Lease restrictive covenants held to be anti-competitive

28 October, 2014

Restrictive covenants and exclusivity clauses are often included in leases and other land agreements. From April 2011, all land agreements have been subject to competition law and there has been a risk that such restrictions could be prohibited as anti-competitive. In the first case on this matter, the Central London County Court has held that a user clause proposed in a lease which prevented the tenant from selling convenience goods was prohibited by the Competition Act 1998.

 

What is an anti-competitive agreement?

 

An anti-competitive agreement is one which may affect trade within the UK and which has as its object or effect the prevention, restriction or distortion of competition. An agreement will not be prohibited unless its effect on competition is ‘appreciable’. This is normally based on the size of the parties’ respective market share. However, price fixing and other serious restrictions on competition can have an appreciable effect whatever the market share. Identifying the applicable market is a complex task involving an assessment of the affected products and the geographic market. Guidance produced by the OFT (now the Competition and Markets Authority) gives a number of examples of land agreements which are at risk of falling within the prohibition (depending on the relevant market) including:

 

  • Agreements that give exclusivity or protection from competition. For example, the landlord of a shopping centre gives one tenant the exclusive right to operate a coffee shop in the centre.
  • Agreements that restrict the commercial freedom of a trading partner. For example, beer ties on a pub.
  • Agreements that raise barriers to entry for potential competitors in the relevant market. Restrictive covenants may have that effect.

 

Are there any exemptions?

 

In many cases land agreements which would otherwise be anti-competitive can benefit from an exemption. However, to be exempt the agreement must satisfy all of the following conditions:

 

  1. It must contribute to improving production or distribution or to promoting technical or economic progress;
  2. It must allow consumers a fair share of the resulting benefits;
  3. It must impose no restriction beyond those indispensable to achieving those objectives; and
  4. It must not make it possible to eliminate competition over a substantial part of the products in question.

 

Take, for example, an agreement with an anchor tenant giving exclusivity in a new shopping centre. Without that anchor tenant the centre would not be built, it would not be viable. Although the agreement may be anti-competitive, if the creation of the shopping centre contributes to economic progress, gives consumers more choice, imposes no restrictions beyond those that are indispensable to these aims, and does not eliminate competition, it will be exempt.

 

Facts of the case

 

In the recent case, the tenant wished to extend the user clause in its lease to enable it to operate a convenience store. The local authority landlord wanted the store to remain solely as a newsagents and proposed a user clause in the renewal lease which prevented the tenant from selling convenience goods.

 

Findings of the Court

 

The Court found that the user clause contained an unlawful restriction of competition. The landlord argued that the user clause was justified as it preserved the diversity of types of shops for the benefit of the community in the relevant locality. However, the Court found that the landlord had failed to establish that the restriction satisfied the four conditions in order to benefit from the exemption.

 

In reaching its conclusion, the Court stated that it was not satisfied by the landlord’s argument and in particular it did not consider that the landlord had adduced sufficient evidence to support its case.

 

Conclusion

 

The outcome of this case is undoubtedly highly fact-sensitive. Nonetheless, the issues raised by this case are likely to be of concern to local authorities and other landlords who grant retail leases and who are keen to preserve a tenant mix whilst avoiding falling foul of competition law.

 

In reaching its conclusion in this recent case, the Court stated that it was not satisfied by the landlord’s argument and in particular it did not consider that the landlord had adduced sufficient evidence to support its case. This demonstrates the importance of landlords ensuring that they not only satisfy all four of the criteria for the exemption to apply but that they also hold sufficient evidence to demonstrate the fulfilment of those criteria.

 

Going forward, landlords should approach exclusivity clauses and restrictive covenants with caution and should seek advice if they are concerned that the provisions risk being anti-competitive.