On 6 April 2011 “land agreements”1 became subject to the UK’s competition rules. Prior to this change, such agreements had been exempt from the prohibition in chapter I of the Competition Act 1998 (the Chapter I Prohibition) and the change means that any restriction within a land agreement that prevents, restricts or distorts competition will be void and unenforceable and will be open to challenge. As such, parties to land agreements must now self-assess the competitive impact of existing and future agreements.
The Office of Fair Trading (OFT) has published guidance on the application of the Chapter I Prohibition to land agreements (the Land Agreements Guidance), which includes the following factors that should be considered when undertaking the self-assessment.
- Agreement is sufficient. The OFT may take enforcement action even if the party benefitting from a restriction is not actively enforcing it. That is, agreeing to a restriction is, in principle, capable of infringing the Chapter I Prohibition (however, see Prioritisation below).
Restrictions. The OFT has sought to explain the types of restriction that are more likely to be considered capable of infringing the Chapter I Prohibition and those that do not generally give rise to competition concerns.
- Competitors and restrictive object. Where parties to a land agreement are competitors and the object of a restriction is for the parties to share markets by territory or customer the agreement will ”almost invariably” infringe the Chapter I Prohibition.
Market power. If any party to an agreement has some degree of market power2, and the agreement contributes to creating, maintaining or strengthening that market power, the following restrictions may fall within the Chapter I Prohibition. Generally, the following restrictions make it more difficult for competitors to enter the market where the land is used, or protect a party from competition.
- Exclusivity. A lease involving a restriction whereby the lessor agrees not to allow a competitor of the lessee to operate on the land, or on other land owned by the lessor, may protect the lessee from competition and ‘foreclose’ competitors of the lessee.
- Leasehold user restrictions. In most cases, a permitted or restricted user clause is unlikely to restrict competition. However, if a land-owner is, for example, active in related markets and seeks to limit the availability of land to downstream competitors, this may restrict competition.
- Freehold restrictive covenants. In most cases, a freehold covenant restricting the use of land to the benefit of another party’s land will not restrict competition. However, if the clause involves the land-owner stipulating, for example, a type of use in order to limit the availability of land to competitors in a related market, this may restrict competition.
- Duration. The OFT recognises property investment can involve varying costs and risks and the commitment of a particular lessee to sign up to a lease may depend on conditions (i.e. exclusivity) being offered. Accordingly, the OFT has not set down an ‘appropriate’ duration of a restriction.
- Prioritisation. Generally, the OFT assesses which cases should be investigated according to published Prioritisation criteria3. Whilst the OFT has not excluded the possibility of prioritising a case involving a land agreement that was entered into prior to 6 April 2011, the Land Agreements Guidance states it is likely that cases involving a restriction that is being actively enforced are more likely to meet the Prioritisation criteria. A case is less likely to meet the Prioritisation criteria (and therefore be less susceptible to a prioritised OFT investigation) where a party has not taken steps to enforce the restriction and has taken steps to amend/modify the land agreement; or if amendment is not possible, where a party has recorded in writing that a restriction will not be enforced.
The OFT is unlikely to take action if none of the parties to the agreement has (or as a result of the agreement obtains) a share of the market which exceeds 30%, although it may decide to investigate where there are significant negative effects on competition.
- Penalties. A breach of the Chapter I Prohibition has a number of possible consequences including financial penalties, unenforceability of an agreement, private damages actions and director disqualification. Where a party has used best endeavours to amend or remove a clause in breach of the Chapter I Prohibition and has not sought to enforce it, the OFT may consider this to be a mitigating factor.
The OFT recognises there are many legitimate reasons for restrictions regarding the use of land, and it expects only a minority of restrictions will infringe competition law. However, the OFT will not give legal advice4 on the application of UK competition law to land agreements, and businesses must consult legal advisers on agreements that may raise competition law concerns and consider whether alteration or amendment is required.