Building competition

The commercial property sector is about to be exposed to the full force of the Competition Act 1998. Michael Grenfell examines the implications

The UK’s commercial property ­sector is about to be fully exposed to UK competition law for the first time. The ­Government has announced the revocation this month of an ’exclusion’ that has protected most ’land agreements’ from the prohibition on anticompetitive agreements in the Competition Act 1998.

Under the new rules land agreements will be subject to the full force of UK ­competition law, just like any other sector of the economy. The rules prohibit ­agreements (whether or not legally ­binding) that appreciably restrict competition. They apply only to agreements between businesses, so they primarily affect commercial property contracts.

There will be a one-year transitional period, until 6 April 2011, before the new rules take effect. However, they will apply retroactively to pre-existing agreements. Companies will therefore have to use this transitional year to review their current land agreements to ensure they are ­compliant with competition law.

Affected provisions

The prohibition on anticompetitive ­agreements applies to those covenants or clauses that restrict competition in the ­production or sale of goods and ­services. Provisions most likely to be affected include:

covenants in a shop, office or factory lease limiting the type of commercial activity that the term may undertake;
restrictions in a lease, for example in a shopping centre, that limit the landlord’s freedom to let other premises or outlets to competitors of the tenant;
restrictions on competition affecting retail outlets, restaurants or refreshment kiosks at sporting venues and events sites, including those in connection with the London Olympics;
restrictions accepted by a vendor of property not to sell adjacent property to any competitor of the buyer; and
restrictions in a lease requiring the tenant to obtain certain goods or services, such as insurance or cleaning services, exclusively from one supplier (this last category never benefited from the exclusion and has been prohibited all along).

No escape

Provisions in a contract that breach the prohibition are automatically void and unenforceable. Whether or not the ­voidness ’taints’ the entire agreement depends on normal English contract law rules of ’severance’.

In addition, third ­parties adversely affected by the unlawful provision, such as excluded competitors, may sue for ­injunctive relief and/or damages. ­Separately, the UK’s competition ­authority, the OFT, may order termination or ­modification of the ­provision (and, in the most serious cases, may impose substantial fines on the parties).

Restrictively speaking

Restrictive provisions in property ­contracts will now need to be assessed by the parties and their advisers to ensure they are ­compliant. Not every restrictive covenant or provision will be caught. The parties must consider whether competition in goods and services is really restricted. Competition law is not concerned with the legal wording of a provision, but its ­economic and ­commercial effect, which must be assessed with regard to the actual ­circumstances of the arrangement, the ­relevant goods or ­services and the locality. For example, if shopping centre restrictions ­provide that only one department store will be allowed in the shopping centre, the ­assessment may depend on whether the department store in fact faces competition from other ­department stores that are ­outside the ­shopping centre but nevertheless regarded by shoppers as realistic ­alternatives.

Agreements where the parties are below certain market share thresholds (10-15 per cent) will normally be treated as de minimis, and therefore outside the ambit of the ­prohibition. The calculation of market share depends on defining the relevant market – for shopping centre restrictions, for example, is it just the centre itself, or does it encompass other retailers nearby?

Even restrictive provisions within the ambit of the prohibition may be treated as ’exempt’ where (broadly) the restriction brings economic and consumer benefits. For example, shopping centre restrictions may be exempt if they are indispensable to attracting an anchor tenant and, without that anchor tenant, the shopping centre (bringing benefits to consumers and the economy) would not have been built. To be exempt the restriction must be no wider than ’indispensable’. The Netherlands, for instance, enforces a six-year limit on ­shopping mall exclusivity.

The OFT is preparing guidance on how the new rules will apply to the commercial property sector. Meanwhile, property ­owners and tenants will need to take advice on whether their existing contracts and ­standard terms are compliant. ­Prospective investors and acquirers of property ­portfolios will need to include, in due ­diligence, checks for potentially unlawful restrictions.

Michael Grenfell is a competition partner at Norton Rose