The UK's commercial property sector will soon be subject to the full rigours of UK competition law for the first time. An "exclusion order" which has protected most types of commercial property agreements from competition law, will cease to have effect as from 6th April. In the past landlords and tenants were free to enter into anti competitive arrangements relating to land. As from April property owners and tenants will need to take advice on whether their existing contracts are compliant or otherwise face the consequences.
Consequences of Infringing Competition Law
The UK competition rules prohibit, inter alia, agreements (whether or not they are legally binding) which restrict or distort competition in the UK. The consequences for parties who enter into such agreements can be significant. Firstly, if an agreement is caught by the competition rules, you will not be able to rely on the restrictions in that agreement which infringe competition law. If a landlord agrees with its tenant not to grant a lease to a competitor of the tenant in the same shopping centre, the question is whether such a restriction is enforceable. If the landlord ignores what he has previously agreed and proceeds to grant a lease to a competitor, the tenant may now find it difficult to rely on this restriction because the landlord may argue in defence that such a restriction infringes competition law and is therefore unenforceable. Another consequence is that any persons who are adversely affected by a restriction (such as a disgruntled competitor who is being excluded from a shopping centre), may sue the parties for damages for any loss they can establish they have suffered as a result of an illegal agreement. Those who are adversely affected also have the ability to complain to the Office of Fair Trading ("OFT"). The OFT has the power to carry out investigations into illegal agreements and in serious cases can impose fines on the parties of up to 10% of their total turnover.
Restrictions in property agreements will now need to be assessed to ensure that they comply with UK competition rules. The sorts of restrictions that raise potential competition law issues include covenants in a shop or office lease limiting the type of commercial activity that a tenant may undertake. Others include restrictions in a lease which limit the landlord's freedom to let other premises or units to competitors of the tenant. Similarly restrictions accepted by an owner of land not to sell adjacent property to a competitor of the buyer may cause problems.
Must Be An Appreciable Effect On Competition
However, not every restriction on competition will be caught by the rules. To be caught, the restriction must have an appreciable effect on competition. Unlike property law, competition law is not concerned with the legal wording of a provision but more about its economic effect in the relevant market. Therefore if a shopping centre restriction provides that only one department store will be allowed in the shopping centre, the assessment as to whether the restriction will have an appreciable effect on competition will depend on whether the department store faces at least potential competition from other department stores. For example there may be supermarkets outside the shopping centre which are nevertheless regarded by shoppers as a realistic alternative.
The OFT has given some guidance on whether there is likely to be an appreciable effect on competition. The OFT considers that agreements between companies do not appreciably restrict competition if the aggregate market share of the parties does not exceed 15% in circumstances where they do not compete and 10% if they compete. Such agreements are regarded as de minimis. However, to do that assessment consideration needs to be given to what constitutes the relevant market. The process of defining a market involves looking at the substitutes for the product in question. Consideration needs to be given to what would happen to sales and profitability of a given product if there was only one supplier of the product and that supplier implemented an increase in price. If an increase is not profitable due to customers switching to substitute products then those alternative products will form part of the same market. Consideration also needs to be given to what constitutes the relevant geographic market. A shopping centre may not in itself constitute the relevant market because it will depend on the ability of consumers to use alternative suppliers within the same catchment area.
Will there be an appreciable effect on competition if the owner of a shopping centre on the outskirts of Glasgow has undertaken with Tescos not to grant a lease to any of its competitors in the shopping centre? This depends on what constitutes the relevant geographic market. Is the geographic market Glasgow or the south of Glasgow or is it limited to the shopping centre itself?
Exemption
UK competition law states that even if a restriction in an agreement has an appreciable effect on competition the agreement may nevertheless be exempt if it satisfies certain conditions. The conditions are:
- The agreement must contribute to improving production or distribution of goods or promoting technical or economic progress.
- It must allow consumers a fair share of the resulting benefits.
- The restrictions must not go beyond what is necessary to achieve the objectives of the agreement. Therefore a shopping centre restriction could be exempt if you can establish that it is "indispensable" to attracting an anchor tenant.
- Finally, the restriction must not allow the parties to eliminate competition in relation to a large part of the products in question.
Implications
Property agreements will become subject to the new rules as from April. Owners and tenants should now take advice on whether their existing leases comply. Similarly prospective investors need to review contracts to ensure there are no anti-competitive restrictions. However, market conditions constantly change. What is permissible now may become a problem at a later date.
To summarise:
- Review your leases to check whether there are any restrictions.
- Consider what is the relevant market in which you operate.
- Is there are a risk that someone might be upset by this restriction eg being kept out of a shopping centre?
- Is the agreement "de minimis" or is there likely to be an appreciable effect on competition?
- Does the agreement nevertheless benefit from exemption?
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.
