Commercial property: competition and use

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Commercial property lawyers have been largely untroubled by the 1998 Competition Act, thanks to the statutory instrument which excluded land agreements (such as leases) from the scope of that act. Although the exclusion was revoked in 2010, there have been few cases.

The recent case of Martin Retail Group Ltd v Crawley Borough Council [2013] WL 7090797 shows just how wide-ranging the effect of the act could be on commercial property agreements. Martin Retail operated a newsagent and post office in a small parade of 11 shops in Crawley. The lease renewal itself seems to have been uncontested but the user clause was in dispute and was referred to the court as a preliminary issue.

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The landlord council sought to uphold its estate management policy, designed to ensure a diversity of small traders. Each lease in the letting scheme had the effect of restricting the user of the relevant premises to a particular trade or business. The various leases were drafted to dovetail together to prevent the tenants in the shopping parade from competing with each other.

Another of the shops in the parade was a convenience store. The tenant wanted to sell convenience goods such as milk and washing powder, and argued that the restrictions imposed by the landlord were anti-competitive.

Practitioners will know from cases such as Crown Estate Commissioners v Signet Group plc and another [1996] 2 EGLR 200 that a landlord seeking to rely on its estate management policy needs to be ready with its evidence. In that case, the Crown Estate filed an annual report to parliament and had a number of written documents specific to the Regent Street estate (pictured) based on professional advice and careful research.

These were used to evidence its estate management policy for the area.

The tenant may not have known the detail of the various Crown Estate documents but the judge found that ‘to a considerable extent management or management potential was certainly generally known’. On that basis, the Crown Estate had acted reasonably in withholding consent to an assignment, change of use and alterations. The case was decided while land agreements were excluded from the Competition Act.

That act provides that agreements which have the effect of restricting competition are unlawful, unless they meet four criteria for exemption. The landlord in this case conceded that the user clause did have the effect of restricting competition. The issue before the court was whether the user clause was saved by the statutory exceptions in section 9 of the Competition Act. These are that the agreement:

1. Contributes to improving production or distribution or to promoting technical or economic progress.

2. Allows consumers a fair share of the resulting benefit.

3. Is indispensable to achievement of the objectives at (1) above.

4. And that it does not afford the parties the possibility of eliminating competition in respect of a substantial part of the products in question.

The landlord’s estate management policy was not written down but was apparently known to the council officers. Nor was there any written evaluation of the policy.  

A party seeking to propose a change to a lease being renewed pursuant to the 1954 Landlord and Tenant Act must produce sufficient reasons for the variation and satisfy the court that the requested change is fair and reasonable (O’May v City of London [1982] 1 All ER 660). By contrast, the party arguing that an anti-competitive agreement falls within the section 9 exemptions is the one which must discharge the onus of proof.

Therefore, the combined effect of the tenant pleading the Competition Act and the landlord conceding the user clause to be anti-competitive was to reverse the evidential burden.

Without relevant judicial guidance on how to assess the parties’ evidence, the court in Martin Retail Ltd looked to the guidance published by the Office of Fair Trading, now adopted by the Competition and Markets Authority. The guidance notes that in most cases, user clauses are unlikely to restrict competition. It is not clear why the landlord in Martin Retail Ltd conceded that the user clause did restrict competition.

One needs to consider the relevant market to determine whether competition is actually restricted. For example, were prices higher as a result? The duration of the restriction is also relevant: a longer restriction is more likely to have a significant effect on competition. However, in this case the landlord’s concession meant those considerations were not relevant to the outcome of the case.

The court held that the landlord had not provided evidence in relation to its tenant mix policy to sufficiently demonstrate that distribution of goods would be improved or that economic progress would be promoted through the user clause it sought for the lease. The exemption criteria are cumulative, so there was no need for the court to consider the remaining three limbs.

However the judge did provide some commentary on the relevant geographic market: the market is relevant when determining whether competition has been eliminated. Both parties produced what was described as ‘some limited evidence of the views of local residents and local traders’. The evidence was correspondence and petitions, which could not be tested by cross-examination.

Despite the subjective nature of this evidence, the judge held that the market for convenience stores was the distance a local resident might walk from the relevant parade to another convenience store, and that this was half a mile. Note that other UK merger control cases have considered a five-minute drive time as the marker of a geographical market for convenience stores. This point seems not to have been considered by the court.

It will be clear from this brief analysis that landlords now need to make sure not only that their tenant mix policies are properly documented, but also that evidence of their benefit is available. Practitioners who have closely followed the commentary on this case will note the contrast between views provided by commercial property lawyers and those of competition specialists.

The latter remark the paucity of evidence and market analysis in this case. A tenant’s adviser contemplating arguing Competition Act issues should be prepared to obtain and review considerable (and doubtless expensive) expert evidence.