Parties to lease agreements often wish to agree on constraints which may conflict with prohibitions under the Competition Act. We have recently sought an opinion from the Estonian Competition Authority to ask for their specifications on competitive constraints in lease agreements of commercial real estate. As expected the position of the Competition Authority in the matter is conservative. According to explanations, a lessor and lessee whose market shares in a relevant market do not exceed 15% may not rely on exemptions laid down for agreements of minor importance. This is because the majority of problematic provisions (from the viewpoint of competition law) included in lease contracts restrict third person access to the market.

These provisions include:

  • lessor's obligation not to lease premises to competitors of the lessee located in the same building as the lessee's premises (lessor's exclusivity obligation) and
  • lessee's obligation not to conduct economic activities similar to those conducted on the premises within a given meter radius of the premises e.g. prohibition on opening a similar store at a competing shopping centre (lessee's exclusivity obligation)

Therefore all competitive constraints included in lease agreements are regarded as conflicting with the competition law. However, it is possible to analyse this on a case-by-case basis and to take into consideration relevant circumstances in assessing whether constraints comply with conditions established for individual exemptions:  

  • the constraint promotes competition (e.g. in the long run the constraint contributes to increased quantity of goods offered, or decreased expenses);
  • consumers receive a fair share of the positive effects (e.g. as a result of decreased expenses, prices to consumers will be lowered to a certain extent);
  • applying constraint to ensure promotion of competition is indispensable and not merely a convenient option and
  • the constraint does not allow the possibility of eliminating competition in respect of a substantial part of the market for particular goods.

The Competition Authority explained its views as regards the conditions of two individual exemptions: restrictions on competition must be indispensable and should not allow the possibility of eliminating competition in respect of a substantial part of the market for particular goods.

In conclusion, parties to a lease agreement with an exclusivity obligation exceeding 5 years should in any event expect that any restrictions are not indispensable for achieving efficiency and therefore conflict with the Competition Act. Lease agreement parties whose share of a particular market does not exceed 30% can feel somewhat confident regarding compliance with the criteria under the requirement that restrictions should not in any way allow the possibility of elimination of competition in respect of a substantial part of the market for particular goods. This is on the basis that in the case of smaller market shares one cannot, in principle, talk about substantially affecting competition. However, market shares below 30% or even 15% do not exclude the prohibition on restriction of competition in situations where the restrictions do not meet the remaining three conditions established for individual exemptions.

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.