A restriction preventing competition in land contracts may soon be unlawful

Does your land contract fall foul of Competition Law?

Do you risk being liable for damages?

You may be surprised!!

From the 6 April 2011 land agreements will lose the benefit of the exemption that they have enjoyed which deals with prohibiting anti-competitive behaviour. The change will mean that any provision in a land contract (for example, agreements dealing with transfers or disposals of land, rights granted over land or leases) which prevents, restricts or distorts competition between competitors who are in the same market for the production or sale of goods or services may be in breach of the Competition Act 1988 (“the Act”).

Importantly, not only will the Act apply to agreements entered into after 6 April 2011 but also to any agreements which are in existence at this date.

How do I know if my agreement in breach of the Act?

In order to assess whether a land agreement breaches the Act a series of five questions should be asked. If the answers to all of these questions are yes, the agreement will be a prohibited agreement under the provisions of the Act. The questions are as follows:-

1. Does my agreement contain a restriction concerning the way in which land can be used or how rights over land may be exercised?
   
   A tenant’s covenant restricting how a property can be used in a lease, exclusivity covenants given by a landlord to a tenant in a lease agreeing not to allow other tenants to carry on a competing business, and user restrictions in transfers when surplus land is sold are all examples of restrictions concerning the way in which land can be used or how rights over land may be exercised.
2. Was the agreement entered into between “undertakings”? 
   
   If the agreement was entered into by individuals in their personal capacity, the parties will not be considered undertakings. However, if the agreement was a lease of a factory unit to an individual occupying it as a sole trader, this would be considered as an agreement entered into between undertaking.
3. Are the parties to the agreement actual or potential competitors in any of the markets that may be affected by the land agreement and do they have an aggregated market share exceeding 10% of those markets?
4. Does the agreement prevent, restrict or distort competition in the relevant market?
   
5. Does the agreement benefit from an exemption?
    
   Exemptions may include contribution to the improvement of production or distribution or to the promotion of technical or economic progress.

If you answered yes to the above five questions then your agreement will be in breach the Act.

Apart from a fine which can be imposed, one of the consequences of a breach is that the agreement becomes void unless the offending clause of the agreement can, in some way, be severed from the other terms of the agreement. In addition, third parties who are adversely affected by the unlawful provision may obtain damages from the parties for any losses they have sustained as a result.

We recommend that commercial landlords and tenants carry out a full review of all existing agreements and when entering new land agreements, due diligence should now include consideration of competition law.

Should you require assistance in considering the impacts of this change on your existing or future business please email Claire Taylor or call her on 01908 689319.