Are exclusivity clauses and restrictions on user in leases in breach of competition law?
Although the UK competition regime has applied to land agreements since 29 June 2010 [with the enactment of The Competition Act 1998 (Land Agreements Exclusion Revocation) Order 2010], until recently there has been only an impractical guidance note issued by the Office of Fair Trading to assist the understanding of which agreements were likely to be caught by the rules. The decision in Martin Retail Group v Crawley Borough Council represents the first reported case where competition law has been applied to a leasehold dispute.
Martin Retail Group v Crawley Borough Council
The claimant was a tenant in a parade of shops owned by the defendant. Martin operated its shop as a newsagent and tobacconist. As part of its lease renewal, Martin sought to extend the permitted use of the shop to incorporate the sale of a wider range of convenience goods. The Council sought to maintain the existing arrangement, which restricted the range of goods Martin was permitted to sell, in the interests of tenant mix. There was already a convenience store on the same parade. The nearest alternative convenience stores were over 1km away.
Martin argued that the restrictive user clause proposed by the Council as part of the renewal was in breach of the Competition Act 1998. Under the Act, it is for the party seeking to impose restrictions to show that they are lawful. The Council conceded that the restriction on user had an anti-competitive effect but sought to argue that a Section 9 exemption applied.
Section 9 Exemptions
For a Section 9 exemption to apply, the agreement imposing the anti-competitive restriction:
- must contribute towards efficiency gains in production or improvement or otherwise contribute towards technical or economic progress in a manner that allows consumers a fair share of the resulting benefits;
- must not impose restrictions beyond those indispensable to achieving such intended benefits; and
- must not afford the parties the possibility of eliminating competition in relation to a substantial part of the products in issue.
The court however did not consider that the proposed restriction in the context of the proposed lease satisfied any of the criteria required to fall within the Section 9 criteria exemption and it was held that the Council’s proposed user clause was an unlawful competition restriction.
Whilst this is a decision at first instance only, and which does not examine directly the application of the prohibition on anti-competitive agreements contained in the Act, it does provide some useful insights into how the courts may interpret restrictions on user and exclusivity clauses in leases in the future – in particular:
- the geographic market, being the distance which consumers are prepared to travel, for convenience goods is likely to be smaller for convenience goods than for household goods;
- a choice of retailers will not necessarily outweigh the potential benefits to consumers of restricting competition;
- the burden of proof is on the party seeking to enforce the same to show that a restriction on user or exclusivity clause is not anti-competitive or that a Section 9 exemption applies; and
- a challenge can theoretically be raised at any time, not just on lease renewals.