Landlord and tenant – Restrictive covenant — Letting scheme — Parade of shops let under leases containing covenants imposing restrictions on specified uses – Claimant tenant making unopposed application for new tenancy with removal of restriction – Court determining preliminary issue — Whether arrangements constituting “letting scheme” — Whether imposition of restriction breaching competition law – Preliminary issue determined in favour of claimant
The defendant granted the claimant a tenancy of shop premises and a garage in Crawley, East Sussex. The premises were located in one of 11 parades of retail units in the centre of a residential housing estate owned largely by the defendant and operated under a letting scheme whereby each lease granted pursuant to the scheme restricted the use of the relevant premises to a particular trade or business. Under the original lease the claimant covenanted “not to use the shop forming part of the premises for any purpose whatsoever other than as a retail shop nor to carry on upon such premises any trade business or manufacture other than the retail trade of newsagents tobacconist confectionary stationery and the sale of books toys records fancy goods and greeting cards”..
At the end of the term, the claimant made an unopposed application for a renewal of the business tenancy under Part II of the Landlord and Tenant Act 1954. The claimant wished to sell a wider range of goods from the premises than the user clause in the existing lease permitted. Accordingly, the claimant proposed that it be permitted to use the premises for all uses in Class 1, as set out in part A of the schedule to the Town and Country Planning (Use Classes) Order 1987. It sought the incorporation into the new lease of a user clause which “shall include, but not be limited to the sale of alcohol, convenience goods, the installation and operation of an ATM machine and national lottery terminal and equipment”.
The defendant objected to the suggested term and proposed that the permitted uses should expressly exclude the sale of alcohol, grocery, convenience goods and other uses falling within Class 1. The claimant’s response was that the defendant’s proposal was unlawful as it was prohibited by competition legislation and would be void.
The court was asked to determine as a preliminary issue whether the prohibition proposed by the defendant was unlawful. It was common ground that a lease was a land agreement for the purposes of the Competition Act 1998 and that the arrangements contained in its proposed user clause would be restrictive of competition within section 2 of the 1998 Act. The issue for the court was whether that clause would be an exempt agreement within section 9.
Held: The preliminary issue was determined in favour of the claimant.
(1) To qualify for exemption under section 9(1) of the 1998 Act, an agreement had to satisfy four cumulative criteria. It had to: (i) contribute to improving production or distribution, or to promoting technical or economic progress; (ii) allow consumers a fair share of the resulting benefits; (iii) not impose restrictions beyond those indispensable to achieving those objectives; and (iv) not afford the parties the possibility of eliminating competition in respect of a substantial part of the products in question. In the present case, on the evidence, the court was satisfied that the leases of the various retail units on the parade formed part of a letting scheme. The user clause proposed by the defendants as part of such a scheme would amount to a breach of the prohibition in the 1998 Act because the effect of such a clause, in the context of the letting scheme, would be to restrict competition in the sale of convenience goods on the parade. Therefore the clause would be void unless the defendants could satisfy the conditions of section 9(1) and show that the agreement would fall within an exemption: Williams v Kiley (t/a CK Supermarkets Ltd) [2002] EWCA Civ 1645; [2003] 1 EGLR 147; (2003) 06 EG 147 considered.
(2) Section 9(2) placed on the party seeking to claim the benefit of the exemption the burden of proving that the conditions in section 9(1) were satisfied. The proof of the right to the exemption was to be established in proceedings, in this case in a court, where, as a matter of law and practice, proof of disputed factual matters was provided by adducing admissible evidence. A disputed fact or matter was proved by showing that it was more likely than not to be true. Thus, giving the words of subsection (2) their ordinary meaning in the context of civil litigation in the courts, the burden was on the defendant to show, on the balance of probabilities, that the agreement fell within the exemption by proving by admissible evidence the relevant factual conditions set out in subsection (1). The guidance issued by the Office of Fair Trading in the document: “Land Agreements. The application of competition law following the revocation of the Land Agreements Exclusion Order” issued in March 2011 provided a practical and sensible approach to analysing the conditions contained in section 9(1).
(3) Following that guidance in the present case, the defendants, on whom the burden lay, had adduced no evidence to prove the positive requirements of either of the alternative conditions set out in subsection 9(1)(a); nor could they prove that the local community would benefit from the restriction contained in the proposed user clause. There were other ways of restricting the use of the premises or the types of goods sold there and, as a matter of fact, the restriction would create a means of eliminating competition in respect of the goods which were or might be permitted to be sold from the premises and elsewhere on the parade. Accordingly, the proposed user clause, within the context of the current letting scheme, would contravene section 2 of the Competition Act 1998 and the defendants had not satisfied the court that it would be an exempt agreement within section 9(1) of that Act.
SM Booth (instructed by Brabners Chaffe Street LLP) appeared for the claimant; Jeremy Burns (instructed by Sharpe Pritchard) appeared for the defendant.
Eileen O’Grady, barrister
