Legal Report - Order revocation alters competition landscape

The UK Competition Act 1998 prohibition on anti-competitive agreements has for the most part been ignored by the property industry in light of the Land Agreements Exclusion Order 2004.

However, the Competition Commission's investigation into the supply of groceries resulted in a determination that certain features of the market, notably operation of the planning system and the control of land by incumbent retailers, act as barriers to entry.

One of the commission's key recommendations was the introduction of a competition test into the planning system and there are signs that the coalition government may adopt this as part of its forthcoming planning reforms.

However, the commission has introduced certain legislative changes that have grabbed fewer headlines but are potentially far more significant.

As part of a package to address the control of land by incumbent retailers, the Groceries Market Investigation (Controlled Land) Order 2010 came into effect on 10 August.

It requires large grocery retailers (LGRs), including Tesco, Sainsbury's, Morrisons, Asda and others yet to be designated by the Office of Fair Trading (OFT) to release or refrain from enforcing restrictive covenants and exclusivity arrangements that may restrict grocery retailing in highly concentrated markets.

Defining the scope of the rules

Restrictive covenants are arrangements restricting use of land belonging to the person giving the covenant for the benefit of the land belonging to the person to whom the covenant is given. Examples are tenant covenants under a lease preventing the use of land for grocery retailing or imposing restrictions on land sales which limit its use to non-retail purposes. Exclusivity arrangements are those whereby a person agrees with an LGR to limit or restrict the sale of groceries other than by the retailer, as is common on retail parks.

Within six months of the date of the order, LGRs must use their best endeavours to release or not enforce specific restrictive covenants listed in it.

Owners of land burdened by a restrictive covenant can apply to the OFT to release them and will succeed if the covenants fail the competition test. LGRs are prevented from entering into new restrictive covenants that prevent land from being used for grocery retailing.

LGRs may not enforce exclusivity arrangements specified in the order after five years. In addition, applications can be made to the OFT to discharge exclusivity arrangements which fail the competition test.

If these succeed, the arrangement cannot be enforced after 30 April 2013 or five years from when the relevant store began trading - whichever is later. LGRs are also prohibited from entering into or enforcing new exclusivity arrangements for more than five years from the date on which the store begins trading.

Application of the legislation

In all these cases, the competition test will be failed if there are a total of three or fewer LGR fascias within a ten-minute drive time and the LGR benefiting from the covenant or exclusivity arrangement has a market share of more than 60 per cent of grocery sales in the area.

To support all this, LGRs will be required to notify the OFT if they agree to acquire another LGR or an interest in a site that has been used for grocery use with a net sales area exceeding 1,000m2 at any time during the 12-month period prior to that agreement.

Finally, the government has decided to revoke the Land Agreements Exclusion Order, which provided many land agreements with immunity from enforcement under competition rules.

Companies will now have to self-assess the provisions of their land agreements to ensure compliance with competition law. Guidance is due to be published on the types of provisions which may be affected.

Property, planning and competition concerns are now increasingly intertwined. Revocation of the order in particular has consequences for the entire real estate industry, not just the retail sector.

Owners and occupiers that maintain their market power by routinely imposing restrictions must now manage the risk of breaching competition law or face fines of up to ten per cent of their turnover, in addition to reputational damage.

Others wishing to enter new markets or to compete more effectively in existing ones will doubtless use this to open up trading opportunities.

Duncan Field is a partner and Sarah Bischoff is an associate in the planning and environment group at SJ Berwin LLP.

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