Competition law and covenants restrictive of land use

Covenants restricting use of land to particular commercial purposes are commonplace. Until recently, the potential for competition law to regulate them was limited, because “land agreements” were excluded from the reach of the Chapter I Prohibition under the Competition Act 1998. The exclusion has, however, been revoked by the Competition Act 1998 (Land Agreements Exclusion Revocation Order) 2010. The OFT has also provided guidance on the application of competition law in this field.

Accordingly, practitioners can increasingly expect competition law to provide a basis for challenging commercial arrangements restrictive of land use. Martin Retail Group Limited v Crawley Borough Council – a County Court case decided in December last year but which BAILII has just made available at our request – well-illustrates the point. It is (so far as we are aware) the first reported decision considering the application of the Competition Act 1998 to “land agreements” following the 2010 Order (although see Humber Oil Terminals Trustee Limited and Associated British Ports for a Chapter II land use case).

In Martin, the relevant arrangement was a “letting scheme” operated by a Council in respect of various parades of shops of which it was freehold owner. Under the scheme, the Council imposed on lessees covenants restricting use of each shop to specific retail purposes. In Martin’s case, the old lease contained covenants restricting use to (essentially) the business of a newsagent; upon its expiry, Martin applied under Part II of the Landlord and Tenant Act 1957 to renew the lease, seeking incorporation of clauses permitting broader use, including (essentially) the business of a convenience store. The Council refused, proposing instead clauses which would have prevented such business. Martin responded contending that the proposal was unlawful, being contrary to the Competition Act 1998.

The Court directed that competition law point be tried as a preliminary issue. By the hearing, the Council had accepted that its proposal would be contrary to the Chapter I Prohibition unless it constituted an “exempt agreement” for the purposes of section 9 of the 1998 Act, i.e. that the arrangement was one that:

(a) contributes to—

(i) improving production or distribution, or

(ii) promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit; and

(b) does not—

(i) impose on the undertakings concerned restrictions which are not indispensable to the attainment of those objectives; or

(ii) afford the undertakings concerned the possibility of eliminating competition in respect of a substantial part of the products in question.

HHJ Dight found that the burden lay on the Council to establish that section 9 applied (see at paragraph 31), and that the Council had not discharged it (see at paragraphs 32-39). Two general points may be emphasised in the light of the judge’s analysis:

First, neither party had adduced independent expert evidence on the competition law issues before the Court. Rather, each had provided statements of their employees explaining (broadly speaking) the reasons for and against expanding trade at the relevant premises, and referring to hearsay evidence of the local community. The Judge considered such material to be of limited use (see at paragraph 32). His approach is yet further encouragement to parties faced with competition law issues to rely on expert evidence. Indeed, it is difficult to imagine a case for “exemption” being made without reference to such evidence.

Second, the Judge placed significant weight on the OFT guidance, structuring his analysis by reference to the four cumulative criteria set out at paragraph 5.3. Those criteria are that, in order to qualify as “exempt”:

• The agreement must contribute to improving production or distribution, or to promoting technical or economic progress.

• It must allow consumers a fair share of the resulting benefits.

• It must not impose restrictions beyond those indispensable to achieving those objectives.

• It must not afford the parties the possibility of eliminating competition in respect of a substantial part of the products in question.

The Judge found that the Council had adduced no evidence sufficient to establish its case on any of these criteria: see at paragraphs 35-39.

Martin should serve as an important reminder that land agreements are no longer beyond the reach of competition law. Restrictions on use are of course a widespread feature of leases, and there is plainly scope for them now to be subject to far more rigorous judicial scrutiny.

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