Do your land agreements contain anti-competitive covenants?

10th March 2020

Recent decisions across different industries demonstrate that the Competition and Markets Authority (CMA) is taking action against anti-competitive covenants in land agreements.  Walker Morris’ dispute resolution, competition and real estate specialists Gwendoline Davies, Trudy Feaster-Gee and Jane Weaver explain and offer practical advice.

What is the issue?

In the UK, all land agreements (including freehold transfers, leases, assignments, licences and development agreements) are subject to competition law.  The Competition Act 1998 prohibits agreements which have as their object or effect the restriction of competition.

As there is no mechanism for obtaining regulatory clearance, parties to land agreements must themselves assess their compliance with competition law.  The penalties for getting it wrong can be severe.  If an agreement is held to be anti-competitive, parties may be fined up to 10% of group worldwide turnover, infringing provisions may be unenforceable (which could render a whole agreement void), directors may be disqualified and third parties may bring private actions for damages. In certain instances [1] there is also a risk of criminal prosecution of the individuals involved in committing the infringement.  There is also the risk of reputational harm and competition law breaches in land agreements can also be of concern for funders and lenders whose investment/security could be adversely affected.

Last year we reported that the CMA used its enforcement powers in connection with a land agreement restriction relating to charges at an airport hotel car park.  That resulted in Heathrow Airport paying a fine of £1.6 million (which included a 20% reduction for co-operation and settlement).  In February 2020, the CMA published a letter in which it confirmed that Tesco had been found guilty of repeated breaches of competition law in its land agreements [2].  It seems that land agreements are, therefore, currently under the competition law spotlight.

What do businesses need to know?

The definition of a land agreement for these purposes is very wide, namely: any agreement which creates, alters, transfers or terminates any interest in land.  Businesses in any industry or sector which own, occupy or otherwise deal with land can be affected.

Examples of scenarios in which anti-competitive provisions could be found in land agreements non-exhaustively include:

• Airports/shopping centres/town centres/hotel or leisure complexes (and similar locations) in which covenants in leases, licences or transfers dictate parking charges and/or impose restrictions on the identity or mix of shops, restaurants, cafes, pharmacists, etc. within the locality
• Freehold transfers or lease assignments which prevent future sale or letting to or use by competitors of the current vendor
• Student or local authority accommodation exclusivity deals with property developers
• Property development deals which restrict the use to which surrounding land may be put or to whom surrounding land may be sold
• Leases or licences which oblige tenants/occupiers to purchase goods or services (such as maintenance, cleaning, food and drink, and the like) from nominated suppliers.

There are, however, some circumstances in which otherwise unlawful anti-competitive provisions in land agreements may nevertheless be legitimate.  A competition law compliance assessment will take into account:

• The relevant market. It is necessary to consider the scope of the relevant product and geographical markets – the more narrow the market, the more likely it is that any provision or restriction will impact on competition.
• The extent of any effect on competition. Only agreements which have an appreciable effect on competition will be unlawful.  Various factors can influence this question.  Generally, the greater a party’s market share, the greater the risk of an appreciable effect on competition.  If sites suitable for use have unique or special qualities; if sites must be in proximity to a particular facility (such as an airport or university); or if planning or other restrictions limit the availability of suitable land, the effect on competition of any potential restriction is more likely to be appreciable.
• Competition ‘red flags’. Certain types of restrictions in land agreements are more likely to be anti-competitive than others – for example agreements between competitors which restrict their ability to behave independently on the market (such as sharing markets by territory or price-fixing) or arrangements that raise barriers to entry into the market for new players.
• Exempt agreements. Some land agreements with anti-competitive effects may benefit from a legal exemption if, for example, they also provide efficiency or other competition gains which are passed on to consumers.

What should businesses do?

There are some practical steps that businesses can take to ensure that their land agreements comply with competition law:

• Staff training is essential. Businesses should provide competition compliance training and guidance to all personnel involved in negotiating and drafting agreements relating to land.
• Contract review. All existing land contracts should be reviewed from a competition compliance perspective, and pre-completion procedures should be put in place to ensure that future agreements do not contain anti-competitive provisions.
• Expert advice should be taken immediately there is any concern that anti-competitive provisions may exist. Specialist advisers can assist with any compliance assessment and can help to mitigate any potential fine or damage, which may include negotiating with counter-parties and with the CMA to resolve matters as effectively, efficiently and sensitively as possible.

If you would like any further advice or assistance in relation to competition law compliance and land agreements, please do not hesitate to get in touch.

[1] in essence, arrangements between competitors designed to fix prices, share markets, limit output or rig bids

[2] via restrictive covenants which prevented landowners from leasing nearby sites to rivals