Age of prohibition
Date: 04 June 2010
Authors: Malcolm Dowden & Saira Malik
Issue: Vol 160, Issue 7420
Categories: Features, LexisPSL
The Land Agreements Exclusion and Revocation Order 2004, which excluded land agreements from the operation of the Competition Act 1998, has been revoked subject to a transitional period up to 6 April 2011 to allow businesses to review their land agreements for compliance with competition laws.
The exclusion for land agreements.
The 1998 Act prohibits:
- anti-competitive agreements (Ch 1); and
- abuse of a dominant market position (Ch 2).
Agreements were excluded from the Ch 1 prohibition to the extent that they create, alter, transfer or terminate an interest in land on the grounds that they were unlikely to have an adverse effect on competition.
However, the Competition Commission’s April 2008 report on grocery retailing concluded that exclusivity arrangements and restrictive covenants (especially by the major grocery retailers) can create:
- challenges for new entrants; and
- difficulties for existing competitors intending to expand.
It concluded that the exclusion for land agreements entered into by those major grocery retailers is no longer necessary or justified. Government went further, and removed exemption from all land agreements, including those already in place.
Land agreement provisions likely to breach Ch 1 prohibition
Restrictions in leases may not be compatible with Ch 1, particularly covenants limiting:
- the landlord’s ability to let other units to competitors of the tenant, eg in a shopping centre lease the anchor tenant may insist on such a provision to prevent its rivals from opening in the centre); or
- the types of activities a tenant may carry out on the property to protect the landlord or other tenants from direct competition.
Restrictions on a sale could also be incompatible with Ch 1, including those which limit:
- a buyer’s use of the property; or
- a seller’s ability to sell any of its neighbouring property to the buyer’s competitors.
Exclusivity periods in property contracts, eg where a seller agrees with a potential buyer not to negotiate with anyone else for a specific time period) are unlikely to be caught, unless the period appears excessive.
Ch 1 prohibition test
For an agreement to be anti-competitive it must have an appreciable effect on competition. The test is the economic and commercial effect of a provision. The OFT considers parties with market shares below a certain threshold (broadly 10—15%) as outside the ambit of the Ch 1 prohibition.
The first step is to define the relevant market to assess the market share. A market is defined by product and geographical area. In practice, it is unlikely that a geographical market will be defined as narrowly as a single shopping centre, retail park or town centre. Market analysis takes into account factors such as “drive time” and fascia counts (the presence of viable competitors) within a geographically and sociologically cogent area. The risk is diminished further considering the diversity of commercial land ownership in the UK.
Even where a provision is subject to Ch 1, it may still be treated as exempt if it is reasonable and brings economic and consumer benefits (eg a restriction in a shopping centre lease necessary to attract an anchor tenant without whom the centre would not be viable).
Next steps
The revocation seems to be designed to catch practices such as land-banking by large supermarkets. It is not expected to impact on provisions in normal commercial property documentation, such as exclusivity clauses in retail leases.
Due diligence should now include:
- checking land agreements for potential breaches of the Competition Act; and
- warranties against any liabilities that arise from possible breaches.
However, the practical impact on existing agreements and the risk of infringement should not be overstated. While all land agreements are potentially affected, only a minority will have a significant enough impact on competition and consumers’ interests.
Share this page
