Australia: Could your permitted use covenants in your lease agreements breach competition laws?

Last Updated: 29 January 2015
Article by Michael Sutton
Focus: The enforceability of "permitted use" clauses
Services: Property & projects
Industry Focus: Property

Have you stopped to consider the enforceability of "permitted use" clauses in your lease agreements from the perspective of Australian competition laws?

A recent decision of the English Courts1 (the Martin Case) serves as a reminder not to take the enforceability of permitted use clauses for granted.

Previous leasing updates have considered the importance of both considering whether a permitted use is intended to be an "exclusive use" and the scope of the definition of permitted use. This update considers the impact of the Competition and Consumer Act 2010 (Cth) (the CCA) on commercial leases.

The Martin Case

The Martin Case was the first reported decision of an English court deciding that a permitted use clause was unenforceable because it breached competition laws.

The case involved a newsagency in a small strip of retail stores that contained a specifically chosen mix of businesses. The newsagency's lease specified the permitted use as a newsagency.

When the newsagent's owner exercised the right to renew the lease, he wanted the permitted use to be expanded to allow for use of the store as a convenience store. The landlord rejected this request.

Without going into the intricacies of English competition law, the court held that a clause restricting the tenant's use to a newsagency was anti-competitive and, therefore, unenforceable. The UK Competition Act 1998 does not permit agreements that "have as their object or effect the prevention, restriction or distortion of competition".

When considering the impact on competition, the court took a narrow view of the geographical scope of the market for "convenience goods", and judged it to be a "relatively short walking distance". The strip of shops already contained a small supermarket, and the next nearest convenience store was about a kilometre away, so this continuing restraint effectively provided the supermarket operator with a monopoly over convenience-type products.

Australian competition law

We are not aware of any reported case in Australia where a permitted use clause has been challenged in the manner of the Martin Case, but this does not mean that a challenge is not possible.

In Australia, under s45B of the CCA, a covenant:

"is unenforceable in so far as it confers rights or benefits or imposes duties or obligations on a corporation ...if the covenant has, or is likely to have, the effect of substantially lessening competition in any market in which the or acquires, or is likely to supply or acquire, goods or services or would, but for the covenant, supply or acquire, or be likely to supply or acquire, goods or services."

It is also an offence under the CCA to require the giving of such a covenant.

Australian courts have the scope to impose significant fines on businesses and individuals that breach the CCA.

Each time a permitted use provision is included in a lease, or an attempt is made to enforce any permitted use provision, it is important to consider the likely effect on competition.

Definitive analysis on this type of issue is rarely simple, but it is often possible to undertake a rough evaluation for the purpose of assessing the risks that may arise from the permitted use covenant.

Much depends upon the identification and definition of the relevant market(s). The smaller or narrower the market, the greater the effect a restrictive permitted use covenant would be likely to have on competition in that market.

For example, if a permitted use restriction of the kind in the Martin Case was required of a tenant in a central Sydney suburb, it would, in itself, be unlikely to have the effect of substantially lessening competition in breach of the CCA. "Convenience goods" can generally be purchased in a variety of nearby locations. If not in the particular strip of retailers which includes the subject retailer, then likely in a strip close by.

However, if you took the other extreme, a small town in remote outback Australia, where there is only one main strip of shops, then this type of restriction would be far more likely to have the effect of substantially lessening competition. A supermarket operator on such a strip would have a monopoly over "convenience goods" if another store was not permitted to also sell those types of products.

Of course, in practice, it is rarely that simple, or clear. There are plenty of areas with less retail density than central Sydney, but more than outback Australia.

If this is a real issue or there are specific concerns about the scope of a permitted use covenant in a particular area, a landlord can always apply to the ACCC for an authorisation of that conduct, prior to entering into the arrangement. It may be that the permitted use covenant might ultimately be pro-competitive, or have some other significant public benefit that outweighs any anti-competitive detriment. A successful application would provide the landlord with the comfort of certainty and enforceability. However, the authorisation process is rigorous, lengthy and (typically) relatively expensive, but it may be warranted where the permitted use covenant is of real importance to the landlord.

Take, for example, a remote town, with only a small retail area. Perhaps the only incentive for a large hardware store with a comprehensive range of products to open in that town would be the assurance of some form of exclusivity in the shopping centre. Would this be likely to substantially lessen competition? In some circumstances, perhaps. However, the benefit to the town of having access to the larger range of products than could otherwise be supplied could outweigh the lessening of competition.

Take away

In the Martin Case, the court took a very narrow view of the geographical scope of the market for "convenience goods". It remains to be seen whether the Martin Case will give rise to a string of copycat actions in Australia, and whether Australian courts would take such a narrow view of the market.

Landlords should remain aware of the possibility that an Australian court could take a similar view when assessing whether a permitted use covenant "has, or is likely to have, the effect of substantially lessening competition". This is particularly the case in regional and more remote areas. The more geographically isolated the relevant market and the more restrictive a permitted use clause is, the more likely that clause is to be unenforceable under the CCA if challenged.

Tenants may well be buoyed by the decision in the Martin Case, so now would be a good time for landlords to review the permitted use covenants they use and the circumstances in which they are applied, to consider just how enforceable they might be.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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