How competition law applies to land agreements

Since 6 April 2011 most non-residential land transaction agreements have had to be examined for compliance with competition law.

The Office of Fair Trading's final guidance on the application of competition law to land agreements, published on 24 March 2011, confirmed that most agreements will not raise competition law concerns. However, it did not answer all the questions that had been raised during the consultation period.

The guidance is relatively accessible, but non-competition law specialists will benefit specifically from reading sections 4 and 9. The latter section in particular contains useful practical case studies which are pitched at non-specialists.

As a general point, the application of competition law is very fact-specific. Previous deals can offer some clues as to how competition law might apply in a new set of circumstances, but it is dangerous to rely on these too heavily. Two very similar transactions can produce two very different results under competition law, even where the underlying facts vary only slightly.

This guide identifies situations where competition law concerns are likely to feature.

Background

Competition authorities' biggest worry in land deals is the potential risk that established businesses could prevent new entrants to the market competing with them through the use of agreements between themselves. This is known as foreclosing the market to competition. The authorities are also aware of the possibility that competitors could divide markets between them on a local or regional basis, which could create opportunities for raising prices above their competitive level.

In order to determine whether an agreement will restrict competition, businesses need to understand how any restrictions in their agreements could limit competitors' scope for trading in the relevant market, including on the land on which the restrictions are to be placed. This will involve an analysis of competitors and will require some investigation of the geographical area over which comparable goods and services compete.

Situations that are most likely to trigger competition law concerns

The OFT considers that situations which merit further investigation include:

• agreements involving parties that are competitors in a market for the supply of particular goods or services where the restriction regarding the use of land is aimed at sharing or dividing that market between those parties. The OFT is also likely to be concerned about restrictions that could amount to price fixing, such as where a retail firm leases land to a competitor on terms which require the competitor not to undercut the landlord's retail prices;
• agreements under which a landlord agrees to not allow access by competitors of the lessee to the site or to other sites owned by the landlord;
• lease provisions which restrict the commercial activity that a lessee is permitted to undertake on the premises;
• restrictive covenants in the context of a sale of land where a restriction is imposed on the future use of that land.

The case studies in section 9 of the OFT guidance offer a number of examples which show that the types of competition law concerns listed in the last three points above will often not materialise, mainly for reasons related to the strength of existing competition in the relevant market.

Situations that are unlikely to trigger competition law concerns

The OFT considers that provisions which would be unlikely to appreciably restrict competition include:

• covenants relating to the payment of service charges and meeting of certain financial criteria;
• restrictions imposed on a lessee regarding alterations, repairs, obstructions to the premises, applications for planning permission, advertisements or hours of use;
• provisions which relate to the use of premises where the owner of a site is looking to achieve a certain mix of tenants, for example to ensure the right mix of shops to make a shopping centre attractive to customers;
• where an owner of one property benefits from a restrictive covenant that restricts activities that may be carried out on an adjacent property which could block access to or interfere with the enjoyment of their site.

Situations which, at first sight, may appear to create competition law concerns but which may on careful examination be exempted completely from competition law

Even where a land agreement is found to be potentially anti-competitive, it may nonetheless be exempted if – broadly speaking – it is likely to generate economic and consumer benefits that outweigh the potential harm to competition. To be exempted, such restrictions must not go further than is necessary and must not substantially eliminate competition.

Such exempted restrictions could arise, for example, where successful market entry would not be possible without the restriction in question. In a mixed use project, it may be possible to show that consumers want specific types of outlet in the development. On this basis, developments that depend on securing an agreement with an anchor tenant, where that tenant will seek some form of insulation from competition for a short period of time in order to recoup its investment, might be exempted from competition law concerns.

Situations which appear to create competition law concerns but which the OFT is unlikely to investigate

The OFT has said that it is unlikely to take enforcement action if none of the parties to an agreement has more than a 30% share of the relevant market. For these purposes, the relevant market is defined as the related market where the land that is the subject of the agreement is being used to carry on an economic activity.

The OFT said, though, that it may investigate if there are some particular features present in the agreement, such as the inclusion of long-term exclusive covenants or where the agreement is concluded between competitors.

Despite the OFT not taking action, it should be borne in mind that if such agreements restrict competition in an appreciable way then they will be automatically void and unenforceable in court should a third party challenge their validity. In certain circumstances, the validity of such an agreement can also be challenged by one of the parties to the agreement itself.

When advice should be taken

There are occasions when specialist competition law advice should be sought when covenants are being incorporated into agreements. These include:

• where it is not obviously clear how the 'relevant market' should be defined. Note that this is an objective concept and may therefore bear no resemblance to how the parties may define the market themselves for business development purposes;
• where the agreement containing restrictive covenants concerns activities on land for which there may be little existing or potential future competition in the area. This could be because no other suitable development land is available nearby or because there are few competitors within a reasonable radius of the development on which user restrictions are to be placed;
• where the parties' market shares fluctuate and it would be possible for one or more party's market share to exceed 30% during the life of the agreement. An agreement that complies with competition law when it is signed is capable of becoming unenforceable several years later if the underlying facts change in such a way as to bring competition law into play;
• where one of the parties to the agreement has a share of the relevant market exceeding 40%, in case that party might be considered to be 'dominant' for competition law purposes. This is because dominant companies have special legal responsibilities, which means that they face additional legal constraints on their commercial freedom that do not apply to non-dominant companies;
• where contractual arrangements involve long-term exclusive covenants. The OFT's guidance on this important issue is poor;
• where advice is required on the consequences for the agreement as a whole of a covenant being ruled unenforceable. Advice may well be needed on whether, under the specific competition rules on severance, a finding that a specific provision is anti-competitive would result in removing just that provision or to the collapse of the entire agreement. The OFT's guidance does not explore this issue in any depth.

Summary

The OFT's guidance is helpful, but it is not binding, which means that companies will not know how courts will rule on these issues until cases are heard.

Until then, companies should fully document why they think a covenant is not anti-competitive at the time they enter into an agreement.

It is particularly important to record the reasons explaining:

• why the covenant in question is vital to the agreement;
• why the covenant is proportionate;
• how the arrangement will benefit consumers;
• why there was no less restrictive means of achieving those consumer benefits; and
• why the restriction will not eliminate competition in respect of the market concerned.