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Land transactions in the competition spotlight

Print publication

19/03/2015

Background

Since 6 April 2011, when a special exclusion order was revoked, all land agreements are subject to UK competition law. Broadly, Chapter I of the Competition Act 1998 prohibits agreements which have the object or effect of restricting competition. Agreements “relating to land” such as freehold transfers, leases, licences, agreement for leases and development agreements are covered by Chapter I [1].

Penalties

First, the consequences of breaching competition law are potentially serious, including fines of up to 10 per cent of group worldwide turnover, unenforceability of the infringing provisions (which may render the whole agreement void), disqualification of directors and the potential for third parties to bring private actions for damages. In the most serious cases (namely cartels), offenders may face criminal sanctions.

Guidance and exemption

In practical terms, companies can gain some comfort from guidance published in 2011 by the Office of Fair Trading, whose functions have now been assumed by the Competition and Markets Authority (CMA), that it expects only a minority of land agreements to contain infringing restrictions.

Even an agreement which has anti-competitive effects may still benefit from an exemption if it can be shown that the agreement also gives rise to efficiency gains that are passed on to consumers, and that the restriction is indispensible to the agreement and does not lead to the elimination of competition.

We are also seeing appetite from companies to use competition law to their advantage in the context of contractual disputes, where parties may use competition law to escape from unduly restrictive provisions.

The competition analysis

UK competition law operates on a “self assessment” basis, meaning that the parties must determine for themselves whether an agreement is lawful or in breach of the Chapter I prohibition. We have summarised the various stages of the analysis into four steps.

Step 1: Define the market

It is necessary to consider the scope of both the product market (including the market for the land itself and the market for which the land is used, e.g. retail sales of groceries) and the geographic market. In relation to land agreements, geographic markets can be very narrow given that competition usually takes place at a much localised level. It may be that the relevant geographic market constitutes the area of a single shopping centre. The narrower the geographic market, the more likely a restriction will impact on competition.

Step 2: Assess whether any impact on competition is appreciable

Only agreements which have an appreciable effect on competition will fall foul of competition law. The general rule of thumb is the greater the market share of the parties to the agreement, 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.

Step 3: Is there an adverse effect on competition?

The Chapter 1 prohibition prohibits agreements which prevent, restrict or distort competition. This involves a case-by-case analysis, but the CMA in its guidelines sets out some “red flags” for the types of restrictions in land agreements that are likely to be anti-competitive. These include: (a) agreements granting one party exclusivity; (b) agreements between competitors which restrict their ability to behave independently on the market (e.g. they share markets by territory); (c) where one or more parties have market power, meaning that they are not constrained by other parties in the market; and (d) raising barriers to entry into the market for new competitors.

Step 4: Does the exemption apply?

Even if an agreement does contain restrictions, it may still benefit from an exemption if it gives rise to efficiencies that are passed on to consumers and which are indispensible to achieving those efficiencies, e.g. 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. However, if this exclusivity provision is unlimited in duration, the agreement may fail the “indispensability” criteria – exclusivity for a few years after opening should normally be enough to ensure the commercial success of the shopping centre. (See also below regarding a case before the CJEU.)

The case law so far

The first reported case concerning the application of Chapter I of the Competition Act 1998 to retail units concerned a user clause in a lease [2]. The local authority landlord had a policy of employing a narrow user clause in order to ensure that a shopping parade maintained a diverse, complementary mix of retailers. When, on lease renewal, a newsagent sought to extend its user clause to become a convenience store, the Council proposed a user clause clarifying that the newsagent could not sell convenience goods, thereby preventing competition with a mini-supermarket on the parade. The judge ruled that the clause infringed competition law and could not benefit from the exemption, as there was no benefit to consumers flowing from the restriction.

This is just one case and possibly of limited application, not least as the Council conceded at trial that there had been a breach of the Chapter I prohibition. The decision is seemingly at odds with the CMA guidance, which is that landlords have a legitimate interest in manipulating user clauses to ensure a good tenant mix. Had the Council adduced evidence, e.g. a written policy, of how it did this, then, again, it is possible a different decision might have been reached. Use restrictions are more likely to be at risk of being found to be anti-competitive in rural areas or out of town retail parks, where there is less actual or potential competition, than there is in an urban centre.

Another, more significant case is in the pipeline. The Court of Justice of the European Union (CJEU) [3] has been asked 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 will necessitate a prompt review of its guidance by the UK’s Competition and Markets Authority and potentially re-negotiation of agreements by landlords and retailers.

This was not such an issue in the past but the applicability of competition law to land agreements is a topic we are going to see more of. We are aware of other cases reaching settlement or listed for trial. Landlords, developers and tenants must therefore understand how competition law can affect their agreements.

How Walker Morris 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.

If you require assistance or should like further information, please contact Trudy Feaster-Gee, Partner (Barrister) and Head of Competition (on +44 (0)113 2834542).

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[1] There is a second prohibition set out in Chapter II of the Competition Act 1998 which prohibits abuse of a dominant position and which may also apply in the context of a land agreement, e.g. an agreement for access to a port. This article does not deal with application of the Chapter II prohibition.
[2] Martin Retail Group Limited v Crawley Borough Council [2013] EW Misc 32 (CC)
[3] Case C-345/14, SIA ‘Maxima Latvija’ Ltd v Konkurences pardone

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