UK: A Competition Review of Your Property Agreements is Required

Last Updated: 21 July 2010

Article by Gary Bownes , Kiran S. Desai , Nick Marshall and Gillian Sproul

Originally published 14 July 2010

Keywords: competition review, property agreements, freehold, leasehold, rental agreements, land use restrictions,

Companies with property interests, particularly those that have a portfolio of property interests, including freehold, leasehold or rental agreements, in which there are restrictions or obligations on one of the parties as to the use of the property, should review their agreements. This is because from 6 April 2011 any land use restrictions or obligations will no longer benefit from an automatic exemption from the prohibition in the Competition Act 1998 of anti-competitive agreements1. This new regime will apply to all new and existing agreements from that date. Many retail chains, for example, seek such land use restrictions in order to prevent competitors from being established in the vicinity of the shopping complexes in which they are present, and many landlords accept non-competitor obligations in order to secure anchor tenants in their developments.

As the UK government's impact assessment in relation to revoking the exemption identifies, in a somewhat understated manner, revocation of the exemption "may require a large number of parties to undertake a certain amount of work to assess whether or not their agreements have any substantive effects on the market". Not every land agreement in which there are restrictions will call for a material review, and the review process will be facilitated by guidelines to be issued by the UK's competition authority that has responsibility for such agreements, the Office of Fair Trading (the "OFT"). The OFT currently plans to issue draft guidelines for public consultation in September or October 2010.

  • Do the New Rules Only Apply to Restrictions on Use?
    • Any provision that is anti-competitive should be reviewed. Unfortunately, a provision that may not be anti-competitive for one agreement, can be anti-competitive for a different agreement because of the factual differences relevant to the review of the two agreements. In addition, a provision that is not on its face anti-competitive might be. For example, a provision in a lease agreement with a fine dining restaurant that is intended as a quality threshold, in which the landlord accepts the obligation not to allow any fast food outlets to operate on the property might be characterised as having the effect of restricting competition because it restricts competition between restaurants. A fast food retailer would likely be the first to make such an argument, particularly if the shopping complex has a significant footfall.
  • Isn't There a Threshold Below Which the Agreement is Considered Too Small?
    • Yes, but its relevance is not obvious for three reasons. First, assuming the parties to the agreement are not competitors, an agreement will normally not be considered as anti-competitive if the market share held by each of the parties is not more than 15%. However, if there is a network of similar agreements, this 'safe harbour' threshold falls to 5%. A network of similar agreements means that one of the parties to the particular agreement is also a party to similar agreements with similar provisions and so potentially similar effects. A classic example would be the provision in pub leases in which the pub tenant could not sell beers other than those supplied by the landlord brewery2. In relation to a single pub lease neither the pub nor the brewery would likely have 15% of the (local) market, but because that brewery had similar agreements with other pubs, the aggregate effect on competition must be considered, hence the lower safe harbour threshold.
    • Second, in order to determine the market share it is necessary to determine the market definition in terms of products and/or services, and in terms of geographic scope. For some businesses existing decisional practice of the OFT and other competition authorities may be of help.
    • Third, in the last ten years or so the OFT has been aggressive in defining local markets, particularly for retail businesses (for example in relation to betting shops, cinemas, grocery stores and pharmacists). Consequently, and considering in particular out-of-town shopping complexes in largely rural areas, a restriction in favour of a tenant by which the shopping complex will not allow a competitor also to be present at the complex might be foreclosing competitors from a significant proportion of the market. Such a restriction might be challengeable for being anti-competitive, even though the opposite conclusion is reached for the same tenant in relation to the same provision in a lease for a unit in a shopping complex situated in an urban environment, perhaps because just outside the complex there are competing retailers.
  • Will a Restriction on its Face Always be Anti-Competitive?
    • No. Whilst a no-competitor or other restrictive provision might be on its face anti-competitive, the practical reality can be that it is not anti-competitive. For example, FitCo has an operation in a part of a shopping complex that was purpose built for FitCo, including very large open areas and a very deep swimming pool. There is an obligation accepted by the landlord of the shopping complex not to allow any other fitness centre to operate from the complex. If the structure of the building means it is impossible for another fitness complex to exist, then the existence of the provision has no anti-competitive effect. In contrast, if there was also a restriction in relation to no retail outlet selling fitness machines, this might be considered to have an anticompetitive effect. Of course, whether the 15% or 5% market share threshold identified above is met would need to be considered.

Most agreements do not attract the prohibition of being anti-competitive, and proportionally this is likely to be the situation for land agreements. However, for the 'unlucky' ones, the consequences can be material. The UK recognised in deciding to revoke the exemption that there were concerns raised that existing agreements and investments based on exclusivity arrangements and made in the context of the current exemption could cease to be legal under the forthcoming regime, and that the value of investments would be reduced if these exclusivity agreements could no longer be enforced. However, that has not convinced the UK government, which was clear in its statement in January 2010 that "if an exclusivity arrangement does have anti-competitive effects, it is right that the parties should cease to benefit from it"3.

Footnotes

1. The revocation order by way of Statutory Instrument is in draft form and currently before Parliament for approval. Approval is expected.

2. This classic example had been the subject of individual legal challenge and resulted for a period of time in changes to such agreements by a required inclusion for the larger pub chain breweries of the so-called guest beer provision, which allowed the pub to acquire beer other than from the landlord brewery.

3. Department for Business, Innovation & Skills; Government response to the consultation on the Competition Act 1998 Land Agreements Exclusion and Revocation Order 2004; January 2010.

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Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; and JSM, a Hong Kong partnership, and its associated entities in Asia. The Mayer Brown Practices are known as Mayer Brown JSM in Asia.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

Copyright 2010. Mayer Brown LLP, Mayer Brown International LLP, and/or JSM. All rights reserved.

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