Land agreements to lose exemption under anti-competition rules

11/01/10

Under UK competition law anti-competitive provisions in an agreement may be held to be void and penalties may be imposed by the OFT for anti-competitive behaviour. However, there is currently an exemption in place for all land agreements (including leases, transfers and the covenants and obligations contained within them) meaning that competition issues do not need to be considered in most property transactions.

This will soon be changing: on 12 January the government announced that, with effect from 6 April 2011, the exemption will be repealed. From that date land agreements will be subject to self-assessment in the same way as other types of agreement.

This note summarises the background to the exemption, the reasons for the repeal and the implications of this.

Anti-competitive agreements - Competition Act 1998

Chapter I of the Competition Act 1998 prohibits anti-competitive agreements which have an "appreciable" effect on trade or competition within the UK. Whether or not a particular agreement has an appreciable effect is a question of fact and is determined by reference to the total market share of the parties to the agreement - in very general terms the parties need to control more than 10% of the relevant market for the agreement to be caught. This prohibition is enforced by the OFT and if an agreement is found to infringe this prohibition then the anti-competitive provision will be void (though the remainder of the agreement may remain enforceable) unless it benefits from an exemption.

How does this apply to property?

It is not uncommon for leases, transfers and other agreements relating to land to contain restrictive covenants which could potentially infringe the Chapter I prohibition. An example might be a covenant by a landlord not to let adjoining property to any company whose business will compete with that of the tenant, or a covenant by the tenant to purchase all of its retail stock from his landlord.

The current exemption for "land agreements"

When the Competition Act was first passed it was necessary to notify the OFT if the parties to an agreement were concerned that any of its provisions may infringe the Chapter I prohibition (in order to obtain confirmation that they did not). The OFT found that it was inundated with precautionary notifications in respect if numerous harmless land agreements by parties wishing to avoid the penalties associated with entering into anti-competitive agreements. Rather than waste resources looking at each of these notifications it was decided that all "land agreements" should be automatically excluded from the Chapter I prohibition (Competition Act 1998 (Land Agreements Exclusion and Revocation) Order 2004), whilst preserving the ability for the OFT to withdraw the exemption in respect of a particular agreement. Essentially this means that anything which falls within the definition of a land agreement is presumed to be compliant unless and until the OFT withdraws the exemption, from which point it is treated like any other agreement and may after investigation be found to infringe the prohibition.

What is a land agreement?

A "land agreement" is any agreement which creates, alters, transfers or terminates an interest in land. It also includes an agreement for such an agreement together with any obligations and restrictions forming a part of the agreement to the extent that they are for the benefit of the undertaking in its capacity as a land owner. This means that a covenant by the landlord not to let adjoining property to any company whose business will compete with that of the tenant is a land agreement (as it benefits the tenant in his capacity as owner of the lease); however, a covenant which requires the tenant to acquire its retail stock from his landlord is not a land agreement (as any benefit to the landlord is in his capacity as a supplier of that stock, not in his capacity as owner of the property).

Why is the exemption being repealed?

In 2006 the OFT decided that certain practices by large supermarkets which fell within the exemption, for example imposing restrictions on the use of the land surrounding their stores, were in fact anti-competitive. They therefore referred the market for the supply of groceries in the UK to the Competition Commission for investigation. In July 2008 the Competition Commission recommended that the exemption be amended so that exclusivity arrangements that restrict grocery retailing and which are entered into by grocery retailers should no longer benefit from it. It also raised the question of whether it was worth preserving the exemption at all, particularly given that the requirement that potentially anti-competitive agreements be notified to the OFT has now been replaced by an obligation on companies to self-assess their agreements for compatibility with competition law (thereby defeating the primary purpose of the obligation, being to reduce the OFT's workload).

On 12 January, following a consultation period, the government determined that amending the exemption so as to exclude the grocery industry would be complicated and risky, that there was no benefit in continuing with the exemption and that there was no policy reason why land agreements should be treated any differently from other types of agreement. The purpose of the exemption had never been to exempt those agreements which were in fact anti-competitive so, with effect from 6 April, land agreements will be subject to self-assessment like other types of agreement.

What does this mean in practice?

Those dealing with property can currently assume that all agreements they enter into and which fall within the definition of a "land agreement" are exempt from the Chapter I prohibition unless notified by the OFT that it has withdrawn the exemption. This means that in the majority of property transactions all competition issues can be ignored.

From 6 April this will no longer be the case. As for other types of business agreement the parties to land agreements will need to think about whether any competition issues arise and will need to self-assess the provisions of the agreement in order to determine whether they infringe of the Chapter I prohibition. For smaller businesses this will rarely be an issue but for larger organisations, particularly those in the retail sector where land use restrictions are common, provisions which were previously exempt will now need to be carefully considered.

It is anticipated that the OFT will draft further guidelines on the application of the Competition Act to land agreements to assist businesses in the self-assessment exercise.

Further advice

If you have any question in respect of any of the issues highlighted in this note, or with regards to any other competition matters, please speak to your BSDR contact partner or contact Paddy Gregan, head of Business Services, direct on 01235 836655 or paddy.gregan@bsdr.com