops in the parade should have a different use and there already was a grocery store on the parade.

In argument the Council conceded to the Court that the use restriction, in the context of the Council’s letting scheme, could have the effect of restricting competition in the sale of convenience goods on the parade contrary to Chapter I of the Competition Act 1998. Therefore the Court did not specifically rule on the application of the Chapter I prohibition due to this concession. Instead the Court limited itself to the possible application of Section 9 of the Competition Act 1998 in relation to the grant of an individual exemption and assessing whether the appropriate criteria for the grant of an exemption was satisfied. As a consequence, the judgment does not contain any detailed findings of the anti-competitive effect of the restriction or the letting scheme as a whole.

However, the considerations taken into account by the Court in analysing whether it was appropriate to grant an individual exemption do give an interesting insight into how such clauses will be analysed by the Courts in future. The judge did not believe that, as a matter of fact, the distribution of goods was improved or economic progress was promoted through the existence of a number of different retailers rather than via a supermarket or a number of similar retailers. Nor did consumers share in the economic benefit produced by the agreement. The judge did not accept that the community would benefit from the restrictions contained in the proposed user clause and letting scheme.

In assessing whether the agreement had the effect of eliminating competition in respect of a substantial part of the products in question the Court approached the subject of market definition. The Council had argued for a wider market definition but did concede that there could be an anticompetitive restriction in relation to the sale of convenience goods within a narrow catchment area of the shops which predominantly served a particular residential estate in Crawley. Of particular importance in this case seems to have been that this parade of shops were the only retail premises within the estate. The nearest rival convenience stores were a Tesco Express about 1000 metres away and two convenience stores on a neighbouring estate (about 1200 and 1500 metres away). Therefore, when approaching the subject of market definition the judge was influenced by the reluctance of customers to walk further than a short distance to buy consumer items (such as milk, eggs or washing powder). He therefore held that a narrow approach to market definition was appropriate. The judge concluded that the proposed user clause, as part of the letting scheme, clearly provided a means of eliminating competition in convenience goods on the parade and within a relatively short walking distance.

However, the judge did recognise that if the relevant geographic market had been bigger so that various other convenience stores (within 1000 to 1500 metres) fell within its catchment area then there would be no such possibility of elimination.

It remains to be seen whether the eminently sensible reasoning of the County Court in this judgment will be followed by the High Court to create general precedents on hyper-local market definitions and holding that usage clauses needn’t confer local monopolies to meet their aim of creating a good spread of different types of retailer. (See Case: Martin Retail Group Limited v Crawley Borough Council).