Are your land agreements anti-competitive?

If your land agreements have not been reviewed and updated since April 2011, Susannah Sheppard outlines why they may no longer comply with competition law.

Until April 2011, UK land agreements enjoyed a wide exemption from the application of UK competition law. Unless your land agreements have been reviewed since then, they may include a number of provisions and restrictions which are no longer enforceable and which could even give rise to fines.

Competition law specialist, Susannah Sheppard, highlights why you may need to review some provisions relating to:

• Exclusivity arrangements
• Leasehold use restrictions
• Restrictive covenants
• Supply agreements tied to a lease
• Upward-only rent reviews.

The change in the law also presents an opportunity for businesses or individuals which are subject to anti-competitive restrictions to challenge those restrictions and even possibly claim damages for losses suffered as a result of them.

There are two basic prohibitions under the Competition Act 1998, which are similar to the prohibitions under EU competition law, namely the Chapter 1 and Chapter 2 prohibitions:

• The Chapter 1 prohibition prevents businesses or other undertakings from entering into agreements which have the effect of appreciably preventing, distorting or restricting competition, unless the benefits outweigh the agreement’s anti-competitive effects;
• The Chapter 2 prohibition prevents businesses or other undertakings in a dominant market position from abusing that position by practices such as tying or bundling its goods or services, entering into exclusive or restrictive arrangements with suppliers or customers or creating loyalty discount schemes which have the effect of limiting or excluding market access or penetration by competitors.

Breaches of competition law can result in serious consequences for those involved, including fines of up to 10% of a company’s turnover, unenforceability of the agreement or restriction in question and disqualification of directors.In relation to very serious breaches, such as price fixing and market sharing (cartels) or bid-rigging, offenders may face criminal sanctions.

Other than in relation to the hard core practices such as price or market fixing, bid rigging and resale price maintenance, competition law is normally not a "clear cut" area of law to analyse and enforce. This is because, the restrictions need to have an "appreciable" effect on competition and even if they do, in relation to the Chapter 1 prohibition, a balancing exercise has to be undertaken in order to assess whether the benefits of the agreement outweigh its anti-competitive effects.

The following types of restrictions may need to be reviewed to check compliance with competition law.

Exclusivity arrangements

It may be anti-competitive to prevent other companies from establishing businesses in the vicinity of existing competitors. This could be achieved by a clause in a leasehold agreement which prevents the land owner from leasing land to a competitor of its tenant.

For example, a shopping centre might grant an exclusive right to a national pharmacist in the centre which would prevent any independent pharmacists from opening up in the retail outlet. There may be pro-competitive anchor tenant arguments in support of such a restriction if the landlord were able to show that the national brand pharmacist generated a footfall to the shopping centre that ensured its viability, but this would have to be assessed on a case by case basis.

Leasehold use restrictions

Sometimes landlords specify the permitted use for land or property or, conversely they specify uses that are not permitted. Many times these clauses will not give rise to competition law problems, but in some cases, they may, such as where the landlord himself is involved in the business which the tenant is being prohibited from undertaking.

For example, where a landlord owns a number of restaurants in a local area and restricts his tenants from opening up any competing restaurants.

Restrictive covenants

Many restrictive covenants on the sale of a freehold interest in land are done for the benefit of another party’s land, such as a right to light, access or water. But if a restrictive covenant were to be imposed in order to protect the vendor from subsequent owners of the land competing with the vendor in another business market, this could distort competition in the location concerned. This would be particularly the case if there were few alternatives available.

For example, if in a local area there was only one convenience store and the owner of the convenience store owned other retail premises in the area but included restrictive covenants in all sales of premises to ensure that no one could set up a competing convenience store, this might raise competition law issues.

Supply agreements tied to a lease

Leases which oblige the tenant to purchase goods or services from a supplier nominated by the landlord might give rise to competition law issues. This could include goods and services such as cleaning, maintenance, insurance and food and drink, common examples of the latter include beer, spirits and snacks supplied as part of ‘tied’ brewery or pub chain agreements.

The problem of beer tied agreements was looked into by the Monopolies and Mergers Commission in 1989, resulting in the Beer Orders which led to the sale of about 11,000 pubs as well as opening up the supply of independent beer to tied pubs through "guest beer" agreements. The outcome was based on a finding that there was insufficient competition in the market so that smaller brewers were unable to get undistorted access to then on-trade beer market and this resulted in higher prices and lower choice for consumers.

These orders were later repealed by the OFT in 2000, because, following a review of their effect, it was found that the beer and pub market had become sufficiently competitive. However, the issues that the OFT assessed in looking at beer ties could apply in other markets if there were insufficient competition in a market so that a leaseholder had little choice but to accept a tie which resulted in higher prices and/or limited choices for consumers.

Upward-only rent reviews

Upward-only rent review clauses (UORRs) appear to be common place in many commercial leasehold agreements. However, there are some interesting points to consider in relation to UORRs and circumstances where they may give rise to potential distortions of competition.

Firstly, as a general rule, resale price maintenance (RPM) is prohibited under competition law. RPM is effectively a requirement placed on a reseller of a good or service to agree a resale price with its supplier in relation to the price charged to a down downstream customer. Resale price maintenance also involves a requirement to resell a good or service at a minimum price.

Where UORRs are imposed as a result of a head lease on a leaseholder and subsequently by them on a sub-lessee, the chain of pricing control has some analogy with RPM in that it creates a minimum resale price.

Secondly, there have been a number of criticisms and challenges to UORRs clauses. Legislation to abolish UORRs in Ireland which was claimed to be unfair as it supported rent levels that were set in times when the commercial rent market was far more buoyant than is currently the case was recently abandoned but only amid much criticism of the Irish Government. OURRs have also been considered by the OFT in the context of an investigation into pub ties and by the House of Commons’ ‘Pub Companies’ Report of 2009 and, particularly, in the latter report, concerns about their fairness were raised:

"The House Trade and Industry Committee recommended that upward only rent review (UORR) clauses should be abolished. This appears to be the case for new leases, and the pubcos have assured us that where such clauses remain in existing leases, they will not be enforced."

So far, there has not been a decision that an UORR breaches UK competition law. However, it appears that the only occasions on which such clauses have been reviewed by a UK regulatory or legislative body have been when the land agreements exclusion has been in place. Thus, any consideration of the fairness of such clauses has not been undertaken as a Chapter 1 or 2 assessment, but as mentioned above only in the context of a market review or a by the House of Commons Committee referred to above.

If UORR clauses are operating in such a way as to provide minimum benchmarks for rents in circumstances where the market price for commercial leases has fallen, there may indeed be merit in considering their application under competition law.

Any such competition issues are more likely to arise if the clauses are part of a network of agreements (such as was the case with the pub agreements) or where the clauses have been applied uniformly in a market as a result of a recommendation to use a standard agreement or clause proposed by a single organisation, undertaking or group of undertakings.

For further information on this subject or any other question concerning UK or EU competition law, please contact: Susannah Sheppard, Consultant Solicitor, Keystone Law susannah.sheppard@keystonelaw.co.uk

This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date this article was published.