Permitted use restriction in retail lease breached Competition Act, London court rules

Out-Law News | 19 May 2014 | 10:56 am | 4 min. read

A 'permitted use' restriction in a commercial lease which limited the type of goods that a retail tenant could sell from the premises was in breach of the Competition Act, a county court in London has ruled.

Competition law expert Natasha Pearman of Pinsent Masons, the law firm behind Out-Law.com, said the judgment is only likely to  have implications for landlords of shopping centres or 'parades' of shops, where customers were likely to walk or take a short drive for their convenience goods and where there were few or no local shopping alternatives for customers. The court's ruling was the first reported case dealing with the application of competition law to land agreements, she said.

The tenant, Martin Retail Group (MRG), had tried to extend the permitted use of premises that it rented in a parade of shops on a housing estate to enable it to sell groceries, including alcohol. The landlord, Crawley Borough Council, opposed this on the basis that each of the shops in the parade should have a different use, and there was already a grocery store at the location. Although the council conceded that the use restriction was potentially anti-competitive, it had argued that it should be allowed under exemptions set out in the Act.

However, in its preliminary ruling the county court found that the council did not satisfy the four cumulative criteria required to exempt otherwise anti-competitive provisions from the scope of the Act. In order to have done so the condition must have contributed to improving production or distribution or promoting technical or economic progress; allowed consumers a fair share of the resulting benefits; must not have imposed restrictions beyond those indispensible to achieving those objections and must not have allowed parties the possibility of eliminating competition for grocery business on the housing estate.

Natasha Pearman said that although the judgment would likely be "heavily cited" by future tenants looking to change permitted usage clauses, it did not fundamentally change the relationship between most user restrictions under competition law.

"So, for example, an out of town shopping centre which attracts customers who travel by car or public transport is likely to be part of a much wider definition; where within that large catchment area there could be alternatives to the shopping centre, such as competing shopping centres or in-town facilities," she said.

"Therefore, user restrictions in this context should be less likely to have an appreciable effect on competition within the local relevant market and so be prohibited by Chapter 1 of the Competition Act," she said.

Chapter 1 prevents businesses from entering into anti-competitive agreements which may affect trade in the UK, or in any substantial part of it; and which are intended to or have the effect of preventing, restricting or distorting competition. Until fairly recently, land agreements were exempt from the rules. This changed in 2011 with the revocation of the Land Agreements Exclusion Order; after which the then Office of Fair Trading (OFT) published guidance on the application of competition law to land agreements. This guidance has been adopted by the new Competition and Markets Authority (CMA).

The council granted MRG a 10-year tenancy of shop premises and a garage in March 2001. The lease bound MRG not to use the shop other than as a retail shop; and only for the retail trade of newsagents, tobacconist, confectionary, stationery and the sale of books, toys, records, fancy goods and greeting cards. The lease formed part of a 'letting scheme' covering 11 shops on the same parade, each with a restriction limiting use of the premises to a particular trade or business.

On expiry of the original lease, MRG sought an extension of the proposed user clause to allow it to sell groceries, spirits and household goods. One of the other shops in the parade was already a grocery store permitted to sell alcohol and so the council refused the extension. When MRG claimed that the council's position was in breach of the Competition Act, the case was referred to the country court as a preliminary issue.

Pearman said that it was unsurprising that the council had conceded that the proposed user clause was in breach of the Act given the "narrow approach to the relevant market" that appeared to have been adopted by the court. Given such a narrow market definition, the court did not go on to consider alternative stores beyond half a mile walking distance from the parade, or whether the proposed user restriction would appreciably restrict competition, she said.

"Ultimately, this left MRG with only the efficiency arguments to try to justify the restriction and these arguments, even if considered at a full hearing, set a notoriously high standard which will often require detailed economic evidence in their support," she said. "No such evidence was adduced by the council and the judge noted that the evidence he was presented with was 'useful, but to a material extent was an expression of subjective opinion by them rather than evidence of primary fact'."

"As a result, this case should be limited as to its specific facts and should be of narrow application to user restrictions," she said.

Although the court "rigidly" followed the OFT's guidance in relation to the efficiency argument, it failed to consider that the guidance also stated that user restrictions were 'unlikely to raise competition concerns' unless they were reciprocal, she said. This was generally taken to mean a restriction accepted by the tenant on the basis that no other tenant would be permitted to compete by selling the same type of product, she said.

"In this case it is not clear whether the court considered the letting scheme to fall within the reciprocal category," she said. "Although some of the council's evidence identified that 'the letting scheme was beneficial to all tenants in the parade, including the claimant which enjoyed the benefit of the restrictions on the other tenants preventing them from trading as newsagents in competition to the claimants', the point does not appear to have been specifically considered and could have steered the case to a different conclusion."