and land agreements What to watch out for May 2011

Leases and for the sale of land are no longer This will be the case where the provision: excluded from the Chapter I prohibition of the Competition Act • has an appreciable effect on competition in the 1998. What does this mean in practice and which types of (which can be the case even in small provision may be in danger of falling foul of the Act? or local markets); and • is neither objectively necessary for the Why worry about competition law? What are the risks? purposes of the overall agreement nor has sufficient countervailing The potential consequences of breaching The Chapter I prohibition of the economic/consumer benefits of the the Chapter I prohibition include: prohibits anti- kind which can be taken into account competitive agreements. Breach of the • unenforceability of the relevant to justify an exemption. prohibition can have serious provision and, potentially, the entire Anchor tenant exclusivity consequences. agreement; Leases in developments such as As from 6 April 2011, all new and • investigation by the OFT, with existing agreements which create, alter, shopping centres often contain a consequences including fines of up to restriction on the landlord leasing other transfer or terminate an interest in land 10% of worldwide turnover; and are no longer excluded from the scope of units to businesses which compete the Chapter I prohibition. • private actions for an injunction and/or directly with the anchor tenant. Although damages by harmed third parties such provisions are capable of infringing Such agreements include leases, which have suffered loss. the Chapter I prohibition, this will very development agreements and contracts much depend on the specific for sale, and transfers, of land - but not In practice, the risk of unenforceability is circumstances. planning agreements. likely to be the principal concern in relation to most land agreements. The Most residential arrangements will also OFT's guidance indicates that the OFT is remain outside the scope of Chapter I. more likely to investigate (and potentially Following a consultation (see our briefing subsequently impose fines) in cases dated October 2010), the Office of Fair where: Trading (OFT) has recently published • the parties are competitors and the final guidance to assist sector relevant provision is aimed at sharing participants in self-assessing land markets between them; or agreements for compatibility with competition law. • the relevant provision shuts out competitors or dampens competition Where the anchor tenant faces and where one of the parties has a competition from other businesses in the high market share (30% or more) or relevant local area, the provision may not Potentially problematic pr ovisions the provision in question is widely which are discussed in the final OFT be regarded as having an appreciable guidance include: used in the market. effect on competition. For example, if the shopping centre is located in a town • tenant exclusivity provisions As regards agreements entered into prior to 6 April 2011, where a party has used centre, an anchor tenant department store • permitted user and restricted user best endeavours to amend or remove an may face competition from other provisions infringing provision from an agreement, department stores near to the shopping and has not sought to enforce it, the OFT centre. • post-sale restrictive covenants on may consider this a mitigating factor in use. Further, it may be that the development determining the appropriate amount of would never have been built unless the fines (if any). anchor tenant had been given exclusivity The final guidance contains more What types of provision may be anti- for the relevant period. In this case, the specific commentary on each of these competitive? provision would be considered objectively necessary for the purposes of the overall common types of restriction in land Land agreements often contain provisions agreements. It also includes guidance agreement and would not be subject to which restrict the way in which land can the Chapter I prohibition. on the OFT's enforcement priorities. be used or how rights over land may be However, as practical guidance for exercised. However, the OFT expects Similarly, the exclusivity may also be able property sector participants it remains that only a minority of such restrictions to be justified on the basis that its overall somewhat limited. will infringe the competition rules. benefits (e.g. in helping to secure a high profile tenant whose presence will attract

large numbers of shoppers) may be Ideally, the landlord should be in a position to ensure that they take competition law expected to outweigh any anti- to demonstrate that any permitted into account when negotiating land competitive effect. user/restricted user clauses have been agreements in the future and to consider arrived at on the basis of objective criteria whether it is necessary to review any of However, to rely on either of these later and not to limit competition to the landlord their existing agreements for compliance two bases, the duration of the exclusivity or to confer exclusivity upon a particular post 6 April. will usually need to be limited to the tenant. “start-up” phase, i.e. the time needed for It is also important not to lose sight of the anchor tenant’s customer base and Restrictive covenants other ways in which competition law revenue to become sufficiently stable to continues to apply to activities in the secure a return on its investment. For The final guidance indicates that the OFT property sector and in respect of which example, a restriction that lasts for the has no objection to restrictive covenants the previous exclusion for land full duration of a 25 year lease is designed to prevent activities that would agreements never applied. For example: unlikely to be justifiable. interfere with the existing use of any retained land. • Price-fixing: agreements between

two or more landlords to co-ordinate For example, where an owner of an office rent rises or to set minimum rental development sold adjacent land subject to levels have never been excluded from a restriction on its use for industrial the Chapter I prohibition – and would activities (with a view to minimising noise almost certainly be regarded as a and other disturbance), this would be serious infringement, potentially unlikely to infringe the Chapter I resulting in significant fines. prohibition. • of : Operators of However, a restrictive covenant directed key facilities such as ports or airports specifically at preventing the use of land by may be at risk of a breach of the competitors would be at much greater risk Exclusivity for other tenants Chapter II prohibition, which outlaws of infringing Chapter I. abuse of a dominant position. For Exclusivity in favour of other (non- example, the High has recently anchor) tenants raises similar issues A problematic restrictive covenant found that Heathrow Airport breached but, where there is an appreciable effect The OFT guidance gives the example of the Chapter II prohibition by refusing on competition, it will often be harder to the owner of a petrol station which to allow competing providers of airport justify such provisions. For example, a operates two sites in a small town, but parking to use Heathrow airport non-anchor tenant such as a coffee wants to close one of them down. The forecourts to offer "meet and greet" shop would be unlikely to be critical to owner faces no competition from other and "valet" parking services. the development of a shopping centre, petrol retailers in the immediate local nor would it be likely to act as a major area. In order to maintain this position, • : In certain cases “draw” for shoppers to the shopping the owner wishes to impose a restrictive property transactions can be centre as a whole. covenant on any buyer of the site which scrutinised under the separate merger is to be closed preventing the land from Permitted user / tenant mix control rules. For example, in 2008, being used as a petrol station. the OFT investigated and referred to The OFT guidance indicates that In the OFT's view, unless there are the Competition Commission the permitted user clauses (permitted uses many other suitable sites for use as a proposed grant of a lease of a cinema for the land) and restricted user clauses petrol station in the same area, this in north London to a company that (non-permitted uses for the land) will not provision would be likely to appreciably already operated a competing cinema generally be regarded as objectionable restrict competition in the local market. It nearby. and that such provisions can legitimately is very unlikely to justify an exemption on Lastly, following the Competition be used to achieve an appropriate mix economic/consumer benefit grounds. of tenants within a development. Commission's inquiry into supermarkets, Conclusion special rules apply to restrictive covenants That said, permitted/restricted user As noted, the OFT expects that only a or exclusivity provisions in favour of large clauses can become problematic if: grocery retailers. minority of restrictions in land agreements • the landlord is also a competitor of are likely to infringe the Chapter I If you would like to discuss any of the the tenant and seeks to restrict the prohibition. Nonetheless, a number of the issues covered in this briefing, please tenant from undertaking activities provisions noted as potentially problematic contact one of the partners named below competing with the landlord; or in the OFT's guidance are not uncommon or your usual contact at Travers Smith. in land agreements. As such, it will be • in practice they grant a particular important for property sector participants tenant exclusivity.

Travers Smith Anthony , Partner, Real Margaret Moore, Partner, Head 10 Snow Hill [email protected] of Competition [email protected] London EC1A 2AL +44 (0)20 7295 3237 +44 (0)20 7295 3255 T +44 (0)20 7295 3000 F +44 (0)20 7295 3500 Simon Rutman, Partner, Real Estate Nigel Seay, Partner, Competition www.traverssmith.com [email protected] [email protected] +44 (0)20 7295 3379 +44 (0)20 7295 3416

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