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Land and the open market

18 April 11

Property lawyers with business clients now have to be alive to competition law issues when concluding any agreements relating to land - and assess their effects on agreements already in force

by Catriona Munro

Competition law prohibits agreements and conduct which restrict competition. In a sense, property ownership does just that: it grants an exclusive right to occupy or use a particular piece of land, to the exclusion of others. Ever since the UK’s Competition Act came into force in 2000, land agreements have been excluded from its application. However, that changed on 6 April 2011, from which date competition law applies to land agreements in just the same way as to any other agreement.

The rules previously applicable meant that it was automatically permissible under the UK’s Competition Act to restrict a tenant of a unit in a shopping centre to selling only, for example, shoes, and for the landlord to agree not to allow other premises in the development to sell shoes. From 6 April, this formal, automatic protection will cease, and the effect of UK competition law on the lease will depend on its effect on competition.

It should be noted that hardcore restrictions such as price fixing and market sharing have never benefited from the exclusion order. So, for instance, restrictions that fix minimum resale prices for the goods the tenant sells, or oblige a tenant to purchase goods or services from a specified supplier, are not restrictions which relate to the land and so have always been subject to the Competition Act’s prohibitions.

It is also worth remembering that EU competition law, which also applies in the UK where an agreement affects trade between EU member states, has never included such an exclusion, and would already require analysis of the competitive effects. However, it is generally assumed that, given the local nature of most land agreements, EU law will not apply.

Land can be an important “input” to a related market where goods or services are being provided and so has the potential to restrict competition in such related markets. This can be the case particularly where the parties are competitors in a relevant market and restrict the use of land in such a way as to share or carve up markets between themselves, or where a company with strength in one market makes access to a related market more difficult. Longstanding case law at EU level illustrates these principles. For instance, in the Holyhead case (B & I Line plc v Sealink Harbours Ltd (IV/34.174) [1992] 5 CMLR 255) the European Commission (EC) found that a ferry and port operator had abused its dominance by permitting access to the port to a competing ferry operator on terms which were less favourable than those granted to its own ferry services. Why then, should access to development land be any different?

The question many property lawyers will be asking themselves is what difference, in practice, will the new, tougher regime actually make? Recent guidance from the Office of Fair Trading (OFT) gives a helpful steer for businesses and their lawyers when they come to apply the new law.

What will the new regime capture?

So, when can competition law apply? Of course, it is normally the most blatant forms of price fixing and market sharing cartels that hit the news headlines beyond the specialist competition law press. Were two landlords to agree not to charge below £x in rent or not to impinge on one another’s geographic patch or client base, these arrangements would be illegal and potentially criminal, even before the exclusion is repealed. The repeal, however, may affect commercial agreements of a much less blatantly anti-competitive nature.

There are two main types of prohibition under UK competition law – the prohibition on anti-competitive agreements and the prohibition on abuse of dominance. The Chapter I prohibition applies to agreements and concerted practices by two or more undertakings. So, an agreement would include for instance a lease, a transfer of freehold interests, an assignment of leasehold interest or a licence agreement. The law applies only to agreements made between “undertakings”, essentially businesses and also individuals acting in a business capacity. Therefore, agreements made in a private capacity between individuals will not fall within its scope. Unilateral action, i.e. action taken by an undertaking without any agreement or concert with another undertaking, does not fall within the Chapter I prohibition.

However, an undertaking in a dominant position may by unilateral conduct infringe the Chapter II prohibition. In order to establish a breach of Chapter II, it must be shown that the undertaking both has a dominant position and has abused it. Dominance can exist in narrow product or geographic markets. So, one might envisage a situation very similar to the Holyhead case outlined above, where a landlord in a shopping centre for which there is no realistic alternative is also a retailer in the centre and refuses to grant a lease to a competitor. This could, in principle, amount to an abuse of dominance, since the landlord uses its dominance on the market for the letting of land in the centre to abuse its position on the downstream retailing market by denying a lease to a competitor in that market.

Restrictive land agreements will breach the Chapter I prohibition only where they have an “appreciable” effect on competition in the relevant market. An examination of an agreement’s effect requires an evaluation of its actual impact on competition in the particular circumstances of the agreement, taking into account the products concerned and the geographic locality. A restrictive agreement that has an effect in a very small geographic area can be caught by the Chapter I prohibition if that area amounts to a distinct geographic market. Depending on the particular circumstances, the relevant market could, for example, extend to a single shopping development, or a wider area covering other shopping developments in the locality. Generally, at combined market shares of below 10% if the agreement is between competitors, and 15% if the agreement is between non-competitors, it will be regarded as unlikely to affect competition (but note that these de minimis thresholds do not apply to market sharing or price fixing agreements).

If an agreement falls within the scope of the Chapter I prohibition, it may still be lawful if on balance it is more pro- than anti-competitive in its effects. If an agreement which, at first blush, restricts competition, is in fact overall beneficial to competition, then it will be permitted.

What will this mean in practice?

From 6 April, anti-competitive provisions within land agreements will be treated in just the same way as any other agreement: they will be illegal and unenforceable if, taken in the round, they restrict or distort competition to an appreciable extent and are not justified by the pro-competitive effects. If the restrictive provision cannot be severed from the rest of the agreement, the whole agreement will be void and unenforceable. In some cases, even where it is possible to sever the anti-competitive provision from the remainder of the agreement, the arrangement will be rendered meaningless and commercially unviable or, at least, less attractive than when first negotiated.

Unenforceability of agreements, while perhaps the most likely consequence of the revocation of the exclusion, is only one possible repercussion (and certainly not the most worrying) that companies and individuals may face as a result of their agreements falling foul of competition law. Companies may in principle face fines of up to 10% of their annual global turnover, follow-on damages claims from private parties who have suffered as a result of an infringement, and the possibility of time-consuming and costly, both in terms of financial loss and reputational damage, investigations from the OFT and Competition Commission. Where individuals are implicated in the context of more serious infringements of competition law (where there is market sharing or price fixing, for example where landlords agree not to charge below a certain rental level), disqualification orders disallowing individuals from acting as company directors, and even jail terms, can be imposed.

Importantly, the new regime could affect large and small landlords and tenants alike. It is not only the strength of the parties which determines whether a restriction will have an appreciable impact on competition, but rather its effect on the particular markets in which the parties operate.

Some practical examples

But what does this mean for the owner of a shopping centre, looking to achieve an attractive mix of outlets? Take a city centre mall, in which the developer is keen to secure a flagship tenant to attract other tenants and customers. To seal the deal, the developer may wish to agree exclusivity with the department store, so that no other department stores will be able to rent a unit in the mall. While this may appear to restrict competition, if the arrangement enables the development of the shopping centre, results in benefits to consumers, and competition is provided via alternative sites in the city centre area, it is likely that it would be allowed, even under the new regime. The difference is that it will now be necessary, as a matter of course, to consider the competition implications.

By contrast, consider the situation where a café outlet agrees to pay higher rent to the developer of an out-of-town retail park, in exchange for a guarantee that no other café will be granted a lease in the park. This is far more likely to be problematic from a competition law perspective. The assessment for landlords and tenants alike is all about degree: what is the market; is there scope for competition from elsewhere; is the arrangement more restrictive than necessary?

A restriction preventing noisy activities, which could interfere with performances from taking place on land adjacent to a theatre, is not likely to infringe competition law. Similarly, a landlord letting office space can normally safely agree with each lessee in the development that all the space will be let as offices.

Likewise, where a housing developer has planning permission for, say, 300 houses, and chooses to build on only part of the site and sell the rest on to other developers, restricting the number of houses that can be built on the plots it sells on would be unlikely to infringe competition law.

Following the Competition Commission’s report on the inquiry into groceries in 2008, it raised the question of whether the exclusion was still merited, observing that it was anomalous. As a result, major supermarkets are now subject to an even more onerous legal regime, where their ability to enforce restrictive covenants and exclusivity arrangements is restricted. With respect to restrictive covenants, the OFT will look at whether there is sufficient competition before deciding whether a restriction is enforceable. A restriction will not be enforceable if there are fewer than three competing outlets within a 10 minute drive and the market share of the retailer benefiting from the restriction in question is 60% or more, within the same area. With regard to new exclusivity arrangements, the major supermarkets will only be permitted to enforce such agreements for five years following the opening of the store concerned.

What does this mean for companies?

The applicability of competition law to land agreements means that companies will be required to self-assess their land agreements. Significantly, as competition law concerns the effects of a particular provision on competition and not the form of the agreement, it will not be possible for companies simply to “draft around” this issue. The new regime will apply equally to both new and existing agreements, and all will need to be assessed for any anti-competitive effects, and modified to remedy any potentially infringing provisions.

The thought process of considering whether the arrangement could be anti-competitive, when entering into a commercial tenancy as landlord or tenant, may initially seem unfamiliar to the property world. However, with the possible risks involved, it has to become second nature.

Catriona Munro is a partner in the EU, Competition & Regulatory Team at Maclay Murray & Spens LLP
 

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