As we saw in our previous briefing note, a land agreement will fall foul of the Competition Act if it has as its object or effect the restriction of competition, unless it is exempt.
The relevant market
In assessing whether provisions within a land agreement fall foul of the Competition Act the first thing to identify is the market that you are considering. An agreement which restricts the sale of electrical equipment out of premises in Bradford is going to be relevant to the market for electrical equipment in Bradford, but is of no consequence to the market for electrical goods in London or the market for children’s clothes in Bradford. So when considering whether a restriction falls foul of the Competition Act you need to identify what the relevant market is and then consider what the effect on that market is.
Take a new out of town retail park. The owner is attracted to the site on which it is built because there are no other retail shops within a 20 mile radius and due to planning restrictions there is no realistic possibility of competing retail outlets within the 20 mile radius. The anchor tenant is intended to be a major electrical retailer. In order to attract the anchor tenant the owner of the retail park contracts with the tenant that no other electrical retailer will be granted a tenancy over any part of the retail park for 5 years. The relevant market here would be that for electrical retailers within the catchment area of the retail park.
A variation on the retail park example: Take the owner of two plots of land which are suitable for developing an out of town retail park. There are no other retail shops within a 20 mile radius of the two sites, which are 5 miles apart and benefit from similar amenities. The owner grants a lease of one site to a property developer. In the lease the owner covenants not to use the other site for the development of retail premises. The relevant market in this example is similar to that in the first in terms of geography, but unlike the first example the market is the market for retail premises generally, rather than a particular type of retailer.
Having identified the relevant market in each case, does the exclusivity agreement (in the first example) and the restriction on use (in the second) distort competition? The answer in each example is yes, as the beneficiary of the restriction has fettered the ability of a rival to compete.
However, this is not the end of the matter. The restrictive provision is not rendered void solely by virtue of its restrictive effect. All but the most serious restrictive agreements can be allowed if they fall within exemptions contained in the Competition Act, which were considered in the last briefing. The following factors may mitigate against a finding that the restrictions in our examples are void:
- The delivery to the relevent market of a large electrical superstore (in the first example) or a retail park (in the second) for a catchment area that previously did not benefit from the same;
- The demand for electrical stores / retail parks in the catchment area being satisfied by one store or park rather than multiples of the same;
- The increase in competition in other markets (for example supermarkets, clothing stores and DIY stores that amy take space) as a result of the creation of the retail park;
- An increase in employment for the local population;
- An improvement in local transport links and property prices; and
- The absence of existing competition actually being eliminated by the restriction.
Therefore just because a provision is restrictive does not mean that it will be void under the Competition Act. However each case will be judged on its own merits and it might be suggested that it is the second of these two examples than runs the greater risk of falling foul of the Competition Act.
Whilst the exemptions may come to the aid of many restrictions in land agreements, they do not apply to the most serious which can be found in paragraph 11 of European Commission Notice on Agreements of Minor Importance. Of most relevance to land agreements is the restriction which fetters the ability of a party to a land agreement to determine a sale price. Sale price could include the price for which land subject to a tenancy is disposed of by a tenant but could conceivably also relate to a restriction on the price for which a tenant sells its own goods. This is likely to be of most relevant to those in the property world when considering provisions in leases and other land agreements relating to disposal and alienation.
In practice land owners who wish to make disposals and landlords with leases that permit alienation must think about the extent to which the Competition Act comes in to play. This is in particular given the sanctions that may apply, both in terms of the remedies available to the OFT but perhaps more importantly because a clause falling foul of the Competition Act which is not saved by the exemptions will be rendered void furthermore, to the extent that the clause cannot be severed from the remainder of the land agreement the agreement itself could be rendered void.
In the next briefing we will be looking a little more closely at some of the commonly encountered provisions in land agreements to which the Competition Act will come into play.