The Supreme Court has ruled that a restrictive covenant that effectively bars competitors to the anchor tenant of a Northern Ireland shopping centre is not unenforceable as a “restraint of trade”.
The court allowed an appeal by Dunnes Stores (Bangor) Ltd, which enjoys the benefit of a restrictive covenant in its lease of premises at the Springtown Centre, Londonderry, preventing rival retailers from opening stores of 3,000 sq ft or more selling food or textiles.
The centre’s owner, Peninsula Securities Ltd, looking to revive its flagging fortunes by attracting new tenants, sought a ruling that the restrictive covenant was a “restraint of trade” and, as a result, unenforceable. Peninsula was unsuccessful at the High Court, but the Court of Appeal ruled in its favour that the doctrine of restraint of trade was engaged.
Now, though, the Supreme Court has unanimously sided with Dunnes, and dismissed Peninsula’s claim.
Explaining the decision, Tom Kiernan, an associate at Dentons, said that it offered “a welcome clarification on the law surrounding restraint of trade”, in particular “the Supreme Court’s confirmation that it agrees with the academic world that the ‘pre-existing freedom’ test – does the clause restrict a freedom the party otherwise enjoyed? – is not fit for purpose”.
He continued: “Instead, the court held restraint clauses should now be assessed under the ‘trading society’ test (ie, does the clause restrict a freedom which is rarely restricted in the circumstances of the case?). The decision to abandon the former test in favour of the latter means that parties can properly assess, by referring to commercial norms within the market, whether any trade restrictions imposed by an agreement are likely to be enforceable.
“While the case concerns premises in Northern Ireland, the decision will be of great interest to retailers who are, or could be, considered ‘anchor’ or ‘cornerstone’ tenants of shopping centres across England and Wales, many of whom will have such clauses in their leases to protect their position within a development. These clauses, and their impact on landlord/tenant negotiations, may be more pronounced than ever given the present state of the retail market.
“By contrast, landlords of large retail developments will need to consider whether they can attract larger tenants to their development in the future without having to engage with, or potentially compensate, their existing anchor tenants. Prospective landlords and developers will also need to think carefully before agreeing to such clauses with potential tenants as they may impact the value of the reversion.”
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