UK: Anti-Competitive Provisions In Commercial Leases: First Reported Case Finds Restrictive User Clause In Lease To Be Anti-Competitive And Unenforceable

Since 6 April 2011, the rules in Chapter 1 of the Competition Act 1998 ('Chapter 1') have applied to all land agreements (including commercial leases). The rules prohibit any agreements which have the effect of preventing, restricting or distorting competition within the UK. Any such agreements are unenforceable and will be void. Importantly, there is an exemption to this if an agreement is ultimately shown to create benefits to consumers that outweigh its anti-competitive effect.

Until recently, OFT Guidance on the application of Chapter 1 to land agreements has been the only advice available to landowners and there has been uncertainty as to how the court would interpret the rules. Martin Retail Group Limited v Crawley Borough Council is the first reported case concerning the application of Chapter 1 to a restrictive user clause in a lease.

Facts

A dispute arose in the context of lease renewal negotiations. The tenant claimant, Martin Retail Group (MRG), had operated a shop as a newsagent since 2001. Under its existing lease, MRG was permitted to use the shop only for the retail trade of newsagent, tobacconist, confectionary, stationery and the sale of books, toys, records, fancy goods and greeting cards. The shop was situated within a parade of eleven local shops owned by the defendant local authority, Crawley Borough Council (the Council), and operated as a letting scheme. One of the other shops in the parade was a grocery store, permitted to sell alcohol. On renewal of its lease, MRG requested a wider user clause which would permit it to sell alcohol and convenience goods at the shop.

The Council objected on the basis that there was already a convenience store on the parade selling these goods and the Council's letting scheme promoted different uses for each of the shops. It proposed an alternative, narrower clause limiting the use to the existing newsagent and tobacconist.

MRG claimed that the user clause proposed by the Council was in breach of Chapter 1. The Council conceded that the use restrictions could have the effect of restricting competition in the sale of convenience goods on the parade within Chapter 1 but sought to rely on the exemption. It contended that ensuring the availability of a number of different retailers at the parade was a benefit to the local community and that the restrictions were necessary to the letting scheme as without them small traders would not come to the parade. It argued that this benefit satisfied the criteria for exemption.

Decision

As the Council had already conceded that the use restriction could be anti-competitive under Chapter 1, the County Court only ruled on the issue of the exemption. It held that, on the facts, the Council had failed to provide sufficient evidence to show that the criteria for exemption had been satisfied. Consequently, the Council's proposed user clause in the lease would contravene Chapter 1.

In reaching its decision the Court consulted and endorsed the OFT Guidance praising it for its practical approach. Interestingly, the judge commented that the position might have been different if the letting scheme was being established from scratch and the restrictions were to support an anchor tenant until that tenant's business had stabilised.

The future

Martin Retail Group Limited v Crawley Borough Council may only be of limited use as it did not consider the application of the Chapter 1 prohibition directly, focusing instead on the conditions for exemption. However, as it is the first recorded case on the application of Chapter 1 to retail leases it will be of interest to both landlords and tenants. Whilst only a preliminary hearing in the County Court, this case does perhaps give an insight into how the higher courts will approach arguments based on competition law in the future.

In the vast majority of leases, restrictions on a tenant's use of the property will still not amount to a breach of competition law (the Martin case concerned a very small "market" for competition law purposes). However, tenants will undoubtedly use this decision as a negotiating tool to argue against restrictive user clauses, both in the context of new leases and lease renewals. Landlords should no longer ignore competition law based arguments.

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