Land agreements and competition law

Transcription

1 Land agreements and competition law A Lexis PSL document produced in partnership with Neil Baylis of K&L Gates LLP What is a land agreement? Assessing land agreements When is the OFT likely to investigate? Dominant companies and land agreements Examples of land agreements and their impact Land agreements are not an area that most people would associate with competition law concerns but, following recent changes in UK competition law, care is needed to ensure that no such concerns arise. What is a land agreement? A land agreement is one which creates, alters, transfers or terminates an interest in land. Examples of land agreements are: an agreement for the sale of the freehold a lease agreement assignments of leasehold interests agreements relating to easements licences, and in Scotland, interests under a lease and other heritable rights in or over land, such as heritable securities. Land agreements were traditionally excluded from the UK prohibition on anticompetitive agreements. However, during the Competition Commission s groceries market investigation, concerns arose as to the use by grocery retailers of restrictive covenants to prevent land being developed as a competing grocery store. In effect, this practice created a barrier to entry. The UK government therefore decided to bring all land agreements within the full scope of competition law, including those agreements already in force. The OFT has indicated that it expects only a small minority of land agreements to raise competition issues. However, clauses which were widely thought to be acceptable and common practice now require closer scrutiny. References: Competition Act 1998, s 2 CC groceries market investigation (2008) References: SI 2010/1709 References: OFT land agreement guidelines, para 1.5

2 Assessing land agreements In some ways, the competition analysis of land agreements is similar to the analysis of other agreements, ie it should take the following stages: stage 1 identify the type of land agreement involved (apparently minor provisions of an agreement which is generally not problematic under competition law need to be considered, eg a restrictive covenant in a lease may be problematic) stage 2 consider whether a block exemption applies stage 3 if the agreement does not meet the criteria for an exemption under any relevant block exemption, a case-by-case assessment is required as to whether competition may be restricted, and stage 4 assess whether the agreement generates positive effects or efficiencies which outweigh the negative effects so that an individual exemption applies. In this Practice Note, we consider stages 1, 3 and 4 specifically in relation to land agreements. Stage 1 types of land agreements Two categories of land agreements that are safe from the prohibition on anticompetitive agreements are: Residential property agreements agreements with individuals who are not acting as businesses will not be caught, eg the terms of a lease between a commercial landlord and a student tenant even though one party, the commercial landlord, is acting as a business, and planning agreements a planning obligation will not be caught, eg planning obligations made under section 106 of the Town and Country Planning Act The OFT has listed certain land agreements which it considers unlikely to raise competition concerns. These are: References: OFT land agreement guidelines, paras covenants relating to payment of service charges, and meeting of certain financial criteria covenants relating to repairs, alterations, obstructions to the premises, applications for planning permission, advertisements, or hours of use restrictions on the use of property ( permitted user or restricted user clauses) eg where the owner of a shopping centre or retail park restricts the specific lines of business that may be carried out by a commercial tenant, in order to achieve its desired retail mix (unless the agreement is reciprocal in that the tenant is restricted to selling a type of product on the basis that no other lessee in the shopping centre will be permitted to sell that type of product (in this case, see the section on Exclusivity Agreements below)), and covenants which restrict activities that may be carried out on an adjacent property which could interfere with enjoyment of the benefited property eg blocking access.

3 Exclusivity arrangements and restrictive covenants There are two main categories of restrictions in land agreements which are more likely to restrict competition: if the parties to a land agreement are competitors in a relevant market and a restriction regarding the use of land is aimed at sharing or carving up markets between those parties ( object restrictions ), and other types of restriction if they have the effect of restricting competition by raising barriers to entry (or expansion) in a particular market where a party to the agreement is carrying out an economic activity and a restriction makes access to that market by other competitors more difficult ( effect restrictions ). Effect restrictions are unlikely to be anti-competitive unless one or more of the parties to the agreement possesses market power (see practice note: The central concept of market power ). Market power is the ability to maintain prices above competitive levels or to maintain product quantities, product quality, range or innovation below competitive levels for a significant period of time. The stronger a party s competitors are on the related market and the greater their number, the less risk there is that parties to the agreement will possess market power. This means that any restrictions in their land agreements are less likely to restrict competition. Restrictive covenants A restrictive covenant restricts the way in which a party can act or the way in which land may be used. For example, a land-owner may stipulate in a sale agreement how a property is to be used in order to limit the availability of land to its competitors. A restrictive covenant may protect the land-owner from competition by shutting out competitors from the market. Exclusivity arrangements An exclusivity agreement is where a land-owner leases land to a party and agrees not to allow a competitor of that party to operate on the land or other land that is owned by the land-owner. For example, a landlord of a shopping centre might guarantee one tenant the exclusive right to operate a certain type of shop in that centre. An exclusivity clause may protect the lessee from competition and have the potential to foreclose competitors. Stage 3 case-by-case assessment Two different markets need to be assessed the downstream market that the land will be used for (the related market ) and the market for land.

4 Related market The first market relevant to the assessment of a land agreement is the downstream or related market. This is the market for the activity for which the land affected by the agreement is used. For example, when considering a covenant in a lease that prevents the tenant from opening a coffee shop on leased premises, it will be necessary to consider the impact of that covenant on the market in which a coffee shop would compete. Market for land The second relevant market is the upstream market for land that is suitable for use in the related market, ie is land available for purchase/rent that can be used to compete in the related market. Determining what land is suitable (and over what geographic area) will depend on the product and geographic scope of the related market. For example, if the related market is for the sale of coffee, the scope might be take-away beverages in an inner city. Appreciability An agreement will not be problematic if it does not have an appreciable impact on competition. This is a criterion which land agreements are often mistakenly thought unlikely to satisfy on the basis that such agreements have limited economic impact. However, the question is whether the impact on the relevant market(s) is appreciable and the relevant market itself may be local/small (see practice note: Appreciable impact on competition ). Note if an agreement includes hardcore restrictions such as sharing or carving up the market between competitors or price-fixing, the agreement will always be considered to have an appreciable impact. Present and future circumstances Land agreements need to be assessed against present and also future circumstances. An agreement which is not problematic at the time when it is entered into may subsequently become problematic. For example, the impact of the agreement may be affected by the entry and exit of competitors or the availability of suitable sites. It is a good idea to include wording in the agreement providing that any unenforceable clauses should be struck out rather than allowing the whole agreement to fail (although this may be unavoidable where the restriction is a major consideration in the commercial terms of the agreement). References: OFT land agreement guidelines, para 2.17 EU notice on agreements of minor importance Duration of the restriction The longer the duration of the restriction, the more significant the impact on competition is likely to be. For example, all things being equal, a restriction lasting 10 years will be much more problematic than a restriction lasting 12 months. If the restriction is challenged in court proceedings, the court will not step in and imply the maximum term that may be deemed acceptable; if the clause is anti-competitive, it will be struck out and may be the subject of a damages action, amongst other consequences. The preferred approach is therefore to agree an acceptable duration up-front.

5 Key factors Particularly important factors when assessing market power are: the number and market share of existing competitors the more credible competitors there are, the more likely the agreement is to be acceptable barriers to entry or expansion on the related market and availability of suitable land this may be a significant factor where: - a single land owner owns all (or substantially all) of the available land suitable for use in that market or, even if the suitable land is owned by multiple parties, it is tied up in long term lease contracts - sites suitable for use in the related market have unique or special qualities eg a restriction which prevents land from being used for a superstore is more likely to have an impact on competition than a restriction which prevents an individual high street unit from being used as a particular type of retail business. This is because there are likely to be fewer sites suitable for a superstore development, and more sites suitable for a high street store - the ability to compete in a market requires access to land in a particular location, such as land in the proximity of a port or transport network an agreement which restricts or prevents potential competitors from using land in such a location is more likely to be problematic, and - the number of other sites suitable for use in the related market is limited as a result of planning restrictions. Multiple agreements Where an agreement forms part of a series or group of similar agreements, it should be assessed whether the combined effect of those agreements is to significantly restrict access to the relevant market or competition on that market. Stage 4 could an exemption apply? An agreement may be exempt from the prohibition if each of the following criteria is satisfied: there are efficiency gains eg the creation of one or more new retail outlets, more efficient distribution of products or a greater range of products is available to consumers the benefits passed on to consumers outweigh any negative effects any restrictions are proportionate ie there is no less restrictive means (eg a restriction for a shorter period) of achieving the efficiency gains identified competition is not eliminated in respect of a substantial part of the products in question where competition within a market is already weak, a relatively small reduction may result in competition being eliminated. In practice, it is often difficult to be sure that all of the above criteria are met and the analysis can be more of a risk assessment than a clear-cut test.

6 When is the OFT likely to investigate? The OFT is unlikely to investigate cases where agreements are not between competitors and: neither party has a share of the relevant market (ie the downstream retail market) in excess of 30% there are four or more independent competitors present in the relevant local market, or agreements are entered into when the market share of both parties is below 30%, but subsequently increases to no more than 35% within a two-year period. The OFT may nonetheless investigate cases if evidence comes to light that the restrictions are significantly restricting access to the market. Note even if the OFT is unlikely to investigate an agreement, if it restricts competition and a party suffers loss as a result, damages can be claimed in the courts. Dominant companies and land agreements Care needs to be taken if a dominant company is entering into a land agreement; entering into certain land agreements may in some circumstances constitute an abuse of a dominant position (see Abuse by dominant undertakings Overview). References: TFEU, art 102 Competition Act 1998, s 18 If a company has a dominant position in a market, conduct in relation to land which may amount to an abuse includes: excluding competitors from a market, for example by limiting access to a so-called essential facility such as a hub or other transport terminal which it is necessary to use in order to access a particular market using restrictions in land agreements as part of a strategic campaign to exclude competitors from a market, particularly where regulatory constraints such as planning or licensing limit the supply of suitable land for the competing activity charging of excessive prices for land (that is, prices which are significantly above the competitive level), and unjustified discrimination between tenants in terms of pricing or upkeep clauses.

7 Examples of land agreements and their impact Example A restrictive covenant prevents land adjacent to a theatre from being used for certain industrial purposes for so long as the theatre remains in place. The aim is to avoid disruption to theatre-goers. A property developer rents space in an office complex subject to covenants requiring that the lessee uses the space as offices. The complex is in an area with plenty of other offices and retail outlets available to let. A property developer is building a large shopping centre and wants a high-profile anchor tenant. A 25-year lease is proposed with an exclusivity clause whereby no other department stores will be granted a lease in the centre. As well as competing with other stores in the centre in relation to some product categories, there are two other department stores within the area from which the centre will draw its customers. A shopping centre developer has entered into a lease with a coffee retailer, which guarantees that there will be no other coffee shops in the centre. Demand estimates suggest that multiple coffee shops would be viable. The only other retailer selling hot beverages within the shopping centre is a fast-food outlet. There are two petrol stations 10 minutes drive apart which are under common ownership. There are no other petrol stations nearby. The owner decides to close one of the petrol stations and sell the land. The seller includes a restrictive covenant in the sale preventing any future owner of the land from using it as a petrol station. Assessment Unlikely to be problematic. Does not appear to fore-close the theatre s competitors or reinforce its position on this related market. The scope of the restriction (affecting industrial uses, rather than all uses and lasting only for so long as the theatre remains in place) appears to be appropriately limited. The vast majority of permitted use restrictions are unlikely to give rise to competition concerns. This restriction guarantees a certain type of environment for other office tenants it is not intended to protect tenants from competition. The exclusivity clause protects the department store from competition within the centre. The presence of the other department stores and shops in the vicinity may mean that the exclusivity does not have an appreciable effect on competition. There may also be other nearby land available for other potential department stores. The agreement may also be justified on the basis of positive effects or efficiencies if the investment could not have taken place without guaranteed exclusivity, the exclusivity is indispensable, consumers are likely to benefit from the centre and some competition will remain. However, exclusivity of unlimited duration is unlikely to be deemed necessary. The appropriate duration should take into account the time necessary for a store to reach mature sales. The coffee outlet is likely to face competitive constraints from a fairly limited geographic area, because most customers of the centre are not prepared to go very far to buy alternative beverages. The market that is affected by the exclusivity clause is therefore likely to be the market for the retail of coffee and other hot beverages within the centre. The exclusivity in this context is likely to appreciably restrict competition as there is very little alternative within the centre. Therefore, this restriction will not be permitted. The restrictive covenant is aimed at preventing others from competing with the remaining petrol station. It is assumed that most customers will drive up to 10 minutes to fill up with petrol. On that basis, the petrol station does not face any competition at present. It is unlikely that the covenant would restrict competition if there are many other suitable sites for use as petrol stations in the vicinity. If this is not the case, or will not be the case for the duration of the covenant, it is likely to appreciably restrict competition in the local petrol station market.

8 Neil is a partner in the Antitrust and Trade Regulation, and the Telecom, Media and Technology practice groups. He has experience in advising clients on all aspects of EU and UK competition law. His work covers merger control; bringing and defending competition law based complaints before the regulators; drafting and implementing compliance programs; drafting and advising on commercial agreements; advising on regulatory issues under EU laws, and advising on litigating competition law issues before the English courts. He has advised on major cases in the following industries: automotive; construction materials; fertilisers; subsea cables; travel; media; sport; betting and gaming; beverages; transport; and oil and gas services. K&L Gates LLP comprises nearly 2,000 lawyers who practice in 41 offices located on four continents. K&L Gates represents leading global corporations, growth and middle-market companies, capital markets participants and entrepreneurs in every major industry group as well as public sector entities, educational institutions, philanthropic organizations and individuals. Our practice is a robust full market practice cutting edge, complex and dynamic, at once regional, national and international in scope. Over the last three years our revenues exceeded $1 Billion and, as stated in the July 2010 issue of the UK publication Legal Business, the firm has further cemented its position as the Global 100 s fastest growing firm. If you would like to contribute to Lexis PSLCompetition please contact: Hannah Bates LexisNexis Halsbury House 35 Chancery Lane London, WC2A 1EL hannah.bates@lexisnexis.co.uk +44 (0) For details of how to access more practice notes like this one, please visit A division of Reed Elsevier (UK) Ltd. Registered office 1-3 Strand London WC2N 5JR Registered in England number VAT Registered No. GB LexisNexis and the Knowledge Burst logo are trademarks of Reed Elsevier Properties Inc. LexisNexis The information in this document is current as of November 2012 and is subject to change without notice.