Applying Competition Law to Land Agreements: will it really change anything?

From 6th April 2011 the Chapter I prohibition in the Competition Act 1998 will apply to land agreements. For most property lawyers and those involved in managing commercial property this will be a big change and potential headache as they will have spent their entire careers not feeling the need to worry about Competition Law. Barry Gross, a senior commercial property solicitor has blogged interestingly about this as @UKLegalEagle at http://uklegaleagle.blogspot.com/2011/04/changes-to-competition-law-end-to-good.html?utm_source=feedburner&utm_medium=twitter&utm_campaign=Feed%3A+Uklegaleagle+%28UKLegalEagle%29&utm_content=Twitter

My view is that in practical terms the change will have limited impact on most property transactions other than adding another element to the due diligence that needs to be carried out. Realistically the OFT is unlikely to investigate any individual agreement almost regardless of egregiousness. This leaves private enforcement by litigation as the principal risk. Competition litigation is exceptionally expensive because of the need to bring market and economic evidence alongside pure legal arguments and this is a serious deterrent to taking points unless there’s a very serious financial impact on a claimant of a particular restriction. That said, if there are other grounds for litigation of a property dispute, it is likely that canny litigators will look to see whether to run competition points, particularly where the impact of a finding of a breach of Chapter I can be contractual invalidity.

A bit of the history

Since the Court of Appeal’s ruling in the Ravenseft case in the 1970s it has been established practice that the restrictions in land agreements were not susceptible to Competition Law. Although that was under the now curious-looking intricacies of the Restrictive Trade Practices Acts, when UK Competition Law was modernised by the introduction of the Competition Act the position was preserved by having land agreements excluded from the application of the Chapter I prohibition (albeit with a clawback power allowing the OFT to regain jurisdiction – although this was never exercised). There was also a second front of protection for property lawyers from the ravages of Competition Law in that the EU Treaties expressly are stated not to apply to systems of property ownership so that EU Competition Law also generally did not apply (breach of Article 101 TFEU can mean that a contract is entirely void ab initio so a finding of such breach in a land agreement would clearly interfere with ownership of property).

However, some incursions have been made into this principle over the years, particularly in the context of intellectual property, which has a number of conceptual parallels with real property. IP and Competition Law have had an uneasy relationship over the years due to the tensions between one field of law which is all about creating, encouraging, protecting and regulating dealings with monopoly property rights and another which seeks to control and limit the exercise of monopoly power. So, Article 102 TFEU (and its predecessors) and Chapter II of the Competition Act have been used to prevent abuses of dominance by IP owners.

In a little reported investigation, the OFT, nearly 10 years ago, applied Chapter II to restrictions in a land agreement. This case involved a betting shop owner placing restrictions on a commercial property to prevent it being used as a betting shop so that the property could not be used to set up a competing business. The OFT found that this was potentially an abuse of dominance and required that the restriction be removed.

More recently, the Competition Commission found large scale use by the major supermarket chains of restrictive covenants on land to prevent store and development sites being acquired for use by their competitors. It ordered that such restrictions be removed in a large number of instances and that the supermarkets should undertake not to seek to impose or enforce such restrictions in the future where that would reduce competition in local markets. This was under the market investigation legislation in the Enterprise Act rather than the Competition Act, so technically did not involve either abuses under Chapter II or anti-competitive agreements under Chapter I. Restrictions in land agreements had also previously been looked at in the long running competition investigations at UK and EU level into tying arrangements between breweries and pub landlords and more recently in Camra’s supercomplaint.

So, it was not really a big surprise to Competition lawyers when it was announced last year that the exclusion for land agreements was to be revoked. The Competition Commission had remarked in the groceries investigation that the exclusion of land agreements had given a false sense of security to landowners. This has been amplified by property lawyers and other professionals never really having had to think too much about the issue.

Some thoughts as to why it won’t really be such a big practical problem

First, it is difficult to imagine the OFT investigating any individual complaint. For at least 5 years the OFT has operated under strict case prioritisation guidelines which set a very bar for complainants to get over if they want to get the OFT involved. Sensibly for a public authority with relatively limited resources, the OFT has moved towards only investigating large and relatively blatant infringements which have a clear and significant adverse effect on consumer welfare. It also looks to see the extent to which there are alternative means of redress and whether a particular complaint is of general public interest or more of a commercial dispute. Realistically, this means that most complaints about anti-competitive provisions in land agreements will need to be looked at as an element of litigation risk. The more frightening penalties of large fines and directors’ disqualification are highly unlikely.

Second, litigation is expensive. Competition litigation particularly so because of its peculiar evidential mix including market analysis and economics. Taking a competition point is unlikely ever to be a serious risk unless there’s a huge amount at stake (eg if there is a known common restriction landowners generally impose within a particular market and there’s therefore a great deal of precedent value to a particular claimant or class of claimant). However, unlike other areas of litigation, competition precedents are not always that helpful because they are factually limited by the economic analysis. If the particular problem is limited to the market conditions in a specific location, there is always the possibility that a ruling will be difficult to apply in other locations where there are different market conditions.

The most likely situations where the change will have some impact will be where there is a pre-existing dispute that is already heading towards litigation. Throwing a competition point into the mix may be helpful to force a settlement and the claimant will already have been committed to a degree of litigation risk and cost.

Although the practical risks for individual agreements are low, this doesn’t mean that they can be ignored. The most pragmatic strategy would be for businesses holding large amounts of commercial property to review the restrictions on the use of their portfolios and to factor possible unenforceability of such restrictions into their decisions. This can be positive as well as negative because they may in some cases have acquired property relatively cheaply on the basis of restrictions against certain commercial uses. Where some restrictions might be unenforceable the next step would be to decide the extent to which this makes a significant difference to anyone, would they notice and if so, what triggers for action beyond technical breach of Competition Law exist. If they might, and only then, it would be worth doing more detailed work on the market and economic impacts to assess and manage the risks posed.