Competition Law Update: Use Restriction in Lease Held to Breach Competition Law
05 June 2014
Practice Area: EU and Competition
The Central London County Court has held that a permitted use restriction in a lease breaches competition law and is therefore void and unenforceable.
The Competition Act 1998 prohibits agreements which have as their object or effect the prevention, restriction or distortion of competition within the UK (Chapter 1 prohibition). Agreements which meet certain criteria can benefit from an exemption from the Chapter 1 prohibition. These are that the agreement must:
- contribute to improving production or distribution, or to promoting technical or economic progress (efficiency gains);
- allow consumers a fair share of the resulting benefits;
- not impose restrictions beyond those indispensable to achieving those objectives; and
- not afford the parties the possibility of eliminating competition in respect of a substantial part of the products in question.
Any restriction which breaches the Chapter 1 prohibition and which does not benefit from an exemption is void and unenforceable. Further, if the restriction cannot be severed from the agreement without modifying the rest of the agreement or distorting the commercial agreement between the parties, then the entire agreement is void and unenforceable. The parties may also be subject to fines and private damages actions.
Since 6 April 2011, land agreements have been subject to competition law in the same way as other types of agreement. The Office of Fair Trading (OFT) has published detailed guidance on the application of competition law to land agreements. The Competition & Markets Authority (CMA), which has replaced the OFT from April 2014, has adopted this guidance.
On expiry of a 10 year lease, the tenant, Martin Retail Group Limited, sought to extend the permitted use of retail premises on a parade of shops in a housing estate to enable it to sell groceries. The landlord, Crawley Borough Council (Council), opposed this extension by arguing that each of the shops should have a different use.
The lease forms part of a “letting scheme” run by the Council covering a parade of shops within a residential area. Each lease has the effect of restricting the user of the relevant premises to a particular trade or business. There was already a grocery store on the parade.
The Council conceded that the use restriction could have the effect of restricting competition in the sale of convenience goods on the parade. The County Court considered whether the restriction could benefit from an exemption from the Chapter 1 prohibition. It concluded that the Council had not provided sufficient evidence to prove that the conditions for exemption were satisfied.
Specifically, the judge applied the CMA guidance and held that:
- the Council had not provided evidence to prove that efficiency benefits derive from ensuring that there are a range of different retailers, rather than a supermarket or a number of similar retailers;
- an increase in the range of goods available might provide consumers with a fair share of the benefits but there was unlikely to be a price benefit;
- the Council had not provided sufficient evidence to support the argument that the restrictions are necessary to the letting scheme and that, without them, small shops would not come to the parade. The judge also considered that a mix of retailers can be achieved by using less restrictive covenants;
- the proposed user clause provided a means of eliminating competition in convenience goods on the parade and within a relatively short walking distance. However, the judge noted that, if the relevant market was geographically larger, then there would be no such possibility of elimination.
The judgment contains no analysis of anti-competitive effects of the proposed user clause and the letting scheme as a whole as the Council conceded that there could be an anti-competitive restriction on a narrow market definition. In addition, the main reason why the use restriction was not held to benefit from an exemption seemed to be due to a lack of reliable evidence.
A key issue in the case was that the parade of shops comprised the only retail premises within the estate and that the nearest rival convenience stores were 1000-1500 metres away. The judge believed that customers would be reluctant to walk further than a short distance to buy consumer items.
The judgment is likely to be of interest to landlords and retail tenants, particularly given the lack of case law in this area to date. The case is a timely reminder of the importance of ensuring that all land agreements are assessed for their compliance with competition law.
Martin Retail Group Limited v Crawley Borough Council, judgment of Central London County Court, 24 December 2013.
If you would like to discuss this article or if you have any other queries about competition law, please contact Dorit McCann.