Since it came into effect in 2004, the provisions of the Competition Act 1998 (“the Act”) have not applied to transactions relating to land. However, with effect from 6th April 2011 land agreements are now subject to Act with implementation being retrospective meaning some existing land agreement will had to be renegotiated to ensure compliance with the Act.
The Act prohibits agreements which have as their main objective the prevention, restriction and distortion of competition in the UK which, for instance, makes it illegal to fix prices or restrict operators from entering markets.
Until now, the law has applied to all sectors of the economy, except the property sector being protected by a special exclusion. The original reason for this being that there was concern that uncertainties about the legal position of land agreements might lead to a large number of documents being submitted to the Office of Fair Trading (“OFT”) for approval.
The definition of a “land agreement” covers a wide variety of agreements relating to property and relates to all agreements that create, alter, transfer or terminate an interest in land or any agreements to enter into such an agreement. If an agreement breaches this prohibition it can be unenforceable and could also result in possible enforcement action by the OFT, usually resulting in a fine which can be up to 10% of the global group turnover of the property owner. In addition, any party which considers it has suffered a loss as a result of the land arrangement could also seek action for an injunction or damages.
Who could be affected?
Properties most likely to be affected by this change in policy are shopping centres and other large scale developments where restrictive covenants may prevent competing uses with a large part of the centre or development.
The OFT has recently published its final guidance on land agreements and the affect of the Act on these. This guidance emphasises that the OFT only expects that a small minority of land agreements will breach competition law. Examples of where competition law is likely to apply include where a restriction protects a business from competition or prevents its competitors entering into a market.
The OFT has also explained that as a matter of administrative priority it is unlikely to take enforcement action in cases where none of the parties to a land agreement have more than a 30% share of the market for which the land is being used.
When the lifting of exemption was first muted, it was thought that restrictive covenants on use which, for instance, benefited an anchor tenant in a shopping centre would automatically breach the legislation but is clear from the worked examples provided by the OFT that this will not necessarily be the case. It will very much depend on the facts in each case although, it should be noted that if the restriction was for an unlimited period this could be a breach. By contrast, restrictions on use imposed on other tenants of individual small to medium retail units in a shopping centre in order to create a desirable retail mix would generally not be a breach of the Act but again this will depend on the particular circumstances. A guarantee of an exclusive right to a tenant to operate as a particular type of retailer within a centre to the exclusion of all competition might well, for instance, be a breach.
Property owners with land which might be affected by the removal of the exclusion should take advice but need not be concerned that the OFT is planning a wholesale assault on covenants and restrictions designed to protect a property owners’ investment.