Charles Morgan and Jessica McGoldrick consider how competition law could trump restrictions in a retail lease that prevent overlapping trades in a parade of shops
Question
I am the tenant of a unit in a small suburban shopping parade created in 2005. The leases of the units in the parade each permit one specified retail trade only and expressly prohibit the other units from conducting that trade. My permitted use is as a shoe shop. I am expressly prohibited from selling handbags, given that there is another unit that is a handbag shop. However, I want to expand my offering to handbags. Is there anything I can do to change this restriction in my lease? I have asked my landlord to vary my lease but he has refused.
Answer
Current competition law may well defeat any attempt by either your landlord or the other tenant to prevent you from selling handbags.
Explanation
The Competition Act 1998 (the “1998 Act”) introduced into English domestic law the fundamental principles of European competition law. These include the “Chapter 1” prohibition. This prohibits agreements between undertakings that may affect trade in the UK and have as their object or effect the prevention, restriction or distortion of competition in the UK.
Until 5 April 2011 most “land agreements”, including leases, were wholly excluded from the ambit of the 1998 Act. From 6 April 2011 that exclusion was removed by the Competition Act 1998 (Land Agreements Exclusion Revocation) Order 2010. The 1998 Act now applies to both subsequent land agreements and those made prior to 6 April 2011 but continuing. It will therefore apply to the leases of the shops in your parade.
The 1998 Act exempts an agreement from the Chapter 1 prohibition in certain defined circumstances. Those are that it contributes to: (i) improving production or distribution; or (ii) promoting technical or economic progress, in each case while allowing consumers a fair share of the resulting benefit.
However, it must not: (i) impose restrictions which are not indispensable to the attainment of those goals; or (ii) afford the possibility of eliminating competition. It is for the person seeking to show that an agreement is exempt to prove that these requirements are satisfied. If the agreement falls foul of the prohibition then it is void.
Martin Retail
These principles were considered in the context of commercial leases for possibly the first time in Martin Retail Group Ltd v Crawley Borough Council [2014] EGILR 17, which concerned the unopposed renewal of a lease of a unit in a parade of shops in Crawley, West Sussex, owned by the local authority. The current lease permitted use as a newsagent but prohibited the sale of alcohol, groceries and convenience foods as part of a “letting scheme” covering the whole parade. This was admittedly for the mutual commercial protection of the tenants, in this case of another unit permitted to trade as a supermarket selling alcohol.
The newsagent tenant sought a new lease with a varied user clause that would allow the formerly prohibited activities. It argued that the restrictions if imposed would offend the Chapter 1 prohibition. The local authority sought to justify them by reference to the exemptions in the 1998 Act but failed.
In the absence of any legal authority, the county court judge followed the guidance contained in the Office of Fair Trading publication The application of competition law following the revocation of the Land Agreements Exclusion Order and concluded that the local authority had not discharged the burden of proof by the evidence of its employees as to their opinion of the likely effect of the relaxation of control.
The judge indicated that it would have been appropriate to have called direct oral evidence from the local community. He also said that while current traders and some local shoppers were reported to fear a “free for all”, the landlord had not shown that new traders would be discouraged. Further, less restrictive provisions than complete mutual exclusivity could still have ensured a good mix of retailers.
The key message
The message from Martin Retail is that competition is a good thing and therefore a landlord’s attempt to restrict competition in a lease may be fatally bad. Your landlord is unlikely to be able to justify its present user restrictions, which clearly do restrict competition, in which case you could seek a court declaration that the covenant restricting you from selling handbags is void and therefore unenforceable.
Charles Morgan is a barrister at Enterprise Chambers and Jessica McGoldrick is an associate at Charles Russell Speechlys LLP
Questions on any topic can be e-mailed to egq&a@enterprisechambers.com and egq&a@charlesrussell.co.uk
