Impact of recent changes

Two recent legislative developments are set to have an important impact on the handling of commercial property, by ushering in standard competition law – more normally associated with price fixing cartels – to the regulation of restrictions contained in land agreements. The two new developments are: 

  • the Groceries Market Investigation (Controlled Land) Order 2010; and 
  • the Competition Act 1998 (Land Agreements Exclusion Revocation) Order 2010.

They mean that some restrictions in land agreements (old and new) could in future lead to unenforceability and/ or orders to remove, and the possibility of investigations, fines, and liability in damages to third parties.

Both developments follow the wide ranging Competition Commission (CC) investigation into the competitive functioning of the groceries market in the UK generally, which concluded (in April 2008) that amongst other things, certain large grocery retailers were using a practice known as land banking, to restrict competition and protect the positions of stores in certain areas where competition was sparse. The method was broadly to buy up or somehow put in place restrictive covenants blocking other likely sites that might be suitable for competing large grocery store development.

This limited the potential for competing stores to develop in some places, and in areas where there was little or no competition between supermarkets, that is a bad thing. The reason this was legal was that the application of the Competition Act 1998 – the law that regulates other types of agreements that restrict or distort competition (eg. price fixing cartels) - was dis-applied from land agreements by virtue of a 2004 exemption to that effect. The CC therefore recommended changes in the law, which have now taken place. The Controlled Land Order affects large grocery retailers only but the Land Agreements Exclusion Revocation Order potentially affects all business sectors.

Before immediately hitting the panic button, however, it should be recalled that competition law is not literal but an effects based law and most restrictive covenants in land agreements will continue to be lawful and entirely benign. Competition law governs relations between undertakings (not private parties acting in an individual and non-business capacity) and the effects of given restrictions will largely flow from the nature of the restriction, the property and the parties involved and how they interweave in each case. What might infringe competition law in one set of circumstances may not in another – it all depends on context. To infringe competition law in the context of land agreements it will be necessary to stifle competition between businesses in an appreciable way.

The Groceries Market Investigation

The CC report of 2008 followed a 2006 reference from the Office of Fair Trading (OFT) under the market investigation provisions of the Enterprise Act 2002. Through this the UK’s two competition authorities (the OFT and CC) are empowered to investigate markets within the UK if concerned that they are not functioning as competitively as they should. Following investigation the CC may recommend changes in the law if it considers this necessary to rectify any inherent weakness in competition it has identified.

In the groceries investigation there were many other issues under consideration but what emerged from the perspective of land agreements was the condemnation of the practice known as “land banking” described above. The recommendation emerged that large grocery retailers be limited in future in their ability to prevent land being used by their competitors for grocery retailing. The Controlled Land Order (described in more detail below) is the direct result of this recommendation. Other recommendations included the use of a competition test in future planning decisions in respect of proposed new stores or extensions.

The Controlled Land Order

The Controlled Land Order now lists various land restrictions in favour of large grocery stores that have been examined by the CC and deemed anti-competitive, and orders those benefiting from these restrictions to lift them. It also sets out a test for examining any further situations that may come to light and how to judge whether they are also anti-competitive, based on the individual circumstances of each case and their effects in practice.

The main effects of the order are as follows:

  • it affects relevant restrictions imposed by defined large grocery retailers only, namely Asda, Sainsburys, Tesco, Morrisons, Waitrose and Co-Op;
  • it requires the large grocery retailers to release a list of specified restrictive covenants or exclusivity arrangements deemed already (following CC investigation) to have anti-competitive effects (certain other restrictions examined that were concluded not to have such effects are named, and therefore fall outside this requirement);
  • large grocery retailers will be prohibited from imposing anti-competitive restrictive covenants or exclusivity arrangements in future. Schedule 4 of the order sets out a complex test for when a given restrictive covenant will be considered anti-competitive. Broadly, this will turn on an analysis of the immediate locality from the site(s) affected (within what is known as a ten minute drive time isochrone) and the level of concentration of competing stores in that area. The law seeks to prevent large grocery retailers from protecting those stores in which they face little or no local competition;
  • in future, interested parties will be able to bring to the attention of the OFT when they consider a given restriction breaches the “Schedule 4” test. If the OFT agrees, then following due consultation, parties benefiting from restrictions that fail the test will be given six months from being informed by the OFT that a restriction fails the test, to take whatever steps are necessary to remove the offending restrictions (normally to execute a deed of release); and
  • certain types of restriction will be exempted from the general rules described above, such as restrictions in leases of land granted to tenants for a residential dwelling and specifying that such a leasehold property be used solely for residential purposes. The Order makes plain that it has retrospective effect on restrictions that have existed for any length of time as well as having prohibitive effect against those that might be considered for the future. It is anticipated that the new draft order will be swiftly adopted and enter into law very shortly.

The Land Agreements Exclusion Revocation Order

Competition law is best known in respect of high-profile cartel agreements fixing prices or sharing markets between competing businesses, sometimes on a global or at least pan-European scale. Within the EU, competition law is enforced at European level by the European Commission and in the UK by the OFT, via the Competition Act 1998. Notable cases from the OFT’s perspective in recent times include the October 2009 decision finding that over 100 construction companies had engaged in illegal anti-competitive collusion in the form of bid-rigging and related practices, and the decision of April 2010 fining various tobacco companies and retailers for colluding in respect of the resale prices of cigarettes. In both cases this is for breach of Chapter 1 of the Competition Act which prohibits agreements or concerted practices which may restrict, prevent or distort competition in the UK.

However, Chapter 1 has long been excluded from applying to land agreements, on the basis of a presumption that land agreements were somehow different to other types of business arrangement, and the regulators did not wish to be swamped with evaluating hundreds of inoffensive restrictions in land agreements continuously. The CC Groceries Market investigation found that anti-competitive effects could still be achieved through land agreements and recommended that the “safe harbour” for land agreements be withdrawn.

It was considered that the large majority of land agreements will continue to be able to proceed with the same restrictive covenants as before and with no chance of the same infringing the Competition Act. However, some such restrictions might damage competition, and that it is only right therefore that land agreements should be subject to the same scrutiny as any other type of business arrangement.

The Land Agreements Exclusion Revocation Order simply lifts the previous immunity that land agreements enjoyed, with effect from 6 April 2011. It will apply retrospectively from that time, however, meaning that when the agreement was first concluded will not matter. Existing and future restrictions in land agreements will now therefore need to be considered in the same way as other types of commercial agreements between independent undertakings. This will impact beyond just the large grocery retailers. Breaches of the Competition Act 1998 can result in the OFT making an order requiring the termination or modification of restrictions, or potentially impose fines for the parties of up to 10% of turnover, and unlimited liability to third parties in damages.

For the most serious infringements (ie. cartels) the penalties can extend to individual criminal sanctions (including jail) and director disqualification. Whilst it is hard to see those penalties arising in respect of land agreements it is surely not impossible.

When does a restriction of competition arise?

A restriction is broadly any provision that requires a party to pursue a particular course of action to the exclusion of something else, or vice versa – in other words something that ties behaviour. Whether or not this appreciably restricts “competition” in a wider sense depends on the nature of the restriction(s) concerned and the context in which they are imposed. For example, a prohibition on title of land against a particular business use has little effect if there are multiple alternative options nearby that are open to parties to go elsewhere, and there is no particular business imperative to be located on the restricted land in any event.

So it proved in the context of the Controlled Land Order: in this case that restrictions fail the “Schedule 4” test when they affect areas in which there is limited competition (between large grocery stores), but not when the reverse is true. In that context limited competition was defined by there being few alternative large grocery stores within a ten minute drive time radius. In many ways this is the land agreements equivalent of considering the market power of normal industrial suppliers of goods in relation to their market share across a defined region.

Put another way, what will be important in determining whether a restrictive covenant will restrict “competition” is a variety of factors, including:

  • the breadth of geographic area affected;
  • the nature of the property affected (a large modern shopping centre is far more likely to be capable of creating competition distortions than one single retail space in a town centre);
  • the length of time any restrictive covenant is imposed for;
  • the market power of the parties imposing and benefiting from the restrictions; and
  • the all-round reality of the situation in the sense of what different does the restriction really make and does it genuinely hinder markets functioning competitively – this emerges from considering all such factors in tandem.

Typical restrictions that may be covered would include large shopping centre leases where large anchor tenants and/or specialist retailers may seek comfort that competitors will be denied access within the same platform. The questions that will then apply will include whether or not any competing retailers so denied an opportunity to locate within that shopping centre is damaged by this if still able to locate across the street and the advantage to be drawn from being within the shopping centre appears marginal.

Other sorts of restrictions that might be caught include:

  • requirements in leases that tenants obtain certain goods or services exclusively from one supplier;
  • restrictions on a landlord not to allow competing businesses within a certain perimeter or excluding them from the facility altogether;
  • restrictions on the type of activity a tenant may carry out from the premises (particularly when the restriction is to protect competing activity carried out by the landlord); or
  • restrictions on a buyer not to allow the property to be used for certain uses (eg. the land banking example).

Restrictions in planning agreements should not be caught by the above provided the same are between the landowner and the local planning authority and genuinely conferred for planning purposes.

Will some sorts of restrictions on competition be exempted?

Clearly yes. Chapter 1 of the Competition Act is characterised by the ability of apparent restrictions of competition to be exempted from the usual prohibition if (very broadly) the restrictions may be considered indispensable to the overall purpose of the agreements in question and the pro-competitive effects outweigh their anti-competitive effects, and the same may be clearly and tangibly demonstrated.

For example, on occasion large asset investments will not be made without comfort of some protection for a reasonable period to depreciate those assets. Without such protection investments will not be made, and so advancements will not be made and consumers will ultimately lose by this. Competition Law recognises the need to be sensitive to this and whilst again this does not aid legal certainty for parties having to self-assess particular restrictions before entering into them, it does offer some comfort that common sense regarding restrictions of competition does play a pivotal role.

Will further guidance be issued?

Yes, and this will surely be hugely welcomed. The OFT has undertaken to issue more detailed guidance before the Land Agreements Exclusion Revocation order takes effect in April 2011.

Clearly the application of Competition Law to land agreements is going to be a new area and good and clear guidance will be very important. Although businesses have been self-assessing their standard commercial agreements for more than ten years with (on the whole) apparent success, and virtually all commentators agree that the permissive effects based approach is infinitely preferable to a dogmatic and inflexible “black and white” approach to which restrictions are permitted and which are not, irrespective of context.

Conclusions – what to do now

6 April 2011 is not that far away. Parties with significant land interests (landowners, landlords and tenants, retailers, restaurant chains, events sites) should consider their existing portfolios and the respective arrangements and whether or not the same have ever been configured with spurning competitors in mind. These should be looked at more closely to see if any exposure arises. If these restrictions are central to particular business models or standard agreements those will need revising in particular.

Otherwise, as noted, many restrictions will be benign but there may be a few that are not and which could in time lead to difficulties in competition enforcement. Equally, those businesses that are aware that they are being stifled by one or more restrictions held over land may wish to reflect on those restrictions in the context of the changes to the law, and consider reminding those that maintain those restrictions of their responsibility and potential liability under the new law. There are already plenty of disputes that are brewing.