This post was also written by Marjorie Holmes.

Have those involved in property development buried their heads in the sand over the question of competition law applying to land agreements? How many carefully drafted exclusivity arrangements for anchor and major tenants could be unenforceable because of the Competition Act which now applies fully to land agreements?

The answer from the heads of terms that we are seeing is that many negotiations seem to take place without regard for competition law. Clients work on the assumption that the exclusivity agreed will be binding, so the legal process where this is questioned must be coming as an unwelcome interruption to getting the deal done.

The Problem with Exclusivity

Exclusivity is common in new retail and leisure developments (and used in many others). In competition terms, the problem with this is that it creates a barrier preventing an outsider from entering that market. When an agreement has as its purpose or effect the prevention, restriction or distortion of competition in the UK then the parties to it are at risk of being in breach of the Competition Act. Whilst we have not seen many exclusivity provisions for new developments that are entered into for the purpose of distorting competition, the question is are they having that effect, and is that effect appreciable?

In the end the question always returns to ‘what is the market’? Tenants will be used to considering this in appraising their decision to locate in a new development. However, it is not just the tenant’s market which is relevant, the developer’s market also needs to be considered. It will be necessary to consider the market for land that is suitable for the contemplated use. Out of town developments are more vulnerable to breaches of competition law. That is because if I am walking round a shopping centre looking for a cup of coffee and a coffee shop tenant has been granted exclusivity for coffee in that centre, I have to pay the price demanded or not have the coffee at all. Similarly, if I drive 30 minutes to get to my nearest out of town retail outlet to buy a new TV, and the choice is poor or they all seem expensive am I experiencing the impact of the exclusivity granted to a retailer who is exploiting the customers? Apart from, perhaps, indulging in a bit of internet shopping at home, I am unlikely to make an hour’s drive from the retail outlet to the nearest town centre as part of the same outing.

So, why agree exclusivity arrangements between developer and tenant in heads of terms which may not be enforceable? A tenant who has invested millions in a fit out (basing its decision on having a number of years with a secure return and no local competitors) may suffer if the landlord reviews all the exclusivity agreements on competition law grounds. This is not too far fetched as landlords sell on after completing the development and come under pressure to let voids. Our advice is that it is best to know the market and understand the potential restriction on competition at an early stage. That way it may be possible to see if the exclusivity agreed can be tailored to fall within the exemption, which applies if it –

  • provides an economic benefit to the consumers;
  • improves distribution or choice;
  • does not impose more than the bare minimum of restrictions necessary to achieve that consumer benefit; and
  • does not eliminate competition for a substantial part of the products in question.

We are seeing the largest tenant operators with significant fit out costs who need exclusivity to justify the decision to invest, take a thorough approach to competition law at the outset. They commission the necessary reports and research to be able to show impact on the market and evidence their claim for the exemption. Smaller tenants seem to be agreeing terms as they always did before the Competition Act was made to apply to land agreements.

Most importantly, however, it seems that in regular real estate development we will have to get used to the fact that it is unlikely that a restriction that applies for over 5 years will ever be seen as legitimate. It is now possible for developer and tenant to seek a short form opinion from the OFT as to the legitimacy of their arrangements. This may enable them to present a case for their anti-competitive provisions to continue for over five years if they can show that they are a special case. So far the OFT have not received a request for a short form opinion on land agreements but they are expected.

As well as anti-competitive provisions being unenforceable, the consequences of a breach of the Act are:

  • investigations by the OFT who have the power to impose fines (a percentage of the group’s global turnover);
  • anybody who has suffered as a result of the restrictive provision can sue for damages or an injunction;
  • ultimately, for the most hardcore offences, there is the risk of criminal liability and director’s disqualification.

What can be learnt from other sectors:

The grocery sector was subjected to very detailed scrutiny by the OFT and is now controlled by the Groceries Market Investigation (Controlled Land) Order 2010. Large grocery retailers are now unable to enter into any new exclusivity arrangements that restrict grocery retailing for more than 5 years from the first opening of the store. Their ability to impose restrictive covenants is restricted and some existing covenants and exclusivity agreements are unenforceable.

Those involved in industries that have always been subject to competition, like telecoms, have simply welcomed us to their world of understanding and analysing exclusive and potentially anti-competitive arrangements on a regular basis.

The future:

We can already see that the biggest developers and tenants understand their markets and their potential impact. They retain economic evidence for a future investigation or justification. Many other tenants who understand their market well may need to develop a rule of thumb about their own impact on the market, even if they do not always fully understand the developer’s position. They should probably assume that exclusivity applying for more than five years is at risk of being unenforceable. Smaller developers are starting to explore the issues. Some day soon we hope there will be an interesting OFT short form opinion on land agreements to review.