As originally enacted the Competition Act 1998 (“the Competition Act”), did not apply to “land agreements”.
Article 3 of the Competition Act 1998 (Land Agreements and Revocation) Order 2004 defines these to include an agreement between undertakings which creates, alters, transfers or terminates an interest in land, or an agreement to enter into such an agreement. Obviously it includes leases. Article 4 of that order provided that “the Chapter I prohibition” was not to apply to such agreements.
That exclusion was removed by Article 2 of the Competition Act 1998 (Land Agreements Exclusion Revocation) Order 2010, effective from 6 April 2011.
In the Central London County Court, Chancery List case of Martin Retail Group Limited (claimant) v Crawley Borough Council (defendant) (2014) the preliminary issue in an unopposed application for renewal of a business tenancy under Part II of the Landlord and Tenant Act 1954 (“the ’54 Act”) was whether the use restriction clause of the proposed new lease should expressly exclude the sale of alcohol, grocery, convenience goods and other uses falling within Class A1 of the Town and Country Planning (Use Classes) Order 1987.
The claimant said this was prohibited by competition legislation and would therefore be void under the Competition Act 1998 as amended by the Competition Act 1998 (Land Agreement Exclusion Revocation) Order 2010.
The claimant wanted to be able to sell a wider range of goods from the Premises than the user clause in the existing Lease would permit. In particular it wanted to sell groceries, including fresh foods, beers, wines, spirits and household goods i.e. convenience goods and have the shop as a convenience store.
Where there is no agreement between landlord and tenant as to those terms of a tenancy, section 35 of the ’54 Act provides that those other terms shall be as agreed between the landlord and the tenant or determined by the court, and in determining those terms, the court should have regard to the terms of the current tenancy and to all relevant circumstances.
If the proposed use clause was unlawful, because it breached competition legislation, then, where there was no agreement as to its inclusion, it seemed highly likely that the court would decide that it could not be imposed on the parties under section 35.
However, the judge reached no concluded view on that because it was not fully argued before him.
The relevant market for convenience stores for the purposes of competition law was a radius of ½ mile of the Premises, a distance customers would be prepared to walk to shop at such stores.
The defendant argued it was in the interests of the community to have a range of different traders and retail outlets available to local residents not just a supermarket and that their scheme protected Martins from newsagent competition.
The defendant also said there had been no evidence to show that the effect of the letting scheme had been to increase prices on the parades where it operated and the letting scheme was not financially advantageous to the defendant since its effect was potentially to depress or limit market rents.
The court said the proposed use clause was a breach of the Chapter 1 prohibition because the effect of such a clause, within the letting scheme, would be to restrict competition in the sale of convenience goods on the parade. The defendant accepted that subsection 9(2) of the Competition Act placed the burden on the defendant of proving that the proposed use clause would be an “exempt agreement” within the meaning of subsection 9(1). Quite simply, the clause would be void unless the defendant could satisfy that burden. That burden would be discharged by showing that a disputed fact or matter was more likely than not to be true.
There was no reported decision on the issues here but the court was prepared to base its decision on the guidance issued by the Office of Fair Trading in “Land Agreements. The application of competition law following the revocation of the Land Agreements Exclusion Order” of March 2011. Especially the Chapter 5, headed “Applying the exemption criteria” and its Paragraph 5 which contained a summary of the conditions in subsection 9(1) of the Competition Act. While the OFT document was guidance, and without formal legislative effect, it provided a practical and sensible approach to analysing the conditions contained in subsection 9(1).
The court would consider whether an exemption had been established by reference to the four criteria which the guidance identified in paragraph 5.3.
The defendant had failed to show that the distribution of goods was improved or economic progress was promoted through the existence of a number of different retailers rather than via a supermarket or a number of similar retailers.
The proposed use clause and the other restrictions in the units on the parade fed a model of distribution determined by the defendant rather than by the market.
If the scheme were being set up from scratch and the restrictions imposed to ensure that one of the units was occupied by an anchor tenant until that tenant’s business had stabilised then the court might have come to a different conclusion on that issue.
As to the second criterion, there was unlikely to be a price benefit from the existence of the restrictions and that must be a matter of considerable concern to the community. An increase in the range of goods available and provision of a social hub might be a fair share of the benefits, if the evidence were to show such benefits arising from the restriction on competition. In considering this question the court had to balance the benefits against the negative impact of the restriction on competition and that the greater the restriction the larger the benefit for the consumer there had to be for the share to be considered fair. In fact, the community would not benefit from the restrictions contained in the proposed use clause and letting scheme.
The third criterion was the indispensability of the proposed restrictions to the viability of the Parade. Without them small traders would not come to it, the defendant said. But the court said a mix of retailers could be achieved at a shopping centre by the use of less restrictive covenants not conferring the monopoly that had been created by the defendant’s letting scheme as applied to that Parade. So the third criterion was not satisfied.
The fourth criterion was whether the restriction would allow the claimant and defendant the possibility of eliminating competition in respect of a substantial part of the products which the lease agreement required the claimant to sell and/or those which it prohibited it from selling.
One had to take into account the relevant market and the existing and potential competition in respect of the particular products in that market.
The market for the convenience goods the claimant wanted to sell was within a relatively short walking distance from the Parade. The proposed use clause clearly provided a means of eliminating competition in convenience goods on the Parade and within a relatively short walking distance.
If the relevant market had been geographically bigger so that the other convenience stores in the locality fell within its catchment area then there would be no such possibility of elimination.
The court concluded that that the proposed use clause, within the context of the current letting scheme, would contravene section 2 of the Competition Act 1998 and the defendant had not satisfied it that it would be an “exempt agreement” within section 9(1) of the Competition Act.
This blog has been posted as a matter of general interest. It does not replace the need to get bespoke legal advice in individual cases.