The existence or viability of a shopping centre may depend on a developer’s ability to attract an anchor tenant. But it may well ask the developer for exclusivity in return, in the form of a covenant not to grant leases to its competitors. Will such a covenant stand up in a court of law?
The Competition Act 1998 (Land Agreements Exclusion Revocation) Order 2010 exposed agreements relating to land to the full glare of competition law. But guidance published by the Office of Fair Trading explains that exclusivity agreements with anchor tenants are unlikely to break the law if a development would not have been constructed without them.
On the assumption that an exclusivity covenant does not fall foul of competition law, are there other ways of attacking it? Enter stage left Peninsula Securities Ltd v Dunnes Stores (Bangor) Ltd [2020] UKSC 36; [2020] PLSCS 161.
Restraint of trade
The litigation concerned a shopping centre in Londonderry built in 1979 on a site that was an “economic and political wasteland”. The developer, Patrick Shortall, had persuaded Dunnes, a highly sought-after anchor tenant, to pay a premium of £50,000 for a 999-year lease of part of the site. The retailer also paid for the construction of its store and contributed one-third of the cost of building the roads and car park. In return, the developer covenanted that there would not be any other units of 3,000 sq ft or more in the centre whose purpose was to sell food or textiles.
The centre opened in 1982 and was subsequently transferred to Peninsula, a property holding company owned by the developer. In due course, the centre began to struggle and Peninsula claimed that the exclusivity covenant was unenforceable. It argued that it was anti-competitive and that it infringed the Competition Act 1998. But, on seeing the retailer’s expert evidence, Peninsula fell back on an alternative claim based on the common law doctrine that applies to contracts in restraint of trade.
The doctrine is of ancient origin and is based on the policies that every man should be at liberty to work, so as not to deprive himself, or the state, of his labour, skill or talent, and that businesses should be free to compete with each other. However, the law also respects freedom of contract and the courts have long recognised that some restrictions can properly be imposed in the interests of trade itself.
Consequently, the rule that restraints on trade are void because they are against public policy is subject to exceptions where restrictions are reasonable, are no wider than is necessary to protect legitimate business interests, and are not detrimental to the public interest.
Pre-existing freedom
A restraint may be susceptible to the doctrine even if it relates to the use of land. In Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269, which concerned the validity of petrol ties, the House of Lords ruled that covenants that restrict the use of land will engage the doctrine against restraint of trade if the covenantor surrendered a pre-existing freedom to use the land as it chose on entry into the covenant.
Applying this test, the High Court in Northern Ireland concluded that the developer had surrendered his freedom to use the land as he wished when he granted the lease to Dunnes. But Peninsula had not surrendered any pre-existing freedom of use because it had acquired the land subject to the covenant.
The Court of Appeal upheld Peninsula’s appeal, ruling that the doctrine against restraint of trade was engaged both before, and after, the change in ownership. So the Supreme Court had to confront an awkward question. Should it discard the “pre-existing freedom test”, as it has become known and, if so, what should replace it?
Trading society
Lord Wilson, who spoke for the court, observed that the pre-existing freedom test has been heavily criticised and has not been universally accepted across the common law world. He explained that it is also capable of creating anomalies because restrictions on the use of land may be prejudicial to the public interest, whether they are imposed before or after its acquisition.
The court preferred the test suggested by Lord Wilberforce in Esso. Have the covenants passed into the normal currency of commercial, contractual or conveyancing relations and become part of the accepted pattern or structure of a trading society? The test would appear to follow where the law might be expected to lead – but the Supreme Court considered that it would be practical, flexible and responsive to changing social needs.
Outcome
Lord Carnwath added a few words of his own. He noted that the business of developing a shopping centre involves doing deals to balance competing interests and regulate use, in order to secure its success, and that there was nothing unusual in offering special terms to secure an anchor tenant. Indeed, had Dunnes thought that the covenant would be unenforceable, the retailer would probably have withdrawn from the development and the scheme would have failed. So the covenant did not restrain trade. It facilitated it, and the doctrine against restraint of trade was not, and never had been, engaged.
Consequently, Peninsula was left to seek an order for the modification or discharge of the covenant under Northern Irish legislation loosely based on – but wider and more flexible than – section 84 of the Law of Property Act 1925.
Key points
- A covenant will affect trade if it prevents a landlord from permitting tenants to sell specified goods in retail units in a shopping centre
- Even so, a covenant in favour of an anchor tenant, restricting competition from other retailers in a shopping centre, was not a restraint on trade that was against public policy
Allyson Colby is a property law consultant
