UK competition law and land agreements
17 October 2019
17 October 2019
This Quickguide provides an overview of the application of UK competition law to land agreements, including leases.
Since 6 April 2011, restrictions in land agreements1, which had previously been excluded from the UK prohibition on anti-competitive agreements, must comply in full with competition law.
Restrictions in both new and existing land agreements which infringe competition law are automatically void and unenforceable, and if the restrictions cannot be severed, the whole agreement may be compromised. An infringement of competition law may also expose the parties to a range of potential sanctions, including fines of up to 10 per cent of the parties' worldwide turnover, and the possible disqualification of directors who knew or should have known about the infringement.
In March 2011, the Office of Fair Trading (OFT) published guidance which sets out the way in which competition law applies to land agreements (the "Guidance") and which has been formally adopted by the Competition and Markets Authority (CMA) (which took over from the OFT as the primary UK competition authority on 1 April 2014). The Guidance considers several common forms of land agreement, explains the application of the law but also, importantly, clarifies the circumstances in which the CMA is less likely to investigate.
This Quickguide provides an overview of the application of UK competition law to the types of land agreements covered by the Guidance. It will commence with an overview of relevant competition law, before considering how the CMA is likely to assess whether a land agreement is restrictive of competition.
Under UK competition law, the Chapter I prohibition of the Competition Act 1998 (the Act) prohibits:
An exemption to the Chapter I prohibition is available where an agreement, although restrictive of competition, offers countervailing benefits (such as improving production or distribution or promoting technical or economic progress) that outweigh any distortion of competition, provided that certain cumulative conditions are met. The Chapter I prohibition is analogous to the prohibition under Article 101 of the Treaty on the Functioning of the European Union, but without the requirement of there being an effect on trade between Member States (which is less likely to arise in relation to land agreements which tend to be local in impact).
Infringements of the Chapter I prohibition fall into two broad categories: infringements by object and infringements by effect. In respect of infringements by object, the very purpose of the agreement is to achieve an anti-competitive restriction (for example, price-fixing or market-sharing). Infringements by object are typically the most serious forms of competition law infringement and it is very unlikely that an exemption will apply. Infringements by effect concern restrictions whose purpose is not to restrict, prevent or distort competition but where it operates in such a way in practice that it has an actual or potential restrictive effect, intended or not. Such restrictions are more likely to qualify for an exemption if they yield offsetting benefits, although adjustments may be necessary to ensure the exemption criteria are met.
The Chapter II prohibition of the Act prohibits conduct by one or more undertakings which amounts to the abuse of a dominant position in a particular market where such conduct may affect trade within the UK (or any part of it). There is no exemption to this prohibition, but objective justifications may be accepted to show that the conduct was not in fact abusive.
A business can be said to be in a dominant position where it possesses substantial "market power" and can therefore behave, to an appreciable extent, independently of its competitors, its customers and, ultimately, consumers. Whether a business is dominant is a complex question of law and economics but, broadly speaking, concerns will only potentially begin to arise where a business has a share of 35 to 40 per cent or more of supplies or purchases of goods or services in a properly defined product and geographical market. However, the level of market share is a guide only and the key issue is whether the business in question has market power. Enjoying a dominant position is not, of itself, illegal. However, an undertaking which occupies a dominant position is under a special responsibility not to distort competition further and will therefore face certain limitations on its conduct which a non-dominant firm would not.
An infringement of UK competition law can have serious consequences. In particular:
The CMA is the primary enforcement body for the UK competition rules.3 The CMA is vested with powers to request or require information and documents to be provided and can also conduct investigations at business premises and take copies of documentation, electronic files, e-mails, and, in certain cases, seize original documents. These powers can also be used to inspect the premises of a business which is not under suspicion but which may have evidence which is relevant to an investigation into another business, such as a customer, competitor or supplier. These "dawn raids" can occur with no notice.
Restrictions in land agreements regarding the way in which land may be used, or how a right over land may be exercised, do not necessarily infringe competition law. Parties that own or have an interest in land are generally free to determine how that land should be used or whether the land is suitable for use for a particular purpose.
Where the parties to a land agreement are competitors and the object of a restriction regarding the use of land is for the parties to fix prices or share markets by territory, type or size of customer, the agreement will almost invariably infringe the Chapter I prohibition. For example, a retail firm leasing land to a competitor on terms which require the competitor not to undercut the landlord's retail prices is akin to a price-fixing cartel between the competing retailers and very likely to restrict competition.
Other types of restrictions may have the effect of restricting competition, if they prevent competitors of a party to the agreement from competing effectively, for example, by increasing the cost of entry or expansion. When assessing whether this type of restriction has the effect of restricting competition, it is necessary to compare the situation on the relevant market with the land agreement (and the restrictions that it contains) in place, with the situation that would prevail in the absence of the agreement (the "counterfactual").
The assessment of a restriction in a land agreement will involve consideration of the following issues:
The Guidance states that the assessment of a land agreement will generally involve the consideration of two relevant markets:
Land agreements are generally unlikely to restrict competition appreciably unless one or more of the parties possesses market power (i.e. it does not face effective commercial pressure) in the related market or the upstream market. A firm is more likely to possess market power where:
The Guidance identifies a number of restrictions that are unlikely to restrict competition appreciably:
The Guidance identifies two types of provision that might restrict competition and where companies should consider the effect of their arrangements:
In assessing these two types of agreement, the CMA will consider the extent of the relevant restriction. The longer the duration of a restriction and the wider its scope, the more significant its likely impact on competition.
Since publication of the Guidance, a European court has held that a non-compete clause benefitting an anchor tenant of a shopping centre by granting the tenant the right to prevent competing retailers from taking other tenancies in the shopping centre, may have the effect of restricting competition. Whether the clause was found to breach competition law required a full assessment of the legal and economic context of the agreement and an assessment of the actual and potential effect of the clause on competition.
A land agreement which appreciably restricts competition may nevertheless be exempt from the Chapter I prohibition if the parties can show that it satisfies all four of the following exemption criteria:
Where one of the parties to a land agreement is in a dominant position, care is required that the restrictions in a new or existing land agreement are not abusive and in breach of the Chapter II prohibition. Examples of abuses of a dominant position that relate to land agreements might include:
The Guidance emphasises that firms are generally free to decide to whom they sell or lease land, and the price at which they do so. Conduct regarding land will only be prohibited by the Chapter II prohibition in limited circumstances which will depend on the facts.
Since 2010, land agreements in connection with grocery retailing activities have been subject to additional control under The Groceries Market Investigation (Controlled Land) Order (the Controlled Land Order).
The Controlled Land Order is primarily aimed at preventing the use of exclusivity arrangements and restrictive covenants to restrict entry by competing grocery retailers into local areas where one retailer has a very high proportion of existing groceries sales floorspace (highly concentrated local markets). The Competition Commission has identified that such arrangements have an adverse effect on competition in the groceries market.
The Controlled Land Order applies to designated large grocery retailers4, who are required:
The provisions of the Controlled Land Order apply separately from general UK competition law. However, land restrictions in the grocery sector that are not caught by the provisions of the Controlled Land Order remain subject to general UK competition law.
The CMA is not obliged to investigate every suspected infringement of competition law, and applies so-called "prioritisation principles" when deciding whether to take action in an individual case.
The Guidance recognises that only a minority of restrictions in land agreements will infringe the Chapter I prohibition and states, moreover, that the CMA is unlikely to investigate where none of the parties to the land agreement has a share of over 30 per cent on the relevant "related" market (or, if market shares are difficult to calculate, where there are four or more independent fascias in the relevant retail market).
However, where the parties to a land agreement are competitors and the restriction is aimed at sharing related markets (i.e. a cartel), the agreement is likely to constitute a serious object infringement of the Chapter I prohibition, and the CMA may investigate irrespective of the parties' market shares. The CMA is likely to impose substantial fines for such infringements.
Most restrictions in land agreements are unlikely to infringe competition law, although caution is required when negotiating land agreements, as infringing restrictions will be void and unenforceable, and other sanctions may apply. It is also important to assess the compliance of restrictions in existing land agreements with competition law.
The Guidance is helpful in clarifying how the CMA will enforce the Act in relation to land agreements. However, specialist legal advice will generally be required as the assessment of restrictions is based on their effect (which may depend on market conditions and so on) rather than their wording, so that an identically worded restriction may be valid in one land agreement but void in another.
For further information on any of these areas, please speak to one of the contacts listed below or your usual Ashurst contact.