Monopoly is not just a game in the property world8th September 2014

Anyone who has ever thrown a dice onto Monopoly's well known multi-coloured board and entered into the inevitable tussle over the dark blues of Park Lane and Mayfair knows the competitive advantages that can arise from controlling a certain property market or sector.

The Competition Act 1998 was put in place to prevent abuse of a dominant market position (as regularly seen around Monopoly boards up and down the country), the distortion of trade and restriction of competition. However, until as recently as April 2011, the UK property market was not subject to its provisions as it did not originally apply to agreements for land (i.e. leases and land transfers).

It is easy to see why the use of restrictive covenants or restricted user clauses are widely used in land transfers or leases - a pub owner selling off adjacent land with development potential would almost certainly impose a restriction on the sale of alcohol and a tenant is delighted when their landlord agrees to restrict competing uses in other premises. Similarly, a landlord of a shopping centre is concerned to procure a good mix of tenants offering a range of goods and services to attract as many customers as possible.

On 6 April 2011 the nature of the game changed and the Competition Act 1998 became applicable to all land agreements.

The rules

Any agreement that may affect trade in the UK and which, whether as its object or effect, prevents, restrict or distorts competition, is void unless it falls within certain specific exemptions.

An otherwise anti-competitive agreement may however be rescued where it:

• Contributes to improving production or distribution or promoting technical or economic progress (e.g. by encouraging more customers);
• Allows consumers a fair share of the resulting benefit (e.g. by helping to reduce prices);
• does not impose restrictions which are not indispensable to attain the objectives (i.e. there must be no other, less restrictive, way of achieving the aim); and
• Does not provide the undertakings concerned with the tools to eliminate competition in respect of a substantial part of the products in question (i.e. there must be another competitor in the market in question.

The players

It is easy to see how the Competition Act might catch transactions involving parties with an already dominant position in their relevant market (e.g. major supermarkets). However, the first (and so far, only) case involving competition law in a land agreement demonstrates that the rules affect all players in the property game, large and small. The case concerned Crawley Borough Council and Martin Retail Group Limited (which has a nationwide chain of newspaper and convenience stores).

Crawley were in the process of granting Martins a shop lease (for premises, which they already occupied under a previous lease) in a parade of 11 shops in Furnace Green, Crawley. Crawley refused to widen the permitted use from a newsagents to include the sale of groceries and alcohol on the basis that Martins would then compete with the "Premier Furnace Green Supermarket", which also had a shop on the parade.

Martins argued that such a restrictive user clause fell foul of the Competition Act 1998. Crawley agreed, but argued that they fell within the exemption on the basis that the restrictive user was required in order to:

• Encourage a variety of shops to the parade;
• Help small businesses which might otherwise be priced out by more competitively run larger retailers;
• Benefit customers (and that it did not benefit Crawley financially because its lease rents were lower as a result of the similarly restrictive user clauses, which were included in all of their retail leases).

Finally, the Council argued that the restriction did not eliminate competition because there was a Tesco Express 1km from the shopping parade, which was a competitor to Premier Furnace Green Supermarket.

Go to jail, do not pass go, do not collect £200

The burden of proof was on Crawley to demonstrate that they met the criteria for the exemption and they failed. The Judge flagged that it was hard for him to rely either on Council employees as witnesses who were clearly not independent or on written statements from local residents when he did not know how they had been selected or what they had been asked to say. The Council did not have any written lettings policy to point to, did not demonstrate how customers would benefit from the restrictive letting policy and the Judge felt that no one would walk for more than 10 minutes for a pint of milk so the Tesco Express was not a competitor to the parade. Finally he decided that Crawley could have achieved a mix of retailers by less restrictive means.

Get out of jail free

The Martins Retail case was very much decided on its specific facts. The Judge did say that a lease on a new-built scheme with a similarly worded restriction designed to allow a key anchor tenant to establish itself might fall within the exemption, if the anchor tenant was going to attract customers to the centre in sufficient numbers.

So, if you are considering a restrictive user clause/covenant, which is likely to distort competition in a particular market, consider the following to see if you fit within the exemption:

• Look at the guidance on land agreements issued by the Office of Fair Trading in March 2011. The Judge in the Martins Retail case relied heavily on this in the absence of case law.
• Any lettings / tenant mix policy must be clearly written up and devoutly followed by the landlord as well as being supported by empirical evidence to show it is a proportionate means of achieving its aim.
• Carefully review the relevant market to check whether competition is still available despite the restriction.

If all else fails, make sure your document contains a severance clause so that, if the restriction is void because of the Competition Act, the rest of the agreement remains in force. A severance provision is damage limitation; it does not give you carte blanche to include a dubious restrictive covenant because the penalties for breach of competition law can also include financial penalties. Above all else – consult a good lawyer and don't leave it to the chance card...

About the author

Katherine Ekers qualified as a solicitor in 2011 and is a rising commercial property star at Forsters LLP.