Land Agreements and Competition Law - A Call for Calm

Scotland

Please note: this is a shortened version of an article which can be found here

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On 24 March 2011, the Office of Fair Trading (OFT) published its final guidelines on the application of competition law to land agreements, ahead of the withdrawal, on 6 April 2011, of the exclusion previously in place for land agreements. The withdrawal has caused considerable concern in the real estate sector, but the key message is that only a minority of land agreements will restrict competition.



Background

The OFT now expressly states that it expects only a minority of restrictions to infringe competition law. It has set out a number of examples of agreements that would not infringe competition law, and has given an indication of the sorts of agreements it considers more likely to do so.



Agreements which are unlikely to infringe competition law

The OFT has confirmed that the following agreements are unlikely ever to give rise to competition concerns:


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; and
use restrictions imposed on a tenant (to the extent that such use restrictions do not also impose restrictions on the landlord and are not implementing an exclusivity agreement in favour of another tenant).

The OFT considers that exclusivity arrangements intended to protect a tenant from competition may be anti-competitive. However, this is only likely to be the case if there is not sufficient competition in the market in question already and no other easily available land in the same geographic area. For example, exclusivity for retailers in town centre shopping centres is very unlikely to infringe competition law, both because there is considerable competition between retailers in the town centre anyway, and because there are likely to be many other retail units available outside the shopping centre.



Arrangements designed to keep competitors of the landlord out of the market

The other area of concern for the OFT is restrictions which protect the landlord itself from its competitors. One example is where a landlord also supplies goods or services of a kind that could be supplied by a tenant or potential tenant of its property. This may be the case if, for example, a supermarket owner owns an entire development and places restrictions on the use of other units.



What it means in practice

The agreements for which more care should be taken are those for which:


the geographic market is very localised and the restriction applies throughout that locality (as for a coffee shop or a betting shop, which have been found to have particularly small geographic markets); or
suitable land for entering the market is in short supply even across a much wider area. This is likely to include markets where larger sites are required (such as large cinemas or large supermarkets) or where planning permission may be difficult to obtain.

Penalties

The OFT has also provided more measured guidelines as to how it will enforce competition law in the real estate sector. It is unlikely to impose penalties if the restriction is not aimed at protecting one of the parties from competition in some way. The OFT also confirms that it is unlikely to impose a fine where both parties have a market share on the relevant market of less than 30%. For the majority of agreements, the only likely effect of it being found to breach competition law is that it is void. Indeed, if the agreement has been well drafted, the restriction itself is void but the agreement itself can remain in place.



Conclusion

In taking a more measured approach, the OFT’s guidelines are more helpful to those in the real estate sector. It is now clear that it is unnecessary for a landlord to decide not to impose any restrictions at all in land agreements. Each land agreement must be assessed on its own facts; our flow chart will help you carry out this assessment. In the vast majority of cases, even those agreements containing restrictions will not restrict competition.



For the full article, please click here.