Anchor tenants welcome clarification from the Supreme Court on whether restrictive covenants “restrain trade”
27 August 2020
Last week the Supreme Court handed down its judgment in a case which had its origins in what the court dubbed the “economic and political wasteland” that was 1970's Derry/Londonderry. Quite apart from the local connection, the case is worth noting because of its repercussions, particularly for shopping centre anchor tenants and their landlords.
The case centred on the Dunnes Stores unit at the Springtown Centre in Derry/Londonderry. In 1981 the original developer of that centre had persuaded Dunnes to be its anchor tenant, on the understanding that he would not allow any other units of over 3,000 square feet to be built on the site selling food or textiles. Latterly the centre had been in decline; the current owner blamed this covenant and sought to resile from it, claiming that it was unenforceable as an unreasonable restraint of trade.
The Supreme Court noted the uncertainty surrounding how the “restraint of trade” doctrine applied to restrictive covenants imposed in property transactions. Departing from a previous much-criticised decision, it ruled that the doctrine should not apply to restrictions which had “passed into the accepted and normal currency of commercial or contractual or conveyancing relations” i.e restrictions which were market norms. This is the so-called “trading society” test: if a particular form of restriction is part of the accepted machinery of a type of transaction generally found acceptable and necessary – “moulded under the pressures of negotiation, competition and public opinion” – then it may be said to have been accepted as part of the structure of a “trading society”. As such it can be considered to have satisfied the test of public policy as understood at that time and ought not to be impugned as a restraint of trade.
The court found that the restriction which the Springtown owner had accepted was just such a normal restriction, there was unchallenged evidence of not infrequent use of such covenants in favour of anchor tenants, so the covenant remained enforceable by Dunnes.
Significantly, the court acknowledged that the “trading society” test was not a static one and that, in some cases, social change might precipitate a change in public policy and result in a finding that, while a particular restriction had not originally engaged the doctrine of restraint of trade, at some point in the interim it had begun to engage it, and had thereby become assailable. In Dunnes’ case, however, the court considered there was no evidence of any such social change.
Particularly in the current climate, this decision will be welcomed by anchor tenants who have the benefit of similar restrictions: they should be more confident of being able to enforce those restrictions, provided they are still in line with market norms. Landlords who might previously have risked ignoring such covenants to fill their empty units may need to reconsider and perhaps offer better lease terms to an anchor tenant in exchange for their agreeing to waive these covenants.
That said, restrictive covenants may still be attacked on the basis that they infringe the Competition Act 1998. Apparently the Springtown owner withdrew its initial claim that the restriction infringed the 1998 Act, so that avenue of challenge was not addressed by the Supreme Court. Restrictive covenants which have an appreciable negative effect on competition (and which do not fall into one of the statutory exemptions) will still be illegal and void under the 1998 Act, but whether their effect is appreciable will depend on a number of factors, notably the market power of the tenant in question.
It should also be recalled that, where any of the “Big 7” supermarkets are involved, the provisions of the Controlled Land Order 2010 will still apply to prohibit certain covenants and exclusivity clauses which restrict grocery sales.
Finally, the Supreme Court made much of the fact that the Springtown owner could still pursue its application to the Lands Tribunal to have the covenant modified or discharged under the Property (NI) Order 1978. Where a landlord has granted normal exclusivity to an ailing anchor tenant, and that tenant is neither a “Big 7” supermarket nor of sufficient market power to render the restriction anti-competitive, the landlord may find he must either negotiate terms with the tenant for the release of the covenant or apply for modification or discharge of the covenant under the 1978 Order and take his chances before the Lands Tribunal.
For further information please contact the Real Estate team at Carson McDowell.
*Please note that this information is for guidance purposes only and does not constitute, nor should be regarded as, a substitute for taking legal advice that is tailored to your particular circumstances.