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Competition

Restrictive covenants and competition law

Something new to consider

By Katherine Crowley, Professional Support Lawyer, Charles Russell LLP

July 2011


Introduction

From 6 April 2011 the exemption which excluded land agreements from the provisions of Chapter 1 of Competition Act 1998 ("Chapter 1") was revoked. Failure to understand and comply with these requirements could have serious consequences for property owners. Chapter 1 prohibits agreements between undertakings which:
  • have as their object or effect to prevent, restrict or distort competition within the UK or part of it; and

  • may effect trade within the UK or part of it.

Application of Chapter 1

Chapter 1 applies to both existing agreements and agreements entered in to after 6 April. A Land Agreement includes a lease, licence, transfer deed of easement (but not a planning agreement such as a Section 106 Agreement).

Undertakings are generally commercial entities operating a business, so a private individual wishing to control, for example, the use of the end of his back garden which he has sold off to developers will still be able to protect himself from untoward neighbours by way of a restrictive covenant.

Circumstances in which there will be a breach

There is only a breach of Chapter 1 if a relevant restriction has an appreciable effect on competition. An appreciable effect on competition involves assessing the product and geographical market of the commercial organisation and activity concerned. As these markets are fluid, land owners should regularly review their agreements. A restrictive covenant may not have an appreciable effect on competition in year 1, but this may have changed by year 5 as a result of market developments. Competition law operates on a self-assessment basis, so land owners must determine for themselves whether a proposed restrictive covenant will be lawful. These assessments could prove costly and time-consuming, particularly in respect of more sophisticated markets where advice may be required from competition lawyers.

Minor infringements will not usually constitute a breach. Generally, if the agreement is between competitors and their aggregate market share does not exceed 10%, or if the parties are not competitors and their aggregate market share does not exceed 15% of the relevant market, it is unlikely that there will be a breach unless there appears to be significant negative effects on competition. This rule of thumb is not, however, conclusive and each case will be assessed on its own particular circumstances.

Exemptions

An exemption based on four cumulative criteria may apply even if the requirement is breached. The conditions of the exemption are:
  • the agreement contributes to improving production or distribution or to promoting technical or economic progress;

  • it must allow consumers a fair share of the resulting benefits;

  • it does not impose restrictions beyond those indispensible to achieving those objectives; and

  • it must not afford the parties the possibility of eliminating competition in respect of a substantial part of the products in question.
Further guidance

The Office of Fair Trading ("OFT") has published final guidance on the application of Chapter 1 to Land Agreements, which is available on their website. This guidance says:
  • The OFT considers that only a minority of restrictions in Land Agreements will infringe the Chapter 1 prohibition; and

  • In terms of examples of restrictions, the OFT does not think there will be a breach of the Chapter 1 prohibition relating to an owner of a property with a restrictive covenant which restricts activities carried out at an adjacent property which could block access or interfere with the site unless it limits access or competition in a given market.

Conclusion

Failure to comply with the Chapter 1 requirement can result in an investigation by the OFT, liability to third parties (by way of damages or an injunction), fines of up to 10% of worldwide turnover, and could make the offending provisions or possibly even the whole agreement void and unenforceable. For large companies, reputational damage is also a significant concern.

Property owners may take comfort from the OFT’s expectation that few restrictions in Land Agreements will be anti-competitive, but they must stay alert to these newly applicable Chapter 1 rules.

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