Do you know if your Restrictive Covenants are anti-Competitive?
Land agreements containing restrictive covenants are used to decrease or remove the presence of competing business, such as a covenant to refuse to allow certain types of businesses to trade on the remainder of a development or on certain land. This restriction of competition has allowed, for example, supermarkets to create local dominance, as recently found by the UK Competition Commission in its investigation of the supermarkets sector.
Most of these types of agreements have remained immune from competition law, benefiting from an exclusion from the Competition Act’s prohibition on agreements that restrict competition.
From 6 April 2011, all land agreements, including existing agreements, containing covenants restricting competition in the production or sale of goods or services, will become subject to competition law. As this change of law affects a vast number of restrictive covenants, a transitional period has been in place from April 2010 for businesses to assess their existing agreements.
The change is only likely to affect larger businesses as parties to an agreement with market shares less than the relevant threshold (10/15%) are regarded as outside the scope of the Competition Act.
The following types of restrictive covenants are likely to be caught by the Competition Act:
- restrictions in leases preventing the landlord from letting other premises to competitors of the tenant;
- restrictions on a seller of a property not to sell adjacent property to a competitor of the buyer;
- restrictions on a buyer of a property not to use the property for a particular purpose or on tenants of a property limiting the type of commercial activity they may undertake; and
- excessive exclusivity periods in property deals.
Restrictions on development in planning agreements will not be caught by the Competition Act if the only parties to the agreement are the landowner and the local authority.
A restrictive covenant that breaches the Competition Act will be automatically void and unenforceable in the courts. Third parties affected by the restrictive covenant can take legal action to obtain an injunction or declaration against the restrictive covenant and/or damages for any losses incurred. Furthermore, the Office of Fair Trading (OFT) has the powers to investigate alleged breaches of the Competition Act, to terminate or modify the restrictive provision in breach and to impose substantial fines on the parties to the agreement.
Parties to existing land agreements should review any potentially anti-competitive provisions and parties to new agreements should carry out more extensive due diligence to ensure compliance with the Competition Act.
David Whitaker, a Director in the Commercial Property department at Lupton Fawcett LLP, warns “It is essential for property owners, landlords and tenants and retailers, to review anti-competitive provisions in their existing agreements, to look at their exclusivity arrangements, and to look at the restrictive covenants placed on tenants.
If you are in any doubt about the agreements that you have in place, or any agreements that you are about to enter into, please contact David Whitaker.
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