Unhealthy competition: Commercial property agreements and the Competition Act

Restrictive covenants and grants of exclusivity in existing and prospective commercial property agreements became subject to full scrutiny under the Competition Act 1998 on 6 April.

Now, those operating in the property market will have to self-assess commercial property agreements for compatibility with competition law in the same way that other types of agreements are assessed.

Property owners, developers, landlords and tenants may each be affected by this change. Restrictive covenants and exclusivity arrangements that fall foul of the rules may be void and unenforceable if they appreciably restrict competition.

Provided the restriction is there to stimulate investment and is of a reasonable scope or duration, it may be acceptable

This reform is part of a simplification of UK competition law by the government. The introduction of a statutory instrument, the Competition Act 1998 (Land Agreements Exclusion Revocation) Order 2010, repealed a previous exemption for commercial property agreements.

The law is changing

Chapter one of the Competition Act 1998 prohibits commercial property agreements that appreciably affect trade and competition in the UK and which prevent, restrict or distort competition.

Sanctions for breach of the Competition Act include fines of up to 10% of a party’s worldwide turnover and the unenforceability of any offending clauses - or the entire agreement if the clauses are not severable. In addition, any party who has suffered loss by reason of the offending restriction can claim damages in court.

OFT guidance

The Office of Fair Trading (OFT) has recently issued new guidance on how the act will be applied to commercial property agreements, but makes it clear that much depends on the context of the provisions in question.

The OFT is likely to take a “softly, softly” approach to enforcement at first but the principal risk comes from parties to the agreement or third parties who could challenge the enforceability of the offending restriction, or the agreement as a whole, before the courts.

Each area of the developer/construction community will have its own individual concerns. Some typical examples relevant to housebuilders and developers include:

• Sale to a competitor: a restriction on a landowner that prevents it from selling adjoining sites to housebuilder competitors. Such a restriction is likely to be a cause for concern but a market analysis will need to be undertaken to ascertain whether the restriction of competition is appreciable.
• Limiting the number of units on a development: an agreement to limit a developer from building more than a specified number of units on a specific parcel of development land where the land sold is part of a wider site, subject to a single planning consent. This is likely to be acceptable as it seeks to ensure the orderly development of the site in accordance with planning objectives.

Exemptions

Certain types of restrictive covenant can benefit from an individual exemption from the prohibition, provided the pro-competitive aspects of the agreement outweigh their anti-competitive effects.

An example of this could be a restrictive covenant entered into by a landlord in favour of a developer of student accommodation seeking to ensure other blocks within a proposed development are not constructed and sold as residential blocks to be occupied as student accommodation. Provided the restriction is there to stimulate investment and is of a reasonable scope or duration, it may be acceptable.

Planning agreements still remain exempt from the provisions of the act.

Next steps

To minimise the risk of challenge it is important for all developers, housebuilders and landlords to conduct an audit of their existing commercial property agreements and standard policy guidance to ascertain whether any clauses could be challenged under the Competition Act.

Those about to enter into property agreements should consider obtaining specialist competition law advice about their enforceability.

Robert Bell and Peter Stockdale are partners in Speechly Bircham