Preparing to be Brave in the New World

For some while, property lawyers have happily managed to give a wide-berth to such esoteric expressions as anti-competitive and anti-trust. Not any more! As from 6th April 2011, property transactions, which had previously been outside of the effects of the 1998 Competition Act, were no longer to be excluded. For the first time covenants and clauses in land agreements, which breach anti-competitive rules will be deemed void and unenforceable, with parties vulnerable to financial penalty.

This brief guide is intended to be a gentle introduction to this new landscape. Clearly as we go forward the courts are going to be required to interpret what, in the context of property transactions, is or is not an anti-competitive agreement.

The starting point is to understand the broad context in which the new law applies. The new law will apply to all land agreements. It will include transfers of freehold interests, agreements relating to easements and restrictive covenants. However it is probably in the context of leases that the greatest effect will be seen.

Not all covenants and clauses will be bound by the anti-competition law. Generally the question to be asked is whether the covenant or clause has a restrictive effect of competition. Examples of the type of covenants likely to be of concern are

(1) User clause restrictions which inhibit the commercial activities in a shop or office;

(2) Restrictions on a landlord letting other premises to like business activities;

 and;

(3) Restrictions upon the ability to assign or otherwise deal with premises.

However, it should not be thought that all covenants and clauses that have the appearance of preventing, restricting or distorting competition will fall within the scope of competition law. For a covenant or clause to fall foul, its impact on competition has to be “appreciable”.

There is little guidance as to what is meant by “appreciable”. The Office of Fair Trading have indicated that unless the aggregate market share of the parties to the agreement is in excess of 10 per cent, they would not consider the impact as appreciable. Even if the market share was in excess of 10 per cent, that is not a determinative factor as other factors such as the nature of the restriction, the relationship between the parties to the agreement and the factual context of the restriction are particularly important.

When assessing whether a restriction may restrict competition, it is necessary to compare the actual or future situation in the relevant market with the situation that would prevail in the absence of the agreement. A restriction will only fall within the scope of the prohibition if it has a negative impact on actual or potential competition.

By way of example a landlord of a shopping centre might guarantee one tenant the exclusive right to operate a certain type of shop in that centre. By definition, such an agreement would protect the tenant from competition with other relevant competitors within that shopping centre and this has the potential to restrict competition on the market. By way of contrast a landlord who specifies permitted uses would probably not be seen as restricting competition. An exception that is useful to illustrate the point might be the case of landlord who operates businesses in a particular area and stipulates a lessee may not use the site for a like business.

Covenants and clauses that are prohibited will be void and unenforceable but the agreement itself will in all likelihood survive as the blue pencil can come out to sever the offending provision. Over and above striking out provisions, financial penalties can be imposed, with maximum penalties of 10 per cent of a party’s worldwide turnover. Of course realistically such a penalty is not likely to be imposed on landlords in a shopping centre environment and indeed small businesses can seek immunity from financial penalty, but what can not be ignored is the possibility that penalties will be more than nominal.

So we enter a brave new competition world, which I can safely say is going to be a bit of a roller coaster as we all, lawyers and property clients alike get used to being competitive but not anti-competitive. It could be more confusing than the competition for Olympic tickets. Now that surely is anti-competitive. How did Seb get away with that one?

Article by Steven Woolf