Introduction to Competition Law
Competition law (or antitrust law, as it is more commonly known in the US) is designed to protect consumers from anti-competitive behaviour by businesses, by:
- prohibiting agreements that restrict or distort free trade and competition
- prohibiting abusive behaviour (such as price fixing) by firms with a dominant market position, and
- supervising mergers and acquisitions of large corporations.
The UK law prohibiting anti-competitive agreements is contained in Chapter I of the Competition Act 1988 (“Chapter I”). (Article 101 of the Treaty on the Functioning of the European Union also applies to agreements that have the potential to appreciably affect trade between EU member states although, in practice, this is less likely to apply to UK land agreements.)
Application to Land Agreements
For the purposes of this note, land agreements are agreements between businesses which create, alter, transfer or terminate an interest in land. This would include the grant of a lease and the sale of property, whether freehold or leasehold, by one business to another, and agreements relating to easements and licences. An agreement where one or more of the parties is an individual, not acting as a business, will not be caught. Most residential property transactions will therefore fall outside the scope of this note.
Land agreements used to be excluded from the scope of Chapter I, for largely practical reasons. However, on 6 April 2011 this exclusion was revoked. Land agreements do now therefore fall fully within the scope of the Chapter I prohibition with effect from 6 April 2011.
The change in the law does not have retroactive effect, so the law in respect of the period prior to 6 April 2011 remains unaffected. However, the new law applies to all agreements from 6 April 2011, even those entered into before that date. Planning obligations contained within e.g. section 106 agreements continue to be exempt from the Chapter I prohibition and are not affected by the recent change in the law.
When will a Land Agreement breach Chapter I?
The factors to be taken into account in considering whether a particular restriction in a land agreement infringes Chapter I include:
- the nature, extent and duration of the restriction
- the relationship between the parties (are they competitors, or do they trade with each other at different points in the supply chain, or are their economic activities unconnected?)
- the market in which the parties operate (is it local / regional / national / international?)
- the parties’ respective and combined market shares
- the availability of other suitable land in the affected market
- whether the agreement will have an appreciable effect on competition.
The assessment of each of these factors will depend on the specific facts of each individual case. Note that a restriction which does not infringe Chapter I at the time it is entered into, may subsequently do so following a change in the parties’ market positions.
Any agreement which is designed to share markets by territory or type of customer, or which seeks to protect a business from competition, or prevent its competitors from entering (or expanding in) in a relevant market (depending on the parties’ market shares) is likely to constitute a serious infringement of Chapter I.
However, there are many legitimate reasons why parties to a land agreement may impose or agree to restrictions limiting how land (or a right over land) may be used. For example, a shopping centre landlord may wish to impose restrictions on the use of individual units, in order to ensure a satisfactory mix of retailers.
The OFT anticipates that only a minority of these restrictions will infringe competition law, and has issued helpful guidance indicating some common provisions in commercial property agreements which it considers are unlikely to give rise to competition concerns. These include covenants relating to service charges; restrictions on alterations, repairs, advertisements, applications for planning permission or hours of use; most non-reciprocal permitted user and restricted user clauses; and freehold restrictive covenants designed to ensure the proper use and enjoyment of a neighbouring property.
An agreement which, although restrictive, gives rise to benefits which outweigh its restrictive effect may nevertheless be exempt from Chapter I prohibition if:
- it contributes to improving production or distribution, or to promoting technical or economic progress (such benefits must outweigh, or at least match, the negative impact on competition), and
- it allows consumers a fair share of the resulting benefits, and
- it does not impose restrictions beyond those indispensible to achieving those objectives (is there a less restrictive means of achieving the same benefit?), and
- it does not afford the parties the possibility of eliminating competition in respect of a substantial part of the products in question.
Whether an agreement falls within the scope of this exemption, will again depend on all the specific facts of the individual case. For example, granting a department store exclusivity in a new shopping centre for a period of time might be the only way to induce the department store to open a new store there and help ensure the centre’s success, for the benefit of consumers.
Consequences of breach
The consequences of breaching competition law can be severe.
- A restriction that infringes the Chapter I prohibition is void and unenforceable. If the offending provision can be severed then the remainder of the agreement may remain valid, but in some cases it may be impossible to sever the offending provisions and the whole agreement may also become void and unenforceable, contrary to the intentions of the parties.
- Enforcement action may be taken by a sector regulator, the Office of Fair Trading, and in some circumstances the European Commission, any of whom may require steps to be taken to bring the infringement to an end and may apply for the disqualification of directors.
- Financial penalties may be imposed, of up to 10% of the business’s worldwide turnover for each year that the breach subsists.
- Any third party who has suffered loss as a result of the infringement may pursue a private action in the courts for damages and/or an injunction.
All existing land agreements should be reviewed to ensure ongoing compliance with the law from 6 April 2011.
The types of agreement that may give rise to concern and that will need to be considered in detail include the following:
- an exclusivity clause granted to a tenant by a landlord, confirming that the landlord will not let premises to a competitor of the tenant
- restrictive covenants imposed on the sale of property, designed to prevent the seller’s competitors from being able to use the property
- agreements designed to share markets between the parties.
Each case must be considered carefully on its own facts. Possible future circumstances should be taken into account as well as current circumstances. Some agreements will need to be amended to bring them into line with the current law, and in some cases restrictions may need to be removed from the Land Register.
The law in this area is detailed and complex, and the consequences of breach can be severe.
For further information or advice, or to arrange a review of your land agreements, please contact Debbie Turner on +44 (0)1372 461411.