Dead rubber

In the beginning
The range of skills necessary to be a successful property developer and investor is about to expand and diversify again.  Over recent years we have had to learn about environmental issues, get to grips with the contaminated land regime and tackle energy efficiency.  Now, we need to be experts on competition law. The Competition Act 1998 introduced two new prohibitions into UK competition law. These were:
- The Chapter I Prohibition: This prohibits agreements between undertakings which may affect trade within the UK and which have as either their object or their effect the prevention, restriction or distortion of competition within the UK or between Member States of the EU.
- The Chapter II Prohibition: This prohibits the abuse of a dominant market position which has or is capable of having an effect on trade within the UK.

The Chapter II Prohibition has always applied to land agreements. From April 2011 the Chapter 1 Prohibition will also retroactively apply to them. This article attempts to summarise the effects the Chapter I Prohibition could ultimately have to land agreements.  It does not deal with the Chapter II Prohibition and is not a definitive statement of the law so if you or your company are a party to agreements which may raise competition concerns, you should take specific legal advice.
 
What does this mean for a property owner?
Often, the answer will be ‘not very much’. The Office of Fair Trading (OFT) which is responsible for introducing and policing the new law, has made it clear that there is no presumption that restrictions in land agreements will be in breach of the prohibition.  Indeed, they consider that very few restrictions will, in fact, contravene it.  However, you cannot afford to ignore the prohibition, as a breach of it may:
- Invalidate specific clauses
- Invalidate whole agreements
- Result in heavy fines from the OFT of up to 10 percent of your worldwide turnover
- Result in court proceedings or a damages claim by a disgruntled competitor
- Or even involve directors being disqualified or worse still prosecuted.

What breaches the Prohibition?
There are some crucial issues which need to be seriously considered for past, present and future land agreements:
- The prohibition only applies to agreements between ‘undertakings’. Undertakings include businesses, public authorities and similar bodies and individuals who are in business.  An individual consumer does not count as an undertaking.
- ‘Land agreements’ has a very broad meaning; including leases, sale agreements, restrictive covenants, easements and licences. 
- The Prohibition applies to: vertical agreements (between non- competing undertakings) and horizontal agreements (between competing undertakings) 
- Agreements do not have to be formal or in writing.
The following are some examples of land agreements which could breach the Prohibition:
- A provision in a sale contract by which the seller agrees not to sell any other land to a competitor of the buyer.
- An agreement giving a tenant total exclusivity.
- Restrictive covenants, restricting the use of land.
Before unbridled panic sets in that all your restrictive covenants are unenforceable, it is important to realise that not all agreements of this kind will be in breach of the Prohibition.  The OFT accept that the majority will not.  In order to breach the prohibition the land agreement:  
- Must be between undertakings.
- It must also contain a restriction on the way in which land may be used or how a right over land may be exercised and either intend to or have the effect of preventing, restricting or even distorting competition in the relevant market. The effect must also be appreciable and must not benefit from any exemption to the rule.  
 
Appreciable effect
A restriction will only breach the prohibition if its effect on the relevant market is appreciable.  While there is no hard and fast rule, the OFT has said that it considers that agreements between competing undertakings will not appreciably restrict competition if the aggregate market share of the parties to the agreement does not exceed 10 percent of the relevant markets affected by it, when dealing with horizontal agreements.  When dealing with vertical agreements the market share of each of the parties to the agreement cannot exceed 15 percent of any of the relevant markets.
 
The relevant market
In deciding whether a land agreement breaches the Prohibition, it will be important to determine what is the relevant market. This can be complicated and the OFT has published a separate guidance note on market definition which can be found online. When looking at land agreements it is important to consider the geographic scope of the relevant market. The market may be international, national, regional or local. Generally a restriction on the use of land would be more likely to have an impact on competition if the market is local or regional. For example the market for a coffee shop is likely to be local – a potential customer is unlikely to travel very far in search of a cappuccino or skinny latte!
In deciding whether a restriction has an appreciable effect in the relevant market it will normally be relevant to look at the market shares of the parties. A retailer may have a very large market share nationally but a very small one within a particular local market.  Conversely, somebody who is only operating out of one outlet in a local market might have a very big market share within that market consequently, specialist sites and uses need to be looked at carefully. For example, a port or marina may, because of the nature of its operation, be the only land which is available for particular types of use within a geographical area.
 
Exemption
There are four cumulative criteria which must (all) be satisfied if a breach of the prohibition is to qualify for exemption. These are:
- The agreement must contribute to improving production or distribution, or to promoting technical or economic progress
- It must allow consumers a fair share of the resulting benefits
- It must not impose restrictions beyond those indispensable to achieving those objectives
- It must not substantially eliminate competition.
 
What to do next
The OFT guidance looks at a number of areas and gives some helpful feedback as to whether or not, in the particular circumstances, it would consider that a breach has taken place.  It is worth reading these examples at oft.gov.uk. Consider whether any existing or potential future land agreements are or might be in breach of the Prohibition and in any new agreement which contains restrictions, include a severance clause – saying that if the restriction is found to be invalid it will not affect the enforceability of the remainder of the agreement – unless you want it to, in which case the agreement should make clear that the restriction is a fundamental term. Where appropriate, advice should be obtained on whether the agreement breaches the Prohibition and if so, what steps to take next.