Out-Law Guide | 04 Aug 2011 | 12:44 pm | 6 min. read
Since 6 April 2011 most non-residential land transaction agreements have had to be examined for compliance with competition law.
The Office of Fair Trading's final guidance on the application of competition law to land agreements, published on 24 March 2011, confirmed that most agreements will not raise competition law concerns. However, it did not answer all the questions that had been raised during the consultation period.
The guidance is relatively accessible, but non-competition law specialists will benefit specifically from reading sections 4 and 9. The latter section in particular contains useful practical case studies which are pitched at non-specialists.
As a general point, the application of competition law is very fact-specific. Previous deals can offer some clues as to how competition law might apply in a new set of circumstances, but it is dangerous to rely on these too heavily. Two very similar transactions can produce two very different results under competition law, even where the underlying facts vary only slightly.
This guide identifies situations where competition law concerns are likely to feature.
Competition authorities' biggest worry in land deals is the potential risk that established businesses could prevent new entrants to the market competing with them through the use of agreements between themselves. This is known as foreclosing the market to competition. The authorities are also aware of the possibility that competitors could divide markets between them on a local or regional basis, which could create opportunities for raising prices above their competitive level.
In order to determine whether an agreement will restrict competition, businesses need to understand how any restrictions in their agreements could limit competitors' scope for trading in the relevant market, including on the land on which the restrictions are to be placed. This will involve an analysis of competitors and will require some investigation of the geographical area over which comparable goods and services compete.
Situations that are most likely to trigger competition law concerns
The OFT considers that situations which merit further investigation include:
The case studies in section 9 of the OFT guidance offer a number of examples which show that the types of competition law concerns listed in the last three points above will often not materialise, mainly for reasons related to the strength of existing competition in the relevant market.
Situations that are unlikely to trigger competition law concerns
The OFT considers that provisions which would be unlikely to appreciably restrict competition include:
Situations which, at first sight, may appear to create competition law concerns but which may on careful examination be exempted completely from competition law
Even where a land agreement is found to be potentially anti-competitive, it may nonetheless be exempted if – broadly speaking – it is likely to generate economic and consumer benefits that outweigh the potential harm to competition. To be exempted, such restrictions must not go further than is necessary and must not substantially eliminate competition.
Such exempted restrictions could arise, for example, where successful market entry would not be possible without the restriction in question. In a mixed use project, it may be possible to show that consumers want specific types of outlet in the development. On this basis, developments that depend on securing an agreement with an anchor tenant, where that tenant will seek some form of insulation from competition for a short period of time in order to recoup its investment, might be exempted from competition law concerns.
Situations which appear to create competition law concerns but which the OFT is unlikely to investigate
The OFT has said that it is unlikely to take enforcement action if none of the parties to an agreement has more than a 30% share of the relevant market. For these purposes, the relevant market is defined as the related market where the land that is the subject of the agreement is being used to carry on an economic activity.
The OFT said, though, that it may investigate if there are some particular features present in the agreement, such as the inclusion of long-term exclusive covenants or where the agreement is concluded between competitors.
Despite the OFT not taking action, it should be borne in mind that if such agreements restrict competition in an appreciable way then they will be automatically void and unenforceable in court should a third party challenge their validity. In certain circumstances, the validity of such an agreement can also be challenged by one of the parties to the agreement itself.
When advice should be taken
There are occasions when specialist competition law advice should be sought when covenants are being incorporated into agreements. These include:
The OFT's guidance is helpful, but it is not binding, which means that companies will not know how courts will rule on these issues until cases are heard.
Until then, companies should fully document why they think a covenant is not anti-competitive at the time they enter into an agreement.
It is particularly important to record the reasons explaining: