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An update on the application of competition law to restrictions on use in retail leases

10 October 2014 #Real Estate


The recent case of Martin Retail Group Limited v Crawley Borough Council has indicated how the requirements of competition law may be applied by courts to retail leases which include provisions that restrict the use of a property.

Since 6 April 2011, land agreements such as retail leases have ceased to be excluded from the scope of the 1998 competition law rules that render provisions with a substantial effect on competition invalid. A land agreement containing a restriction on the use of the premises may now be held to be unenforceable under the Competition Act 1998.

In Martin Retail Group Limited, the county court considered whether the leases of a parade of shops demised by Crawley Borough Council which restricted the business of each respective premises to a single use were unlawful under the provisions of the Act. The provision relating to the use of the premises was challenged by a tenant on the renewal of their lease, who wanted to extend the use of their premises from newsagent to the sale of groceries and other items already sold by a neighbouring unit.

As the Council conceded in court that the restrictive use clause did breach the Competition Act provisions, the case centered on whether the land agreement fell under one of the following exemptions, set out in section 9(1) of the Competition Act: 

  1. The agreement contributed to improving production or distribution or to promoting technical or economic progress
  2. It allowed consumers a fair share of the benefit that derived from the agreement.
  3. It did not impose restrictions beyond those indispensable to the attainment of the objectives of the Council.
  4. It did not afford the parties the possibility of eliminating competition in respect of a substantial part of the products in question

On considering the facts, the court did not find sufficient evidence that the lease restriction met the criteria of any of the above four conditions. The court held: 

  1. The land agreement’s restriction on use did not improve production or promote progress
  2. The benefits deriving from the restriction on use were limited - there was no discernible positive effect on prices, and any increase in the variety of products available at the parade due to the existence of the restriction did not outweigh this negative effect resulting from any lack of competition on prices
  3. The land agreement restriction was not "indispensable": the landlord would be able to achieve the same mix of retailers with a less restrictive use clause 
  4. Given that the shops in the parade were small and frequented mainly for convenience items, the restriction was held to eliminate competition from similar shops located within walking distance of the area in question (this being the distance that a customer would be prepared to travel for such convenience items). The court indicated that competition would not have been deemed to be eliminated if the products sold at the parade were not merely convenience items but the more substantial items purchased on a weekly shop. In this case the relevant market would have been larger as the customer would have been prepared to travel further for those items.

It can be seen that when including restrictions on use in land agreements, it will be important to consider each land agreement on a case by case basis, taking into account the overall effect of the restriction on competition and considering each condition for exemption in turn. Landlords seeking to rely on a potentially restrictive land agreement should note that the court has held that the burden lies on the party seeking to impose the restriction to prove that the restriction does not negatively affect competition or that an exemption applies. The Council in this case failed to provide considered, reliable evidence to show that the restrictions had not been breached, showing the importance of being prepared to provide independent third party witnesses to the court (as opposed to hearsay) if a land agreement restriction is challenged. The Council also accepted that the restriction breached competition rules early in the proceedings - a surprising concession given that the Office of Fair Trading’s own guidance notes provide that few use clauses are likely to be caught by the prohibition on restrictions of use in land agreements. Conversely, tenants will note their greater scope to challenge land agreement use restrictions that potentially infringe the provisions of Competition Act on negotiating both new and renewal leases.

Clarkslegal, specialist Real Estate lawyers in London, Reading and throughout the Thames Valley.
For further information about this or any other Real Estate matter please contact Clarkslegal's real estate team by email at realestate@clarkslegal.com by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.

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