Landlords should tread carefully with tenant exclusivity clauses, warn Claire Ilingworth and Mark Evans.
It is not uncommon for a prospective tenant of a unit in a shopping centre or retail park to request an “exclusivity” or “non-compete” clause as part of lease negotiations. Traditionally, these clauses restrict the landlord’s ability to let other units in its retail park or shopping centre to the prospective tenant’s competitors. In a 21st century twist, we have recently heard anecdotal evidence of requests for a different kind of non-compete, where a tenant seeks to restrict other A3 occupiers from using specific third-party home-delivery operators.
Agreeing a non-compete clause
When faced with a request for a non-compete clause from a tenant, a landlord’s first thought will be whether this will have an effect on investment value, either now or in the future, by restricting its freedom to let other units. The freedom to change the tenant mix going forward is especially important given the fast-changing nature of the retail market and when set in the context of 10 or even 15 year leases.
If a landlord is prepared to accept a non-compete clause in principle, then landlords and their advisers should give careful consideration to the detail of the restriction itself as, if sufficient care is not taken, there is the potential for difficult questions at the time of a sale and for legal action by the tenant, with the benefit of the clause if the restriction is not properly reflected in the terms of other leases.
Since 6 April 2011, landlords must also consider the implications of competition law. The government removed the exemption of leases and other land agreements from competition legislation following its investigation into supermarkets’ behaviour, as it felt it was being used to distort competition. If competition law is breached, the tenant’s competitors within the shopping centre, any competitors that can’t take a lease due to the restriction and even the Competition and Markets Authority, might be able to take action against the landlord.
Protecting the investment
Ideally, the benefit of a non-compete clause should be personal to the specific tenant and should only apply while it is in occupation of the unit. It may also be appropriate to consider whether such a clause should apply only to a certain part of the shopping centre and/or whether particular units in the shopping centre should be excluded from the restriction. These issues should ideally be agreed at heads of terms stage.
A landlord must also consider the position on the ground. Do any existing tenants already have the right to use their unit for the use which is now being restricted? If this is the case, the prospective tenant must accept that this use be allowed to continue and this should be reflected in the heads of terms and the lease documentation.
New leases granted going forward should contain appropriate “mirror wording” which prevents other tenants from using their units for the restricted use. This being the case, the restrictions on use should not be so wide that it could have a negative impact on rent review.
Competition law considerations
In addition to the above, compliance with UK and EU competition law now requires careful consideration of the size and type of business which has the benefit of the restriction, the nature and size of the catchment area of the asset covered by the agreement, the duration of the restriction, and the extent to which there is the possibility for a competitor to establish itself elsewhere in the catchment area (eg in another shopping centre).
Each case will turn on its particular circumstances and ultimately depend on whether the clause has actual or potential anti-competitive effects.
Example 1: If the business gaining the benefit of the non-compete clause and the extent of the restricted area are both fairly small, the non-compete clause may not create a significant impact to the market that business operates in, and so be considered lawful.
Example 2: If the business is a major store which is going to be the anchor tenant, the impact on the market may be more significant so an objective justification would be required – for example, would the development provide significant competition to another retail centre, and would not offering exclusivity mean the anchor tenant would walk away and the development not be built?
The effects of breaches of competition law can be serious, and can include the following:
■ Businesses that are party to agreements and which are in breach can be fined up to 10% of their group’s global turnover (whether or not they have made a profit).
■ The directors of the companies could be disqualified from being a director of any company.
■ Others who suffered detriment because of the behaviour may be able to sue.
■ Non-compete clauses being rendered void and unenforceable.
Case law is thin on the ground at present and the full effects of the change in the law since 2011 are yet to be felt. Note also that UK domestic competition law is modelled on the form of EU competition law, but immediate or significant changes to UK competition law as a result of Brexit is considered unlikely.
Non-compete clauses at a glance
■ Non-compete clauses can, depending on the facts, be a legal and valid way for a tenant to protect its business interest, but should be given careful consideration by landlords
■ Specific care should be taken, when drafting the clauses, to protect investment value and to minimise the risk of falling foul of competition law
■ Seek advice if you are ever unsure as to whether there may be a breach of competition law or where there is the potential for breach of the lease provisions
Claire Ilingworth is a real estate partner and Mark Evans is an associate in the competition team at Irwin Mitchell.
