The Competition Act (Land Agreements Exclusion and Revocation) Order 2010 (the order) will have been in force for two years in April. Its effect was to apply competition law to land agreements, meaning that all agreements creating, altering, transferring or terminating an interest in land since have been caught by the Competition Act 1998 (the Act).
Some commentators heralded it as a brave new world, in which a raft of competition cases in the property arena would undoubtedly arise. This has yet to transpire, but there are sectors in the property industry in which the Act will readily come into play, including multi-let shopping centres, where user and exclusivity provisions are found universally.
Chapter I prohibition
The Chapter I prohibition (the prohibition) in the Act prohibits agreements that prevent, restrict or distort competition to an appreciable extent.
If a land agreement – including, for example, a user or exclusivity provision in a shopping centre lease – has an appreciable effect on competition and is not eligible for an exemption, it will be prohibited.
In those circumstances, the offending clause, and possibly the entire agreement, is considered void and unenforceable. The Office of Fair Trading may investigate anti-competitive practices and impose fines and penalties. Damages can be awarded to compensate victims of anti-competitive conduct and injunctive relief can be imposed.
Exclusivity
In recessionary times, anchor tenants are driving a hard bargain. Landowners and developers usually have to offer favourable terms to secure an anchor for a scheme. Invariably, this will include exclusivity provisions in favour of that anchor tenant.
In a hypothetical new shopping centre redevelopment, let us assume that a department store agrees to anchor the scheme on the basis that the owner will not let any other unit within the shopping centre to a competing department store for a period of 75 years. Is this an agreement that will fall foul of the prohibition?
The exclusivity provision might appreciably restrict competition in the market in which the store competes.
The machinery of the competition legislation is complex and specialist economic evidence may be necessary to help establish the relevant market and the actual effect, if any, on competition.
In assessing the legality of the exclusivity, an assessment of the relevant market is required. It will typically include stores of a similar nature within the geographic catchment from which the anchor tenant draws its customer base. Competition is also assessed on the potential availability of alternate sites at which other competing stores can be located.
It is possible to see circumstances arising in which such an exclusivity provision could appreciably affect competition.
Notwithstanding the effect on competition, one must also consider whether the exclusivity provision may benefit from an exemption from the prohibition.
In the hypothetical scenario, it is arguable that the exclusivity clause facilitates market entry. The issue is whether the shopping centre would have been developed at all, because without such a provision the anchor tenant may not have agreed terms. If it can be shown that, objectively, the exclusivity provision was necessary to enable the department store to enter the relevant market (and that it could not have done so without the provision), the clause may benefit from an individual exemption from the prohibition.
Potential exemption also demands an analysis of whether the agreement gives rise to market efficiencies. In this case, arguably by facilitating the development of the shopping centre, increasing choice in the local area or footfall within the shopping centre and contributing to the overall profitability of the scheme.
One must also consider the duration of the effect of the exclusivity provision. A provision of unlimited duration is likely to be more difficult to uphold, as this is arguably unnecessary to protect the investment of the department store or to ensure overall profitability.
These points have not been tested in court and the future is difficult to predict. However, with retailers’ sharp focus on market share and trading advantage, it is only a matter of time before we see battle lines being drawn.
The remaining retail units in the scheme and user restrictions
In the hypothetical shopping centre, the developer is now proceeding to let the small and medium-size units in the scheme.
A pre-eminent shoe retailer is also driving a hard bargain and manages to agree with the developer that no other unit will be made available to shoe retailers within the scheme. For the duration of the restriction, competing shoe retailers may therefore be unable to establish a unit in the centre and this would potentially eliminate competition within the shopping centre itself.
As before, the competition analysis requires consideration of the relevant market and its geographic scope.
To assess the market, one must establish how far consumers travel to seek an alternative substitutable product. This might be the shopping centre itself and the local town. This analysis is further complicated if the shoe retailer operates on a national level, as it may be relevant to consider whether its retail offer is defined according to conditions of local competition.
While consumers may benefit from a healthy tenant mix within the scheme, the owner may find it difficult to establish that such an exclusivity provision is indispensable to facilitating investment, as it is likely that there would be demand to support a number of shoe shop operators within the centre.
There are arguably other means for a landlord to ensure the presence of a shoe retailer within the scheme without needing such a provision, negating any defence on the basis of necessity.
Tenant mix
The landlord of the hypothetical shopping centre is now completing leasing arrangements for the remainder of the centre. It is seeking to achieve its desired retail mix and the attractiveness of the centre to consumers. Accordingly, the leases of the remaining units contain restrictions on the use of each unit to a specific user and certain types of retailers are to be located within particular zones.
Generally speaking, restricted user provisions will not restrict competition and are common in retail leases.
However, there is a potential issue if the restriction is accepted by a tenant on the basis that no other tenant in the shopping centre will be permitted to sell a particular type of product. Here, one must again invoke an analysis of competition principles to establish whether there is an appreciable effect or restriction on competition.
The future
This is an area in which the impact of competition law on property agreements is not yet clear or established. Practitioners should watch this space.
Nicholas Wood is a senior associate in the real estate dispute resolution team at Nabarro LLP
