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Court reminds landlords about pitfalls of competition law - user clauses can be caught!

29 May 2014

A London Court has ruled that a restriction on use in a shopping parade lease is unlawful under the Competition Act 1998 (CA98). This is a powerful reminder to landlords and tenants, alike, that user clauses can breach competition law and, as such, they may prove unenforceable, giving landlords a headache and tenants a way to safeguard their business plans.

We have previously written about how competition law can catch land agreements. Since 2011, when the government repealed an exclusion order which had previously protected land agreements, including commercial leases and freeholds (Exclusion Order), the Competition Act 1998 (CA98) has applied to such contracts.

As we explained, this is important because sometimes land agreements contain terms, like use restrictions and exclusivity clauses, that can make them unlawful under competition law; if they are unlawful, the penalties can be very severe. Fines of up to 10% of turnover, contractual invalidity and follow-on civil claims are the most serious.

What happened?

Crawley Borough Council (the Council) were sued by its tenant Martin Retail Group Limited (Martins).  During negotiations to renew Martins' 10 year lease of a shop and garage at Furnace Parade (first granted in 2001), the Council refused to extend the old user clause (which permitted use as a typical newsagent type business) to include the sale of household goods, groceries and spirits, such as would be found in a convenience store.

Why competition law came into it, and how it decided the case

Martins took the dispute to the County Court under Part II of the Landlord and Tenant Act 1954, with one allegation being that the original, narrower user clause would breach Chapter I of the CA98. Chapter I prohibits commercial agreements which have the intention or have the effect of eliminating, restricting or distorting competition.

As we explained in our November briefing, the crucial question in relation to restrictions in land agreements is what constitutes the relevant market.  If that market is very wide, and covers a large geographic area then one restriction is unlikely to be found as having a significant effect on competition. Importantly, in this case the Council admitted that the user clause would restrict competition in breach of Chapter I. 

They conceded that the relevant market would be for grocery outlets within a relatively short walking distance, as the types of products being sold fell into the 'convenience category'.  For that reason, this judgment is not  definitive of how the anti-competitive effect of user clauses is analysed.

Nonetheless, it is a cautionary example of the need to take expert advice before seeking to renew or enforce certain restrictions in land agreements, not least user clauses.

The Council's case at the hearing was based on section 9 of the CA98, which provides an exemption from Chapter I.  The Council claimed, in essence, that the clause helped to preserve diversity of outlets in the parade. 

To successfully claim the benefit of an exemption the party seeking to rely on it has to show on the balance of probabilities that:

  • the clause brings efficiency gains: the Council failed at the first hurdle here, since the judge saw no evidence sufficient to show that ensuring a range of different retailers gave rise to any improvement in the distribution of goods or economic efficiency compared to, notably, a supermarket or a number of similar retailers doing business on the relevant site instead
  • allowing consumers a fair share of the resulting benefits: the Council failed to convince the judge that upholding the user restriction would benefit the community and/or bring any benefit to local consumers in terms of lower prices
  • the restriction must be 'indispensable' to the aims it pursues: the judge rejected the Council's claim that the narrow use clause was necessary to protect the letting scheme for the parade and maintain the presence of smaller traders
  • the clause would not allow the parties to eliminate competition on the market: the judge took the view that the market was, indeed, for convenience stores within a relatively short walking distance. The clause therefore did entail the possibility of shutting potential rival convenience stores out of the parade and surrounding 'walkable' zone.

Lessons to learn? Be very wary of precinct-type settings

If for no other reason, this case is notable because it is among the first since the Exclusion Order was lifted. 

It reminds us that user clauses can give rise to serious competition law risks when the physical and economic features of the relevant site and its location mean restricting future use can lead to foreclosure of competitors. 

The case illustrates that, even in local precincts involving small retail outlets, competition law problems may still arise (and are not necessarily de minimis). Failing to address these can have serious consequences, including financial penalties (mentioned above) as well as the possibility of invalidity of lease provisions if not the failure of the entire agreement.

If you are in any doubt as to whether introducing or extending a restriction in any leasehold or, for that matter, freehold agreement may restrict competition then come to us right away. The Martins judgment shows how it can pay to ascertain the risk before signing up to the terms!

This article was written by Paul Henty or Rory Ashmore.

For more information please contact Paul on +44 (0)20 7427 6506 or paul.henty@crsblaw.com