While the issue can be relevant in purchases (e.g if the seller wants to impose a use restriction on the property to protect a neighbouring business operated by it), it much more commonly arises in relation to the grant of a new lease. As the Act can not only make the relevant arrangement unenforceable, but can also expose the parties to potential fines of up to 10% of group turnover, it is very important to avoid breaching the rules. The fact that the Act is retrospective, and so applies even to arrangements that were in place before April 2011, is an added complication.
Even now we are finding that some in the property industry still do not always keep these provisions in mind when they are agreeing heads of terms for new leases - and so I thought that it might be useful to comment on a few key issues.
What is prohibited?
The Act prohibits arrangements which, to an appreciable extent, restrict, prevent or distort competition within the relevant market. Since 6 April 2011, it has applied to all leases - whether entered into before or after that date.
Property owners who want to impose restrictions on the use to which the let property can be put, or prospective tenants who want their landlord to grant them the exclusive right to carry on a particular use within a development always need to consider the Act. Such an exclusivity provision, or solus trading right, would likely involve the landlord agreeing not to let another unit for a competing use - perhaps for a period of time.
Those who manage existing assets, where pre-Act anti-competitive arrangements remain in place, also need to have regard to the Act's restrictions.
Legal and surveyor input is usually required
Assessing any situation requires an analysis of the type of goods being sold and of the geographic market. Essentially, the question is how far would consumers go to find a substitute product or service, if the one offered in the particular let unit was too expensive or not of the type sought.
Lawyers can advise on the interpretation of the wording in the lease and of the Act, but a surveyor's analysis of the economic impact of any restriction and of the geographical and sectored markets involved is also crucial to the reaching of a conclusion as to whether any particular restriction would breach the rules or not.
Guidance from the Competition and Markets Authority ("CMA")
Competition issues are now dealt with by the Competition and Markets Authority who took over the role from the Office of Fair Trading ("OFT") and the Competition Commission in April 2014. Guidance has been available since March 2011. It was issued by the OFT but is still accessible from the CMA website.
Generally, the effect of an arrangement will not be considered to be appreciable unless the tenant has a greater than 15% share of the relevant market (including the unit of which they are about to take a lease).
Further, the CMA are unlikely to take any action unless the share is greater than 30%. That said, they might depart from that policy if a lower share still resulted in a significant effect on competition (e.g. where there is a long term solus trading right which significantly restricted access by competitors to the relevant market).
For so long as the CMA stick with the 30% rule, there would be no appreciable effect if there were at least 3 other existing outlets then being used for a similar use within the geographic area of the relevant market.
Last year I commented on the first case on the topic - in which the court found that the restriction on use imposed by the landlord was anti-competitive. In that case the relevant market was small - and the court accepted that they might have decided differently had the relevant market been larger.
Common situations - breach of the Act or not?
I've set out below a summary of commonly occurring situations on new lettings with comment as to whether or not such would be likely to breach the Act or not. The answer in any actual case will usually, however, depend on the wording used, the nature and location of the development and the uses of other properties within the relevant market.
| Shopping centre or retail park, normal use restriction to a particular type of goods e.g. sale of footwear or greeting cards: | Acceptable provided that landlord's consent is not to be unreasonably withheld to a change of use, but where the landlord is entitled to have regard (in making its decision) to estate management, or appropriate tenant mix, considerations. |
| Anchor tenant in a new development, with a solus or exclusivity right on its principal use: | Could breach competition law if it would have an appreciable effect on competition, but an exemption might apply. The exemption is likely to apply if the exclusivity applies only to the principal use of the anchor tenant and is of such duration, and is the minimum needed, to secure the tenant's required return on its investment - as distinct from affecting too wide a range of goods or applying for the full duration of the lease. An exclusivity for the whole length of the lease would breach the rules. |
| Other tenant solus or exclusivity | Could breach the Act if it would have an appreciable effect on competition. The exemption which is available for an anchor tenant is unlikely to apply to other tenants. Solus restrictions need to be considered very carefully, having regard to current competition within the relevant market. |
| Office building - all leases restricted to office use | Acceptable - not a breach. |
We can provide more detail on all of these situations.
Future changes can put a non-breaching solus into breach
A curious (and difficult) feature of the Act is that it looks at any agreement throughout its duration.
An agreement which might not breach the Act when it is entered into, might be in breach in the future if circumstances change. The type of changes which might affect the position would be changes in the use, or availability for use, of other units in the development and in the surrounding area (to the extent that the relevant market reaches beyond the development).
For that reason, managing agents need to keep all exclusivity arrangements under regular review. If any become in breach then efforts should be made to try to remove them. While, at first glance, removal might not be seen to be in the interests of the protected tenant, if the provision has started to breach the Act then that tenant (in addition to the landlord) would be at risk of CMA sanctions - and so might be prepared to agree.
Landlord or tenant is a supermarket - Controlled Land Order restrictions
If the landlord or tenant is a supermarket, consideration must also be given to the Groceries Market (Controlled Land) Order 2010. This applies to transactions involving large grocery retailers - and it prevents them from entering into exclusivity arrangements which last for more than 5 years from the date on which the relevant supermarket store opens for trading.
Any use restriction or exclusivity arrangement which might benefit the supermarket operator could breach this Order, in addition to the Act.
If you'd like to speak with us, please get in touch with our Real Estate team.
