October 5, 2010

Competition rule changes changes impact on land agreements and protection of trade

Two changes to Competition Rules have recently been implemented which are likely to see adjustments in the way in which land agreements are used to protect trade.

One piece of legislation, the Groceries Market Investigation (Controlled Land) Order 2010 – the Groceries Order – only affects large grocery retailers (LGRSs). These can be defined as ASDA; Morrisons; Tesco; Sainsburys; Waitrose; Co-op and Marks & Spencer and any parties contracting with them in connection with land deals.

The Groceries Order came about as a result of the investigation into the groceries market which took place from 2006 to 2008. The Competition Commission (“the Commission”) carried out a wide ranging investigation but this article examines the new legislation which deals with control of land, only.

Whilst the Commission found no evidence of land banking it did find a number of restrictive agreements controlling land which were anti-competitive. The Groceries Order identifies 29 sites where covenants have been put in place which prevent the sale of groceries on land the LGRs did not own but which covenants could be enjoyed by the LGRs.

A further 29 locations were identified where exclusivity agreements (whereby an owner of land will agree not to allow any other food retailer to operate from a site) were found to be anti-competitive.

Those covenants and exclusivity agreements must be released by 2011. With limited exceptions relating to planning constraints and residential use no new covenants or exclusivity agreements which may restrict grocery retailing can be entered into or procured by the LGRs.

Whilst the investigation was ongoing the Competition Commission observed that one particular aspect of the current law – the Competition Act 1998 (Land Agreements Exclusion and Revocation) Order 2004 – which exempted property agreements from the Competition Act 1998 was something of an anomaly in the competition regime.

The original reason for excluding land agreements from the competition regime was that when the 1998 Competition Act came in, a process was in place whereby businesses could ask the Office of Fair Trading (OFT) to check whether the agreements that they were entering into were anti-competitive and could gain clearance for those agreements.

There was concern that the OFT would be flooded by many precautionary notifications of land agreements. These agreements had not previously been subject to the competition regime and no one would be quite sure whether the kind of restrictions land agreements contained were anti-competitive or not.

The Land Agreements Exclusion and Revocation Order (“Exclusion Order”) was therefore made because it was felt that otherwise there would also be uncertainty in the property sector. However, hardly surprisingly, what seems to have happened as a result of this is that the existence of the Exclusion Order has promoted the misconception that no land agreement could raise concerns regarding competition.

This has never been the case because of the overarching nature of EU competition law and the ability of the OFT to dis-apply or withdraw the benefit of the exclusion if it was necessary. To clarify this in 2010 effective from the 6 April 2011 the Competition Act 1998 (Land Agreements Exclusion and Revocation) Order 2010 removes the land agreement exclusion and puts land agreements squarely within the competition regime.

Parties have to self-assess their land agreements to ensure that they comply with competition law. The impact of this revocation could be felt in shopping centres where landlords grant exclusivity to certain tenants to persuade them to come into a location and impose restrictions in leases to control the tenant’s use of the property.

Other restrictions which could be caught are those whereby a seller of property agrees not to sell adjacent property to a competitor of the buyer. These sorts of restrictions need to be looked at in their entirety however and will not necessarily be anti-competitive per se. It is fair to say that most land deal restrictions will not have a sufficiently appreciable effect on competition as to fall foul of Competition Rules.

The order does have retrospective effect so that although it does not come into force until April 2011, it will apply to existing arrangements. Parties should be using the time now to look at their existing agreements but guidance as to what will be viewed as anticompetitive is currently awaited from the Office of Fair Trading.

Restrictive agreements are only anti-competitive if they actually do restrict competition to an appreciable effect. If the market share of the parties involved is less than a certain threshold (10-15 per cent) it is generally deemed that their arrangements will not have an appreciable effect on competition but this always depends upon the particular market being considered, it could be local or narrowly defined.

Even then, if the arrangement is indispensible to achieving economic and consumer benefits (e.g. if they assist in setting up a shop and developing a customer base or create a balanced tenant mix in a shopping centre) they will be allowed to exist.

It is interesting to note that the Groceries Order allows exclusivity agreements for the first five years from a store opening and in Holland there is a six year limit on exclusivity. The suggestion is that this is seen as a period of time which is indispensible to achieving economic and consumer benefits and anything longer would not benefit from exemption.

The competition regime cannot of course be viewed in isolation and the most significant control on land use in the UK is of course the planning regime. The Groceries investigation found that the planning regime does, unsurprisingly, constrain entry by new larger grocery stores and causes a delay to entry due to the time it takes to assemble sites and obtain planning permission.

The planning system also imposes limited constraints on the extension of existing stores and limited barriers on entry for expansion by mid-sized grocery stores. However the wider objectives of the planning regime override any anti-competitive effects of planning control.

In conclusion, the LGRs will no longer be able to keep out competitors by controlling land. The planning regime will however continue to be the most significant influence on where and how land is developed or used for retail purposes. The Competition Commission on their investigation confirmed that they recommend a competitive test be introduced into the planning regime to proposed new stores and extensions for new stores.

Everyone else who is party to land agreements needs to know that those agreements may be void and unenforceable if they have an appreciable effect on competition in their particular market although most land agreements will not be caught by the competition rules.