Tue 10 Jun 2014

Lease use restriction was a breach of the competition act

Since April 2011, all land agreements and leases (whenever entered into) have been subject to Chapter 1 of the Competition Act 1998 ("Act") - which prohibits any arrangements that are, to an appreciable extent, anti competitive.

Most lease clauses place restrictions on the permitted use of the let property. Generally such limitations are imposed for sound commercial reasons. In shopping centres or complexes, for example, the landlord will seek to ensure a good user mix in order to make the centre attractive to customers.  You won't go to a shopping centre whose shops all sell shoes - unless, of course, you need shoes! Usually such restrictions do not have an appreciable effect on competition for the purposes of the Act. However, in some circumstance, they can be anti-competitive.

We have just had the first case on this topic, where the court decided that such a tenant mix restriction breached the Act - because is was anti-competitive and it did not satisfy the exemption criteria. Although it is an English case, the law applies UK wide and so any tenant (even of a property in Scotland) might find the decision useful if they are trying to resist or challenge a use restriction on a lease of a unit in a shopping centre or parade of shops where:-

  • customers are likely to walk or only drive a short distance and 
  • there are few, or no, alternative shops within the neighbourhood.

It is not likely to be of use to tenants of units in town centres (where there are many other alternative shops) or in out of town centres (where most customers get there by car).

Martin Retail Group Limited v Crawley Borough Council

This case involved a parade of retail shops in a housing estate, where the Council was landlord. Martin Retail Group, one of the tenants, was applying for a lease renewal.

The leases of all of the units restricted their use to a particular trade or business. The use clause in Martin's existing lease was not to use otherwise than as a newsagent and tobacconist (and also allowed the sale of confectionary and other specified items). Martin wanted the use clause in the renewed lease to be open Class 1 ie any retail use.

The Council wanted to keep the existing fixed list of permitted uses and also expressly to exclude the sale of alcohol, grocery, convenience goods and other Class 1 uses. One of the other units in the parade was a supermarket, operated by a local family.


Landlord arguments

The Council had various lines of argument, including that:

  • the restrictions in the leases of all of the units in the parade, encouraged diversity and enabled new traders to enter the market when otherwise they might not do so and the local community benefitted from the social hub created and the range of retail outlets; 
  • there was no breach as there was competition for the family run supermarket in the parade from a Tesco Express that was 1 km away on the other side of a railway line and two convenience stores on a neighbouring estate, respectively 1200 and 1500 metres away; and 
  • the Council's letting policy was not financially advantageous to itself as landlord - as the policy had the potential to depress rents - and there was no evidence to show that the prices to consumers had increased.


Tenant arguments

Martin's view was that:

  • the "relevant market" was only a half mile radius (ie not as far as the other supermarkets mentioned by the Council) as this was as far as consumers could be prepared to walk to a similar shop - and therefore the restriction would give the supermarket in the parade a monopoly; and 
  • the Council had led no evidence to prove that the exemption criteria had been satisfied.

Court's decision and reasoning

The English court decided that the restrictions in each of the leases were designed to form part of a series of obligations that dovetailed together to prevent competition among the various tenants in the parade. Therefore the use restriction would be anti-competitive, in breach of the Act, unless it fell within the exemption.

In order to qualify for the exemption the Council had to show that the agreement:

  • would contribute to improving production or distribution, or to promoting technical or economic progress and allow consumers a fair share of the resulting benefits; and 
  • would not impose restrictions beyond those indispensable to achieving those objectives or give the parties the possibility of eliminating competition in respect of a substantial part of the goods in question.

The Council had failed to do this. Indeed, the court said that the Council had fallen at the first hurdle, as it had not demonstrated that (as a matter of fact) the distribution of goods is improved, or economic progress promoted, through the existence of a number of different retailers rather than via a supermarket or a number of similar retailers.

Circumstances are key to the outcome

Although, in this case, the Court decided in the tenant's favour, the Court accepted that its view might have been different if the "relevant market" had been larger.

This parade was unlikely to be the consumer's choice for a weekly shop, and so the relevant market covered a short walking distance. In the circumstances, the proposed use restriction would eliminate competition for convenience goods in the parade and in the immediate vicinity.

Also, the court didn't take into account the fact that none of the use clauses in the leases in the parade gave the tenants the right to insist that no other unit in the parade was used for the use in their lease. This "policing" function was effectively being done by the Council, but the tenants themselves could not enforce the restrictions in the leases of the other units. If the Council had argued this point, it's possible that the case would have been decided differently.

If you would like to discuss these issues further, please contact us.

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