This post was also written by Marjorie Holmes.

In our previous posting ‘Land Agreements come under the Competition Law Spotlight’ when government consultation was underway, we reported on the likely impact of Competition Law applying to property deals. Whilst the issue arose out of the Competition Commission’s market investigation into the supply of groceries, the changes that will apply from 6 April 2010 can affect any property agreements and will affect pre-existing agreements as well as anything to be entered into after 6 April. The commercial property world needs a new competition law mindset.

What agreements are affected by the change?

Any restrictions on use could in theory be affected, however many ordinary restrictive covenants will not be anti-competitive. The sort of restrictions most at risk of challenge in this area are the covenants tenants impose on landlords, not to permit the use of any neighbouring property by a competitor and this often happens when anchor or significant tenants take space in new developments involving high investment e.g. in fitting out costs, rents and a long lease commitment.

Covenants imposed by landlords on tenants to protect other occupiers in a development also need to be considered in this context.

When will this new regime apply?

The net effect of the changes creates a 12-month period from 6 April 2010 during which it will be possible for any parties to any property agreement containing provisions that could be anti-competitive to seek a ruling from the Office for Fair Trading (‘OFT’) as to the legality of those restrictions. From April 2011 all parties to agreements restricting use will have to make their own assessment as to whether they are compatible with competition law and referrals to the OFT will no longer be possible.

What needs to be done?

  • Assess any user restrictions in property deals that are important to your business;
  • Analyse whether the restrictions affect trade and were designed to prevent, restrict or distort competition in the UK and whether they do so in an ‘appreciable way’;

This is a new way of thinking about common property deals and in some cases businesses will need expert help. As a blog posting this does not go into all of the detail businesses will need to consider.

If the outcome of your early analysis is that there is a risk of your restrictions being anti-competitive and appreciable then our advice will be to make an early application to the OFT for a ruling on the restriction. This will bring certainty and avoid the risks of fines. It may enable parties to agree a lesser set of restrictions providing some protection but being fully enforceable.

What about agreements being negotiated now?

Any deals under negotiation now should be dealt with on the assumption that the Competition Act will apply. It is possible to refer issues to the OFT in advance of doing a deal just for one year but this is likely to delay transactions. We are expecting to see guidance from the OFT on competition law and land agreements which may provide a bit more certainty to us all.

What is the worst that could happen?

Fines of up to 10% of the world turnover of the offending company can be imposed. Are these fines likely? Competition law is affected by trends in other parts of the world. In Brazil there have been several decisions punishing shopping centres for enforcement of certain exclusivity provisions in their agreements with their stores. Iguatemi São Paulo, one of the most important shopping centres in Brazil, was fined 2% of turnover for abusing its dominant position by denying other stores located inside its premises the right to open affiliates inside other shopping centres within a range of 2.5 km, without express authority. This is a new trend we can see developing and we are concerned that similar fines might be imposed in the UK.

If a property deal is found to be anti-competitive then not only will the anti-competitive provisions be unenforceable but, if the provisions cannot be severed from the agreement, the entire agreement may become unenforceable. There will be many tenants who wish to ensure their landlords will continue to be bound not to let vacant space to their competitors. Action must be taken now to assess the risks and to document the relevant justifications or seek a ruling from the OFT.
Whilst it is also possible for damages to be claimed by anybody who suffers a loss as a result of an anti-competitive agreement we think that is less of a concern than fines or unenforceability.

Conclusion

The new law should not be ignored where you know you have existing covenants that are restrictive of user particularly in a market with few competitors. Review and then consider them whilst there is time to negotiate. Adopt a new approach for new transactions right away.

For further advice please contact the authors or your usual Reed Smith attorney.