Background
The Central London County Court has, in the first reported case on the subject [1], ruled that a restriction on use in a lease breaches the Chapter I prohibition of the Competition Act 1998 (the Act).
Section 2 of the Act prohibits certain anti-competitive agreements (the Chapter I prohibition). By virtue of the Competition Act 1998 (Land Agreements Exclusion and Revocation) Order 2004 (the Exclusion Order) land agreements were originally excluded from the application of the Chapter I prohibition; however, the Exclusion Order was revoked on 6 April 2011[2]. Since the revocation of the Exclusion Order all new and existing agreements which create, alter, transfer or terminate an interest in land may, depending on the circumstances, fall within the scope of the Chapter I prohibition. Infringing the Chapter I prohibition has serious consequences and agreements which breach it will be rendered void and unenforceable unless certain exemption criteria, set out in section 9 of the Act, can be met.
The Office of Fair Trading, in order to assist companies in assessing their agreements for compatibility with competition law, published detailed guidance on the subject, which has since been adopted by the Competition and Markets Authority (CMA). This guidance contains specific commentary on many commonly occurring restrictions in land agreements and also details on the regulator’s enforcement priorities with regard to such agreements.
Facts
In 2001 Crawley Borough Council (the Council) granted to Martin Retail Group Limited (Martin) a 10-year lease of shop premises at Furnace Parade, Crawley. In the lease, Martin covenanted not to use the shop other than for the retail trade of newsagents and tobacconist and for the sale of confectionery, stationery, books, toys, records, fancy goods and greeting cards.
Martin’s store was one of eleven on Furnace Parade and formed part of a letting scheme run by the Council covering the parade. Each lease of premises within the parade contained a user clause restricting the use of the relevant premises to a certain trade or business and one of the other stores in the parade, Premier Furnace Green Supermarket, was already run as a grocery store.
On the expiry of its lease in 2011 Martin sought to agree a new lease, however, a dispute arose as to the terms of the user clause in the new lease. The Council wanted to restrict the use in a similar manner as in the 2001 lease, however, Martin wanted to extend the user provision in order to permit the use of the shop as a convenience store, selling groceries, spirits and household goods.
The resulting dispute as to the terms of the user clause was referred to the Country Court with Martin claiming that the proposed user clause breached the Chapter I prohibition.
Judgment
At a trial of the preliminary issue, the Council, for reasons not explained in the judgment, conceded that the proposed user clause would breach the Chapter I prohibition. The only issue therefore remaining to be decided was whether the clause could take the benefit of any of the exemptions under section 9(1) of the Act. In order to satisfy the criteria the arrangement in question must:
- contribute to improving production or distribution or to promoting technical or economic progress;
- allow consumers a fair share of the resulting benefit;
- not impose restrictions beyond those indispensable to attainment of objectives; and
- not afford the parties the possibility of eliminating competition in respect of a substantial part of the products in question.
The judge concluded that the burden of proving that the conditions for exemption were satisfied lay with the Council as the party seeking to claim the benefit and in order to prove that those conditions apply they would need to adduce sufficient admissible evidence of the relevant facts. In relation to the evidence provided the judge commented that the witness evidence was, for the most part, opinion rather than evidence of the facts. In addition the witnesses were employees of the parties, rendering their opinions less than independent. Furthermore little weight could be attributed to the evidence from local residents and traders provided in the form of correspondence and petitions as some of this evidence was hearsay and there were concerns as to reliability and a lack of impartiality.
Addressing each of the criteria in turn the judge concluded as follows:
- Contributes to improving production or distribution or to promoting technical or economic progress – The judge rejected the argument that by ensuring the parade contained a range of different stores efficiency benefits could be obtained by customers. There was no evidence to support the Council’s assertion that improvements were derived from their letting scheme. Instead, the judge accepted Martin’s view that the proposed user clause and letting scheme as a whole lead to a distribution model determined by the Council rather than by the market itself.
- Allows consumers a fair share of the resulting benefit – Whilst in theory by ensuring diversity in retailers occupying the parade this leads to a wider range of goods available and therefore is of benefit to the community, the evidence did not necessarily show that the letting scheme actually had this result. Furthermore it seemed unlikely that any discernable price benefit resulted from the arrangements in place. On the evidence placed before him, the judge was not satisfied that the community would benefit either from the restrictions in the proposed user clause or the letting scheme as a whole.
- Does not impose restrictions beyond those indispensable to attainment of objectives – The judge concluded that the Council’s letting scheme was disproportionate to the results it achieved. Insufficient evidence was provided to prove that the restrictions were necessary and in their absence small traders would not be attracted to the parade.
- Does not afford the parties the possibility of eliminating competition in respect of a substantial part of the products in question – The view was formed that the relevant geographical market for the purpose of this condition was likely to be convenience stores within a relatively short walking distance from the parade (being the distance a local resident might be prepared to walk from the parade to shop at another store). The judge concluded that the proposed user clause did provide a means of eliminating competition in convenience goods on the parade and within the relevant geographical market.
As a result of these findings it was held that the proposed user clause, within the context of the letting scheme, breached the Chapter I prohibition and was not exempt under section 9(1) of the Act.
WM Comment
Notable in its absence from the judgment was a detailed analysis of the relevant geographical market. The evidence heard was limited and in light of the Council’s admission that the user clause was prima facie anti-competitive it was not necessary for the court to give in-depth consideration to the relevant product or geographical market for the purpose of assessing whether the Chapter I prohibition was breached.
As compared to the standards of the CMA, Competition Appeal Tribunal or the Chancery Division of the High Court, where competition disputes are more commonly heard, the consideration given to the relevant market was scant at best. The case contains none of the detailed analysis that is the norm in relation to litigation involving competition law arguments. It is, however, unlikely that the CMA would have been able to assess the case given the stage that negotiations on the lease had reached and commencing the proceedings in court quite probably led to a faster resolution to the dispute.
The outcome of this case turned on its specific facts and the fact that the Council conceded the breach of the Chapter I prohibition. The case does, however, highlight the importance of accurate evidence in competition law cases. It is likely that the court may have been more willing to consider the Council’s arguments on the application of the exemption criteria had the evidence that had been presented been more robust. As the Council’s letting scheme was not the subject of a written policy there was nothing presented to the court to back up the Council’s argument that the scheme was required to ensure a diverse tenant mix. Landlords would therefore be well advised to ensure that tenant mix policies and their perceived benefits are properly documented.
Interestingly, the judge in the case did comment that if a scheme such as this was being set up from scratch with restrictions being put in place to ensure that an anchor tenant occupied one of the units and to support that tenant until its business became more stable then the outcome of the case may have been different.
Notwithstanding the fact that the case may be of limited application in the future, bearing in mind the lack of court precedents regarding the interaction of competition law and land agreements the judgment is still likely to be of interest to both landlords and tenants.
[1] Martin Retail Group Limited v Crawley Borough Council [2013] EW Misc. 32 (CC)
[2] By the Competition Act 1998 (Land Agreements Exclusion Revocation) Order 2010.
