UK: Real Estate Briefing - July 2011

Last Updated: 20 July 2011
Article by Jennifer Chappell and Nitej Davda

Competition law and land agreements – what's changed?

How has competition law changed?

Chapter 1 of the Competition Act 1998 (the Competition Act) prohibits agreements between two or more businesses which have the effect of preventing, restricting or distorting competition within the UK.

Up until April 2011, land agreements were excluded from this prohibition by the Competition Act (Land Agreement Exclusion and Revocation) Order 2004 (the Exclusion Order). From 6 April 2011, the Exclusion Order has been revoked and companies will now have to self-assess land agreements to ensure they comply with UK competition law.

What is a land agreement?

All new and existing agreements which create, alter, transfer or terminate an interest in land are caught by the Competition Act. This includes:-

  • Leases
  • Development agreements
  • Contracts for sale
  • Transfers of land
  • Easements
  • Licences

The prohibition on competition excludes planning agreements, for example section 106 agreements. It does not apply where one party to the agreement is an individual who is not acting in a business capacity. This is intended to exclude residential agreements, but there may be some cases where individuals are deemed to be carrying out 'commercial or economic activities'.

The important point to note is that the revocation of the Exclusion Order will be retrospective. This means that existing land agreements entered into prior to 6 April 2011, as well as new ones, will need to be considered. It is also important to realise that provisions in land agreements cannot purely be assessed at the time they are entered into. Provisions that may not breach the Competition Act at the time the agreement is entered into may need to be re-assessed at future points in time, as circumstances and market conditions change

What sorts of provisions are likely to breach the Competition Act?

Land agreements often contain provisions which restrict the way in which land can be used or how a right can be exercised. Examples of these include:-

  • Restrictive covenants
  • Exclusivity provisions
  • Permitted user and restrictive user provisions

The relevant provision will infringe the Competition Act if it has an 'appreciable effect on competition in the relevant market'. These phrases are important to bear in mind and there has been some guidance given by the OFT, as mentioned below.

Exemptions

There are some limited exemptions that apply. Land agreements where the parties' market share is below a 10-15% threshold will be outside the scope of the Competition Act unless the hardcore restriction applies. We will expand on the definition of 'hardcore' restrictions in our next briefing, but broadly this means 'hard' agreements to fix prices or allocate customers. There are also four criteria that can result in a statutory exemption, namely agreements that:-

  • Contribute to improving production or distribution, or promoting technical or economic progress;
  • Allow consumers a fair share of the resulting benefits;
  • Must not impose restrictions beyond those 'indispensable' to achieving the objectives; and
  • Must not afford the parties the possibility of eliminating competition in respect of a substantial part of the products in question.

Consequences of breach

The consequences of breaching the Competition Act include:-

  • Unenforceability of the provision and/or the whole agreement;
  • Investigation by the OFT together with power to impose sanctions;
  • Fines of up to maximum of 10% of worldwide turnover;
  • Private actions for injunctions or damages by third parties suffering loss.

It is clear that the potential consequences of breaching competition law are serious. The OFT guidance emphasises that each land agreement is different and each case will need to be assessed on its own unique set of facts.

The OFT is generally unlikely to take further action in respect of a land agreement where none of the parties to the agreement has a market share exceeding 30% of the relevant market. This is not, however, a hard and fast rule.

Is there any guidance to help us?

The Office of Fair Trading (OFT) issued a guidance note in March 2011 which is aimed at assisting companies in assessing their land agreements. It gives some commentary on common types of restrictions in property documents that may fall foul of the Competition Act.

The good news is that the OFT has suggested that it will only be a minority of restrictions that will infringe competition law, but the bad news is that the guidance does not give much practical advice on what will be affected. It will take some time to see a change of practice within the property industry and we expect to see some interesting case law developing.

What happens going forward?

Organisations will need to carry out assessments of existing agreements to check whether or not they breach the Competition Act. An existing agreement may be void and unenforceable, or the clause severed from the other provisions of the agreement.

For existing agreements, if a party has used best endeavours to amend or remove an infringing provision or has not tried to enforce it then the OFT may take this into consideration when determining any sanctions.

As well as continual re-assessment of current land agreements, it is important to bear in mind the issues highlighted in this note when negotiating new agreements. In our next briefing, we will be illustrating how the Act will work in practice. If you would like to discuss any of the issues raised in this briefing, please do feel free to get in touch.

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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