Land Agreements and The Competition Act 1998

Background

The Competition Act has two main parts: the purpose of Chapter I is to prohibit agreements which have the object or effect of preventing, restricting or distorting competition in the UK or which may affect trade within the UK. The Chapter II prohibition prohibits anti-competitive unilateral behaviour amounting to the abuse of a dominant position in the market in the UK and which may affect trade within the UK. Although the Competition Act was passed in 1998, the Chapter I and II prohibitions will not be brought into effect until March 2000.

The Government acknowledged some time ago that although a considerable number of land transactions would be caught by the provisions of the Act, in general, such transactions do not give rise to competition concerns unless one or more of the undertakings involved possesses market power on the relevant market or the agreement forms part of a network of similar agreements. Because it was not intended that the vast majority of property agreements should be prohibited the government has consulted widely on the most appropriate way of excluding such transactions from Chapter I of the Act. In January this year, the Office of Fair Trading published its latest, and presumably its last, formal consultation draft guideline and Order on excluding land agreements (the Competition Act 1998 (Land and Vertical Agreements) Exclusion Order 2000).

Current proposals

The latest proposals provide that the Chapter I prohibition will not apply to any agreement to the extent that it is a “Land Agreement”. A “Land Agreement” is defined as an agreement which creates, alters, transfers or terminates an interest in land, or an agreement to enter into such an agreement. The definition of an interest in land is now extended to include any interest or right created by a licence. This answers criticism of the last consultation draft which did not exclude licences to occupy, concessions and franchise arrangements even though these may have contained provisions similar to a lease. The exclusion is automatic and no notification needs to be given to benefit from the exclusion. A Land Agreement for the purpose of the Exclusion Order will also include any obligation and restriction to which Article 6 of the draft Order applies, ie, any obligation or restriction which is accepted in, or for the benefit of, an undertaking in its capacity as holder of an interest in the relevant land. This connects the obligation or the restriction to the interest in land as opposed to the trading capacity or other business interests of the undertaking.

The consultation draft guideline makes it clear that the exclusion for “Land Agreements” does not cover agreements which relate to land but which do not create, alter, transfer or terminate an interest in land. An example is given of an agreement between land owners in a particular area to fix levels of rent; these are not “Land Agreements” and do not benefit from the exclusion. Arrangements such as standard town centre management agreements will be outside the scope of the definition of “Land Agreement”, but it is considered unlikely that the Competition Act will have any significant impact on these agreements because they are not by their nature anti-competitive. The Office of Fair Trading has worked hard to ensure that any obligations and restrictions generally included in everyday property agreements will benefit from the exclusion for “Land Agreements”. Therefore, Chapter I will not apply to, for example, the normal lease covenants such as those relating to the payment of rent, service charges, user clauses and alienation. This will therefore mean that landlords will still be able to give covenants agreeing to prevent competing uses in a shopping centre.

Obligations and restrictions

As mentioned above, for an obligation or restriction to be excluded it must be accepted in, or for the benefit of, an undertaking’s capacity as holder of an interest in land. The emphasis here is on the capacity in which a party enters into or receives the benefit of a restriction. For example, if a carpet retailer wants to dispose of a surplus site but insists that the buyer covenants not to sell carpets from that site for a period of years, this covenant would be for the benefit of the seller’s retained business and the agreement would not therefore benefit from the exclusion as it was not entered into in the seller’s capacity as holder of an interest in land.

Restrictions on the activity which may be carried out from relevant land are excluded from the provisions of the Act. For example, restrictions on the use of premises, the hours of opening, the window display and on the type of goods that may be sold from the premises are all acceptable. Restrictions which have the effect of fixing minimum resale prices at which goods may be sold, the quantity which may be sold or the suppliers or the sources of goods that may be sold are not.

Because the term “Land Agreement” is widely defined the Director General has power to withdraw the benefit of the exclusion from the Chapter I prohibition if he considers that if it was not automatically excluded the Land Agreement would infringe the Chapter I prohibition and he is not likely to grant it an unconditional individual exemption. If he does intend to withdraw the benefit of the exclusion the Director General must consult the parties to that agreement. Such a direction does not have a retrospective effect.

Consequences

Any obligation or restriction in any property agreement which is not a Land Agreement (eg the covenant required by the carpet retailer referred to above) remains subject to the Chapter I prohibition. If, following analysis, it is found to infringe the Chapter I prohibition, such provision will be void and unenforceable. Indeed, the entire agreement could be rendered void unless it is possible to separate the offending provisions. If it is feared that a provision will be outside the benefit of the Order it is possible to request guidance or a formal decision from the OFT as to whether the agreement does infringe the Act. If it does, it is possible to apply for an individual exemption by way of a notification to the Director General. An individual exemption may be granted because the wider economic implications outweigh the agreement's anti-competitive effect. The exemption may be subject to conditions or obligations and be for a specified time.

Without such an exemption, fines for breach of the Chapter I prohibition can be as high as 10% of turnover in the UK of the offending undertaking.

Chapter II Prohibition

The Chapter II prohibition covers abusive behaviour by dominant companies in a market within the UK or part of it, where such abuse has an effect on trade in the UK. The Exclusion Order provides no exclusion from the Chapter II prohibition for “Land Agreements” or any other agreements relating to property. The consultation guideline actually comments on the application of the Chapter II prohibition to property agreements and states that there are two tests in assessing whether the Chapter II prohibition applies:

1. Whether an undertaking is dominant and

2. If so, whether it is abusing that dominant position.

The test of whether an undertaking is dominant depends upon the definition of the market in which the undertaking is alleged to be dominant and the undertaking’s position within that market. The market definition will vary depending upon the type of product and the relevant geographic area. The Director General considers that in most cases it is unlikely that a geographic market would be defined as narrowly as, for example, a single town centre.

An undertaking may be dominant if it possesses a substantial level of market power. The dominance may be sustained by one undertaking on its own or by a group of undertakings. It is considered unlikely that an undertaking will be individually dominant if its market share is below 40% although dominance could be established below that figure if other relevant factors (such as a weak position of competitors in that market) provide strong evidence of dominance. The consultation draft comments that, in general, ownership by an undertaking of an “essential facility” confers a dominant position. A facility can be viewed as essential if access to it is indispensable in order to compete in the market and duplication is impossible owing to physical geographical legal constraints. Examples of this type of facility would include ports, bus stations and some telecommunications networks. Owners of such facilities will need to check that they do not fall foul of the Competition Act by abusing their dominant position in relating to property agreements they enter into with third parties.

In relation to land, examples of conduct which could be an abuse of a dominant position may include charging excessive rents which are above the market level, discriminating between tenants, applying vertical restrictions that tie or otherwise affect the buying or selling of goods and services by occupants of the land in question or limiting access to an essential facility.

As stated earlier the Act comes into force next month. As a result of the successful lobbying campaign and the proposals in the draft guideline and Exclusion Order, the Act will now only have a limited impact on most commercial property transactions.

For further information, please contact Mark Heighton ([email protected]/+44 171 367 2177) or Caroline Potter ([email protected]/+44 171 367 2721)