Land agreements: when exclusivity clauses breach competition law

Exclusivity clauses in land agreements are normally negotiated by tenants to prevent landlords leasing another portion of the building or development to the tenant’s competitors. For the purposes of competition law, land agreements are agreements which create, alter, transfer or terminate an interest in land. Land agreements therefore include transfers of freehold interests, leases and assignments of leasehold interests. Competition law applies to land agreements between both competing and non-competing undertakings, to the extent they prevent, restrict or distort competition. For example, where a landowner leases land to a party, an agreement not to allow a competitor of that party to operate on the land or other land owned by the landowner may protect the tenant from competition – and has the potential to foreclose competitors of the tenant in a related market. Exclusivity clauses risk being found to be anti-competitive as they are considered to raise or increase barriers to entry for competitors. This is because chapter I of the Competition Act 1998 prohibits agreements (including land agreements) and concerted practices which have as their object or effect the prevention, restriction or distortion of competition. Breaches of competition law can result in fines of up to 10 per cent of worldwide turnover, and the anti-competitive clauses being unenforceable. The entire agreement may also be void depending on severability of clauses. There is also a risk of director disqualifications; and damages actions from third parties who have suffered loss as a result of the anti-competitive agreement. This can include aggrieved third parties who may be seeking to lease land from the burdened landlord but are unable to do so as a result of an exclusivity clause. Until 2011, exclusivity clauses, including other restrictions on land agreements, were exempt from competition law under the Land Agreements Exclusion Order. After this was revoked on 6 April 2011, the Office of Fair Trading (OFT) released its official guidance on the application of competition law to land agreements. The Competition and Markets Authority (CMA), which replaced the OFT, has demonstrated a renewed interest in land agreements recently, last year fining Heathrow a record-breaking £1.6m for anticompetitive clauses regarding car park leases with the operator of a Terminal 5 hotel.

AGREEMENTS BETWEEN NON-COMPETITORS

In general, unless the parties to the agreements are competitors, when the CMA decides to investigate an exclusivity clause, it will look at them on a case-by-case basis and analyse whether they have an appreciable anticompetitive effect on the market. In doing so, it will consider: — the duration of the agreement: the longer the duration of the restriction the more significant the impact on competition is likely to be; — the market power of the parties: taking into consideration what the scope of the likely ‘market’ is that each party is active in; — the strength of any competitors; — whether the agreement is part of a network of agreements leading to a cumulative foreclosure of the market; and — whether the agreement is likely to become more or less restrictive in the case of changes in the market. For example, a landlord of a shopping centre might enter into a lease with a tenant who demands to be given an exclusive right to operate a certain type of shop in that centre. Such an agreement would protect the tenant from competition from other relevant competitors within that shopping centre and this has the potential to restrict competition on the relevant market. Factors the CMA would take into consideration when assessing the effect on competition include the presence of similar types of shops within the local area; the ability of competitors to compete by entering into agreements with other landowners (thereby increasing choice for consumers); and the length and geographic scope of the agreement.