Anchor tenants, exclusivity and competition law

21st January 2016

The Court of Justice of the European Union (CJEU) has delivered an important ruling concerning the application of EU competition law to land transactions. The CJEU [1] was asked by a Latvian Court to consider whether exclusivity agreements given to anchor tenants in a shopping centre automatically infringe competition law, irrespective of their effect.

A finding that they do so could have necessitated a change of approach from the UK competition regulator, the Competition & Markets Authority (CMA), and, more importantly, significant potential renegotiation of agreements by landlords and commercial tenants. However, the CJEU ruled that such agreements do not automatically infringe competition law. Instead, a full economic and legal analysis has to be undertaken in order to assess the effects of the agreement on the relevant market. Relevant factors include accessibility to appropriate commercial land in the geographic area concerned, barriers to entry for new competitors, market power of the operators in the relevant market(s), customer loyalty to existing brands and consumer habits. Landlords and tenants are therefore left to consider the competition effects of their agreement but are able to take comfort from the knowledge that exclusivity arrangements of the type described above are not automatically anti-competitive.

In the UK, since 6 April 2011, all land agreements, including freehold transfers, leases, licences, and development agreements, are subject to UK competition law. Broadly, Chapter I of the Competition Act 1998 prohibits agreements which have as their object or effect the restriction of competition. As there is no mechanism for obtaining regulatory clearance, landlords and tenants must themselves assess their agreements’ compliance with competition rules. This can be split into four stages:

• Define the relevant market(s). It is necessary to consider the scope of the product market (addressing specifically the market for the land itself and the market for which the land is used, e.g. retail sales of groceries) and the geographic scope of each such market. In relation to land agreements, geographic markets can be very narrow, given that competition often takes place at a localised level. It may be that the relevant geographic market comprises a single shopping centre. The narrower the geographic market, the more likely a restriction will impact on competition.
• Is there an appreciable effect on competition? Only agreements which have an appreciable effect on competition will fall foul of competition law. Generally, the greater the parties’ market share, the greater the risk that any impact on competition is appreciable. Other factors indicating a potentially greater likelihood of an appreciable restriction arising include, for example: if sites suitable for use have unique or special qualities; if sites must be in proximity to a particular facility to enable a service to be provided (e.g. airport parking services); or if planning restrictions limit the availability of suitable land.
• Is there an adverse effect on competition? CMA guidance sets out some “red flags” for the types of restrictions in land agreements that are likely to be anti-competitive. These include agreements between competitors which restrict their ability to behave independently on the market (e.g. they share markets by territory) or arrangements, for example, that raise barriers to entry into the market for new competitors (e.g. vertical integration).
• Is the agreement exempt? An agreement with anti-competitive effects may nevertheless benefit from an exemption if it can be demonstrated that the agreement also gives rise to efficiency gains that are passed on to consumers, provided the restriction is indispensible to achieve those benefits and does not lead to the elimination of competition. For example, a restriction on tenants of a shopping centre as to the type of store they can operate may benefit consumers by ensuring a good mix of retailers. Similarly, granting a department store exclusivity in a new shopping centre may be the only way to secure the anchor tenant and ensure the centre’s success, which in turn will benefit consumers by giving them greater choice.

The CMA’s approach to exclusivity provisions is consistent with the CJEU’s ruling in recognising that whilst such provisions may create an appreciable restriction of competition, it may be possible to justify such exclusivity (at least for a limited period of time) on the basis, for example, that securing an anchor tenant in a shopping centre may be necessary for ensuring the financial viability of the scheme.

If an agreement is held to be in breach of competition law, the parties may be fined up to 10 per cent of group worldwide turnover, the infringing provisions may be unenforceable (which may render the whole agreement void), the directors may be disqualified and third parties can bring private actions for damages.

How we can help

We can help you ensure that your land agreements comply with competition law. Your compliance programme might cover:

Training

Providing competition compliance training and guidance to personnel involved in negotiating and drafting agreements relating to land.

Compliance

Ensuring all agreements which restrict use of land are assessed for competition law compliance. Such assessments involve looking at the relevant markets for the economic activities affected by the restriction, the position of the parties on those markets and the overall effect of the restriction on competitors, potential competitors and customers.

Advice

Taking specialist competition law advice on any agreement where, because of the markets, parties or restrictions involved, there is a risk of the prohibitions being breached. Clear and persuasive evidence must be adduced if the parties want to prove that the agreement benefits from exemption and we will advise you as to whether the test is met.

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[1] Case C-345/14, SIA “Maxima Latvija” Ltd v Konkurences pardone