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After this was revoked on 6 April 2011, the Office of Fair Trading (OFT) released its official guidance on the application of competition law to land agreements.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.

Agreements between competitors

The analysis of such clauses will vary slightly where the landlord also operates in the same market as the tenant. In such circumstances, the landlord and tenant will be competitors and the agreement will therefore be considered an anti-competitive agreement ‘by object’.

It is an important concept under competition law that agreements which have an anti-competitive object are illegal per se, and the CMA will not have to show that there was also an anti-competitive effect on the market.

This is because they are considered to have an anti-competitive intention and are anticompetitive by their very nature. The CMA will usually conduct an analysis of the product and geographic markets in which the parties operate when assessing whether companies are competitors.

Exemption

In each circumstance, the CMA will also examine whether clauses falling within the chapter 1 prohibition may qualify for an exemption from the prohibition. It is for the party wishing to rely on an exemption to prove that the criteria are satisfied; and they must assess whether the relevant criteria apply according to the particular circumstances.

The four cumulative criteria which must be satisfied to qualify for exemption are:

1. The agreement must contribute to improving production or distribution, or to promoting technical or economic progress. In the land agreements guidance, these are often known as ‘efficiency gains’ or benefits of the agreements. The benefits of any agreement must outweigh (or at least match) any negative effects on competition. The guidance states that benefits may include the creation of one or more new retail outlets, more efficient distribution of products, or a greater range of products being available to consumers.
2. It must allow consumers a fair share of the resulting benefits which must compensate for the negative impact of the restriction of competition; and the net effect of the agreement must be neutral from the point of view of consumers likely to be affected by the agreement. The greater the restriction on competition, the greater must be the efficiencies and the pass-on to consumers to justify that restriction.
3. It must not impose restrictions beyond those indispensable to achieving those objectives. The agreement must not contain restrictions going beyond those which are indispensable to achieving the benefits identified.
4. It must not afford the parties the possibility of eliminating competition in respect of a substantial part of the products in question.

Increased interest from the CMA

The Heathrow case represents the first time the CMA has used its competition enforcement powers to sanction a land agreement restriction.

The CMA has sent letters to other airports and hotel operators warning against similar agreements. Also, on the same day the CMA announced the Heathrow fine it published guidance, Land agreements and competition: do’s and don’ts, which is available on the CMA website.

Practical points

When entering into new land agreements, it is important for tenants and landowners to consider whether any exclusivity clauses are likely to have an anti-competitive object or an anti-competitive effect on the market; and whether they may benefit from an exemption.

There is potential for the CMA to investigate any land agreements between competitors or non-competitors which contain exclusivity clauses, no matter the size of the parties or the market concerned.

It would be possible, for example, for the CMA to find an exclusivity clause concerning the operation of shoe shops within a regional shopping centre to be anti-competitive (and therefore void), if it could be shown that the restriction effects the ability of competitors to compete within the local market for the sale of shoes; and the benefits do not outweigh the negative effects on competition.

So it is important for businesses to review their existing and any proposed exclusivity arrangements. Landowners burdened by such restrictions may also consider raising competition law arguments in commercial negotiations with new tenants.

Businesses wishing to lease land, but prevented from doing so as a result of such arrangements, would also be within their rights to challenge such arrangements with the landowner.

Neil Baylis is a partner and Gwen Ballin-Reeler is an associate in the competition group in the competition group at Mishcon de Reya mishcon.com