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.
References: Competition Act 1998, s 2
CC groceries market investigation
(2008)
The UK government therefore decided to bring all land agreements within the full
scope of competition law, including those agreements already in force.
References: SI 2010/1709
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: OFT land agreement
guidelines, para 1.5
Produced in partnership with
Neil Baylis, Partner, K&L Gates LLP
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:
• s tage 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
1990.
The OFT has listed certain land agreements which it considers unlikely to raise
competition concerns. These are:
References: OFT land agreement
guidelines, paras 4.29-4.30
• 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.
Produced in partnership with
Neil Baylis, Partner, K&L Gates LLP
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.
Produced in partnership with
Neil Baylis, Partner, K&L Gates LLP
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.
References: OFT land agreement
guidelines, para 2.17
EU notice on agreements of minor
importance
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).
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.
Produced in partnership with
Neil Baylis, Partner, K&L Gates LLP
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.
Produced in partnership with
Neil Baylis, Partner, K&L Gates LLP
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.
Produced in partnership with
Neil Baylis, Partner, K&L Gates LLP
Examples of land agreements and their impact
Example
Assessment
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.
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.
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.
The vast majority of permitted use restrictions are unlikely to give
rise to competition concerns.
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.
The exclusivity clause protects the department store from
competition within the centre.
This restriction guarantees a certain type of environment for
other office tenants—it is not intended to protect tenants from
competition.
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.
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.
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.
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.
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.
Produced in partnership with
Neil Baylis, Partner, K&L Gates LLP
Produced in partnership with
Neil Baylis, Partner, K&L Gates LLP
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.”
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