OFT Consultation – The application of competition law to land agreements

Background

Land agreements currently benefit from an exemption in relation to Chapter 1 of the Competition Act 1998 (the "Chapter 1 Prohibition"). This exemption, set out in the Land Agreements Exclusion Order 2004 (the "Order"), is set for revocation on 6 April 2011. After that date, the full force of the UK competition rules will apply to all land agreements.

As part of this process the OFT announced on 15 October 2010 a consultation seeking the views of interested parties on its draft guidance on the application of competition law to land agreements following the revocation of the Order.

The consultation provides draft guidance on the application of the Chapter 1 Prohibition to all new and existing "land agreements". Land agreements in this context, means those agreements which "create, alter, transfer or terminate an interest in land" and which are made between businesses rather than residential owners. The consultation anticipates that the majority of these will be agreements in the retail sector, reflecting in part the political background to the revocation of the Order, which was part of a set of recommendations following the Competition Commission's Groceries Market Investigation.

The draft guidance

The guidance, in the main, fails to live up to its name: it offers very little practical guidance in terms of specifically applying these principles to land agreements. Much of the guidance simply reiterates the general principles underlying the Chapter 1 Prohibition and the steps that legal advisers would normally take when assessing whether an agreement will infringe. These include, defining the relevant market and the requirement to assess the extent to which such an agreement will prevent, restrict or distort competition (its appreciable effect).

The OFT states in the consultation that it expects only a minority of restrictions will infringe the prohibition. However, considering the vast number of leases which currently receive the benefit of the Order, separating the infringers from the non-infringers could still be a lengthy task. In addition, given the OFT's broad interpretation of a restriction ("provisions which affect or limit the way in which the land may be used, or how a right over land may be exercised") almost all land agreements may require at least some level of competition review.

Highlights

The OFT has paid particular attention to the following issues:

• Exclusivity arrangements. Those agreements which include restrictions that guarantee one party exclusivity, or protection from competition in a market more generally (an example given here is the exclusive right to operate a sweet shop in a shopping centre).
• Availability of suitable land. Those agreements that involve sites suitable for use in a related market which have unique or special qualities or where such sites are limited as a result of planning restrictions (an example is where land is subject to a restriction against use as a superstore, which is more likely to have a impact on competition than a restriction on a particular high street unit from being used for a particular type of retail business, this is because land suitable for superstore development is relatively rare).
• Agreement between actual competitors. Restrictions and agreements between actual competitors are seen as more likely to have an appreciable impact on competition.
• New shopping centres. New shopping centres seem to be given special treatment. The creation of a new shopping centre, even those containing restrictions which grant exclusive rights to particular tenants that protect them from facing competition, may be able to receive the benefit of an exemption under the Competition Act 1998. Specifically, it appears possible that "anchor tenants" (i.e. those high profile tenants required to secure funding), could well receive the benefit of the exemption. However, what amounts to an appropriate period of exclusivity will need to be determined, and the only guidance in this regard is that it should "be no longer than necessary to achieve the improvements".

What happens next?

The guidance lacks clarity and application and unless this is addressed in more detail by the OFT in the final version, it is clear that most land agreements containing restrictions will need to be assessed on a case by case basis using general competition law principles.

The Order is set to be revoked from 6 April 2011, from which date the Chapter 1 prohibition of the Competition Act will apply to all land agreements, including those entered into prior to 6 April 2011.

The consultation will run from 15 October 2010 to 14 January 2011.

Lawyers Robert Vidal, Louisa Penny