This post was also written by Philip Olmer and Marjorie Holmes.

From the time the UK joined the EEC, sections of UK industry have had to grapple with European competition law requirements on anti competitive and monopolistic behaviour. In terms of real estate, competition law had really only affected public sector procurement projects and certain monopolistic businesses such as motorway service areas. From April next year the Competition Act will apply to land agreements. The two real estate lawyers writing this blog are still struggling to get to grips with the consequences of the variable enforceability of potentially anti-competitive agreements. Our colleagues specialising in competition law are very clear that we will have to!

In March of this year we posted an update on the new competition law regime and how it would apply to all commercial property documentation – retrospectively as well as for anything entered into after April 2011. The OFT have now published draft guidance on how competition law will apply to land agreements. The consultation is open until 14 January 2011.

Anchor tenants in new retail or leisure developments have got used to the idea that they can, when agreeing their lease terms, negotiate exclusivity to secure the investment they need to make and their landlords have, in order to secure the viability of the development, been happy to accept their demands and restrict the other tenants from competing uses. Without these deals being reviewed to consider the impact of any anti-competitive clauses the parties will not know if they are enforceable or, in a small number of cases, whether there is any risk of investigation by the OFT.

The OFT Guidance uses a number of worked examples in a fictional shopping centre and analyses whether the restriction is likely to be anti-competitive.

One example is where a landlord is building a new shopping centre and needs to secure an anchor tenant to ensure viability. If the anchor tenant requires exclusivity for the whole of the lease term and any extension/renewal the OFT think this is likely to be anti-competitive, but it might be acceptable if the exclusivity was only for a limited period of time. No clues are given as to how long that time might be! The tenant would have to justify its need for exclusivity by limiting it to the period needed to justify its investment.

The OFT in another example talk about a coffee shop tenant agreeing a higher rent with a shopping centre landlord in return for an agreement not to allow any other coffee shops. This is likely to be anti-competitive because it would give the coffee shop a monopoly in the shopping centre for coffee which could result in the consumer being charged higher prices. This would be a breach of the competition rules.

Anti-competitive agreements can attract fines up to a maximum of 10% of worldwide turnover. It is possible that the OFT will select a target to investigate next year having given us a year to get used to the new concept of competition law applying to land agreements. The OFT’s original expectation was that during that year anti-competitive agreements would be re-negotiated. However without the OFTs guidance for that year many businesses have felt it would be unadvisable to re-negotiate and many may therefore be stuck with clauses that may infringe competition rules without the necessary justification.

In addition to that, the parties who have anti-competitive agreements may find the anti-competitive restrictions to be unenforceable. From the two examples above, the anchor tenant could find itself facing unexpected competition and the coffee shop tenant will still owe the landlord its high rent but may find that a new coffee shop let by the landlord is taking away a lot of its income. The state of the market is something which can change over time so the restrictions may become enforceable again later. This variable enforceability is something that landlords and tenants are not used to. The mere existence of the restrictive provisions may put a competitor off investing. What an unaccustomed muddle this seems to be!

Even though the reality may well be that many of the restrictions imposed do not have an appreciable anti-competitive effect – in the draft guidance the OFT states that it considers only a minority of restrictions will infringe the prohibition – this does not mean that the restrictions can be ignored. Given the potentially devastating consequences of receiving an OFT fine, the approach we recommend is to consider this element of the transaction very carefully.

Reed Smith are responding to the OFTs consultation on the OFT’s draft guidance. If you want to speak to us to give us your views then please do get in touch with your usual contact at Reed Smith or the authors.