Talking shops
Supermarkets’ land agreements come under closer competition scrutiny
by Neil Baylis and Jennifer Marsh*
On 1 July 2012, the UK’s Office of Fair Trading implemented
its powers under the Groceries Market Investigation
(Controlled Land) Order 2010 (the Groceries Order) to assess
the competitive impact of land agreements operating for the
benefit of the large supermarket chains. This means that – in
terms of having the relevant software, personnel and procedures
– the OFT is now in a position to review such agreements when
notified to it, and to require the relevant supermarket to release
or not to enforce infringing agreements.
Background
The Competition Commission conducted a market
investigation into the supply of groceries in the UK, issuing its
final report in April 2008. One of the concerns identified
related to the use by supermarkets of land holdings and
practices connected to land (such as restrictive covenants). In
particular, there was a concern that land agreements entered
into by the major supermarkets were making it difficult for
competitors to enter local groceries markets, as stated in the
CC’s final report (at paragraph 39): “The control of land in
highly-concentrated local markets by incumbent retailers acts
as a barrier to entry, by limiting entrants’ access to potential
sites for new larger grocery stores”.
This led to changes in the competition law assessment of land
agreements in all sectors as the UK prohibition on
anticompetitive agreements (Chapter I of the Competition Act
1998) became applicable to them for the first time. In relation
to land agreements in the groceries sector, it has also led to the
additional requirements set out in the Groceries Order.
Field of application of the Groceries Order
The Groceries Order relates to the “large grocery retailers”,
which are Tesco, Sainsbury, Morrison, Asda, Co-op, Waitrose
and M&S (including any associated businesses in each case).
The OFT may also designate additional “large grocery
retailers” to whom the Groceries Order would then also apply
(see article 3 of the Groceries Order). The Order catches the
following agreements entered into by such grocery retailers:
• restrictive covenants – that is to say, agreements that
restrict the use of land for the benefit of another plot of
land (for instance, a restriction on the burdened land being
developed as a grocery store); and
• exclusivity agreements – that is to say, arrangements by
which a person agrees with a large grocery retailer not to
allow another grocery store to operate from the same site
or otherwise agrees to restrict or limit the sale of groceries
by competitors on the site.
The CC noted that restrictive covenants and exclusivity
agreements were only some of the mechanisms for large
grocery retailers to control land. In particular, the OFT in its
market investigation reference had drawn the CC’s attention
to “land banking”, whereby grocery retailers own a bank of
sites that are potentially available for development into retail
stores or additional retail space.
According to the CC (final report, paragraph 7.72), the four
largest grocery retailers in the UK owned approximately 520
land bank sites as of July 2006. However, the CC noted that
land banking was a costly way for supermarket chains to
restrict the opportunities for competitor entry. Restrictive
covenants or exclusivity agreements incorporated into a sale or
lease of the site would be a much cheaper means of controlling
the use of the sites.
The following covenants are outside the scope of the
Groceries Order and the OFT will not agree to review them:
• covenants previously examined by the CC in the context of
the groceries market investigation and found to be acceptable;
• covenants in favour of a tenant of a residential dwelling; and
• covenants relating to agreements or undertakings relating to
planning obligations.
The process
A party affected by a restriction such as a restrictive covenant
or exclusivity agreement for the benefit of a designated large
grocery retailer may now make a complaint to the OFT. The
regulator will then conduct a review, involving an assessment
as to whether (1) the agreement falls within the relevant terms
of the Groceries Order (for example, in terms of the type of
agreement, whether a designated large grocery retailer has the
benefit of the covenant and whether it was entered into in the
relevant time period); (2) the OFT has received all of the
information it requires for its assessment; and (3) the test set
out in the Groceries Order Test box (see p19) is passed.
The process is expected to be relatively streamlined, compared
with the OFT’s review processes under general competition law
(in particular, Chapter I of the Competition Act 1998). It is also
hoped that it will be a more predictable process requiring less
time and expense on the part of complainants.
OFT powers
If the OFT believes that the test has been failed, it will notify
the relevant large grocery retailer and the applicant of its
provisional decision. It will then allow 20 working days for the
parties to respond and may seek further information before
coming to its final decision.
If the OFT concludes that the test has been failed, the OFT
will, as relevant, require (1) the infringing restrictive covenant
to be released within three to six months from the date that
the retailer is notified of the OFT’s decision; or (2) that the
infringing exclusivity agreement is not enforced from
whichever is the later of 30 April 2013 and five years from the
date on which the grocery store that benefits from the
exclusivity arrangement began trading.
* Neil Baylis is a partner in – and Jennifer Marsh is a senior associate with – K&L Gates LLP
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16 October 2012 • Competition Law Insight
Talking shops
In terms of the mechanics for releasing a restrictive
covenant, the Groceries Order requires (see article 4) that the
retailer should (without any charge to the owner of the
burdened land) (1) enter into a deed of release with the owner
of the burdened land; and (2) bring about the removal of the
entry from the relevant land or charges register.
If the retailer uses its best endeavours to release the restrictive
covenant but is unable to do so, it should (1) procure that the
attempted release is noted on the register; (2) execute a
declaration by deed providing that it will not enforce the
restrictive covenant; and (3) if the land benefiting from the
restrictive covenant is sold, require as a condition of the sale that
all successors in title enter into a similar declaration to that
mentioned in (2) above.
However, in no circumstances is the relevant retailer
required to make an incentive payment to persuade a party to
agree to the release.
New covenants
The designated large grocery retailers are also prohibited
under the Groceries Order (see articles 5 and 8) from entering
into:
• restrictive covenants that restrict grocery retailing (ie
restrictive covenants that implicitly or explicitly prevent land
from being used for grocery retailing); or
• exclusivity agreements that restrict grocery retailing
(specifying, for instance, that all other units in a
development will be let or sold to retailers other than
grocery retailers) with a duration of more than five years
from the date on which the store benefiting from the
agreement began trading.
Agreements with equivalent effect are also caught and
prohibited, as are agreements entered into on behalf of the
large grocery retailers.
Mergers
Under the Groceries Order (see article 11), designated large
grocery retailers are also required to notify the OFT within four
weeks of entering into an agreement either (1) to acquire a
grocery store with a sales area of more than 1,000 sq m; or (2) to
acquire an interest in a site that has been used for a grocery store
of such a size at any time during the previous 12 months.
A template notification form is available on the OFT’s
website. This obligation applies separately to merger control
under the Enterprise Act 2002. A number of individual
groceries store acquisitions, however, have in fact already been
notified to the OFT, particularly in recent years following the
lengthy merger investigation into Tesco’s completed acquisition
of a former Co-op store in Slough. But given that notification
under the Enterprise Act 2002 is voluntary, the mandatory
requirement to notify the OFT under the Groceries Order is
likely to ensure that the OFT is promptly informed of store
acquisitions where it may want to initiate a formal review.
Other measures in the groceries sector
The groceries sector has been the subject of a considerable
amount of attention by the UK competition authorities even
prior to the 2006-2008 groceries market investigation. The
supermarket industry was also referred to the CC for an in-depth
Competition Law Insight • 16 October 2012
Groceries Order Test
T Construct a 10-minute drive-time isochrone around the
burdened site.
T Identify any grocery stores with a sales area of 280 sq m
or more owned by the relevant retailer within 10 minutes’
drive-time.
T If no stores are identified, the test is passed.
T If stores are identified, construct a 10-minute drive-time
isochrone around each identified store.
T If the identified store has a sales area of more than
1,000 sq m:
• in each isochrone, count the number of competing
supermarkets of different groups with a sales area of
more than 1,000 sq m;
• if the number is three or more, the test is passed;
• if the number is less than three, calculate the share of
the identified store’s owner of the total sales area of all
stores within the isochrone with a sales area of more
than 1,000 sq m;
• if the share is less than 60%, the test is passed;
• if the share is 60% or more, the test is failed.
T If the identified store has a sales area of between 280 sq m
and 1,000 sq m inclusive:
• in each isochrone, count the number of competing
supermarkets of different corporate groups with a sales
area of 280 sq m or more;
• if the number is three or more, the test is passed;
• if the number is less than three, calculate the share of
the identified store’s owner of the total sales area of all
stores within the isochrone with a sales area of more
than 280 sq m;
• if the share is less than 60%, the test is passed;
• if the share is 60% or more, the test is failed.
If any identified store fails the test, the test is failed regardless
of whether several other stores have passed the test.
investigation in 1999, although the CC’s final recommendations
were ultimately more modest than in 2008. Further, the sale of
Safeway and the bids by other leading UK supermarket chains
were examined in detail by the CC, concluding in 2003.
As regards the 2006-2008 market investigation, the following
remedies were also imposed: (1) the introduction of a
“competition test” in the planning regime regarding the building
of new larger groceries stores; and (2) the establishment of a
groceries supply code of practice, based on the existing code of
practice but, for example, now monitored by an ombudsman.
Comment
The OFT has had jurisdiction to bring an enforcement action
in relation to land agreements under general competition law
since April 2011 (private court actions are also possible),
although no cases have been brought as yet. Now that the
Office of Fair Trading has concurrent powers in relation to
some land agreements under the Groceries Order, there is a
range of tools open to parties wishing to challenge potentially
anticompetitive land agreements and it remains to be seen
which cases the OFT takes up first.
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