April 30, 2010

Gordons retail update – Competition Law Developments affecting Retail Property Agreements

Following a consultation by the Department for Business Innovations and Skills the Government has decided to revoke the Competition Act 1998 (Land Agreements Exclusion and Revocation Order) 2004. The Revocation Order was due to be made in April but this has not yet happened.

Until now land agreements (including contracts, leases and other commercial agreements) were not generally considered to have a negative effect on UK competition. As a result they benefited from the Order, which protected them from the Competition Act’s prohibition on any agreement that is restrictive of competition.

Most retail shop leases, particularly in shopping malls, contain restrictions on trading and these restrictions will now be open to scrutiny to see if they have the effect of being anti competitive, as will restrictive covenants in freehold sale and purchase agreements.

The revocation of the Order takes effect on 6 April 2011 however the Government has confirmed that it will act retrospectively. Consequently parties will have to ensure that provisions in both new and existing land agreements comply with UK competition law. As competition law is concerned with an agreements actual economic and commercial effect on competition it will not be possible to ‘draft around’ the prohibition.

The Office of Fair Trading is expected to issue guidance on the sort of provisions in land agreements that will be judged as anti-competitive. However in practice land agreements will now have to be self-assessed with regard to competition law in the same way as any other agreement. This will be a difficult task as the restrictions need to be looked at in all economic commercial and consumer circumstances of the particular case to see if there is an appreciable effect on competition in the particular market under consideration. There are possibilities of exemptions where the market share is less than 10-15% (but this will depend upon the definition of the particular market) or where the benefits of the restriction (e.g. in providing jobs economic and consumer benefits) outweigh any competition disadvantages.

Many retail leases contain restrictions aimed at producing a balanced mix of use within a shopping centre and provided that this is the true purpose of the restriction it is possible that such restrictions will not fall foul of the anti competition rules. Exclusivity agreements from landlords will be more difficult to justify as not protecting the tenant from competition and retailers who are excluded from shopping malls due to restrictions on competition in other leases will now have an opportunity to take action through the courts to try to have the restriction declared illegal and / or claim compensation for any loss suffered.

Assessment of agreements to ensure compliance will be important over the coming months in order to avoid the possible consequences of infringement which include:

  • Unenforceability of the contravening provision
  • Fine of up to 10% of world wide turnover
  • 3rd party legal action for those adversely affected by the restrictive provision
  • The need to cease/modify activities in contravention of prohibition.