The Competition Bill - implications for retail property.

Mark Heighton reviews some of the property implications

Many retailers will be familiar with the Competition Bill which is currently being debated in Parliament.

The Competition Bill sets out to mirror, in relation to trade within the United Kingdom, the provisions of Articles 85 and 86 of the Treaty of Rome. In effect, the Bill is aimed at prohibiting agreements which distort, restrict or prevent competition or conduct which is an abuse of a dominant market position.

The Competition Bill has been much debated in Parliament and there is an obvious impact on the trading activities of retailers. However, there has been far less attention paid to the property implications of the Bill.

In the past, land transactions have not generally been subject to UK competition law. However, the Bill (as originally drafted) would have impacted on land because of its effect on certain types of restrictions which are common property transactions.

This was clearly not the Government's intention and following a lobbying campaign from the British Retail Consortium and others, the DTI have now released a draft paper setting out proposals which would exclude most property transactions from the provisions of the Bill.

So what is the effect of the new proposals?

In brief the proposals mean that the Competition Bill will not apply to agreements which create or transfer interests in land.

There are however a list of "exclusions from the exclusion" so that certain land transactions could still be subject to the provisions of the Bill.

Excluded transactions

Types of contractual provisions which will be excluded from the Bill under the new proposals, include:

• User covenants in leases: clauses in leases which restrict use are extremely common and these will still be allowed. In the past these clauses have been challenged on competition law grounds but the courts have analysed such clauses as granting a limited right to the tenant to use the property rather then imposing anti-competitive restrictions on the tenant.
• "Tenant mix" covenants: it is a well established principle of law that retailers cannot, as a matter of general law, prevent a landlord from allowing a competing retailer to occupy a unit in the same shopping centre. In such circumstances the landlord is not in derogation from its grant and the retailer will generally have no cause of action - although the recent decision in Chartered Trust -v- Davies may provide some assistance to retailers in the future in ensuring that landlords do take an active role in managing shopping centres and ensuring that the activities of one tenant do not interfere with the rights of other tenants.

The absence of general protection has led to a number of retailers in recent years insisting on covenants from their landlords preventing competing uses in the same centre. These types of covenants will not be subject to the Bill and will still be permitted.

The "exclusions from the exclusion"

Although the provisions of the consultation paper will be widely welcomed by the property industry, some of the "exclusions to the exclusion" will still mean that some fairly common property transactions will still be subject to the provisions of the Bill.

Transactions potentially affected include:-

• Licences to occupy which contain restrictions on use or "tenant mix" covenants. Because licences do not create an interest in land they will not fall within the general exclusion. Licences to occupy are particularly common in concession and franchise arrangements.
• Leases where there are restrictions on the terms on which trade or activity may be carried out. Examples include restrictions imposed by the landlord on price fixing, the identity of suppliers or the brands which may be sold. In particular there is a potential impact on factory outlet centres where the landlord may wish to impose in the lease a number of obligations so as to preserve the overall "brand image" of the factory outlet centre (for example, by controlling pricing and insisting that all goods are sold for a price of at least 30% below normal market price). Leases which contain provisions which restrict trade or pricing could still be subject to the Bill.

Is the Bill retrospective?

The simple answer is yes. The Bill (once enacted) will not just apply to agreements entered into after Royal Assent but also to agreements entered into before that date.

To assist, there is to be a transitional period of 12 months to achieve compliance for existing agreements. This means that any leases and/or licences which are in breach of the new Bill will need to be varied during this 12 month period.

Consequences

Restrictions which are in breach of the Bill will be void and unenforcable. As long as the relevant restriction is severable from the agreement as a whole, the rest of the agreement will still be valid.

There is a proposed statutory notification procedure which will avoid fines being levied. However, in the absence of notification, fines may also be levied.

Timetable

The Bill was introduced in the House of Lords and is now making rapid progress. It is hoped to go through all of its House of Commons' stages before the summer recess and to receive Royal Assent later this year.

The DTI has always made it clear that it was not their intention that the Bill should apply to normal property transactions and no doubt discussions will continue with the DTI to remove some of the outstanding anomalies. For those who are interested in commenting, time is short and representations should really be made in the course of the next few weeks.