Competition Law, Restraint of Trade and Restrictive Covenants in Real Estate Developments

The Supreme Court has taken the rare step of overturning a longstanding House of Lords precedent on restraint of trade, but what about competition law?

11 September 2020

The case – Peninsular Securities v Dunnes Stores – concerned the enforceability of a restrictive covenant in a lease in the context of a new shopping centre development. Under the lease, the landlord (which was the developer) covenanted to prevent competition with an anchor tenant in the shopping centre. The case considered the law on restraint of trade: essentially whether the doctrine of restraint of trade was engaged at all. It did not go on to consider whether, if the doctrine was engaged at all, the covenant was ‘reasonable’ and thus enforceable. Curiously, competition law arguments – which would seem to be very relevant – were dropped at an early stage in proceedings.

Whilst on secondment to the Office of Fair Trading (now the Competition and Markets Authority ('CMA')) in 1999/2000 I was involved, with the Department for Trade and Industry (as it was then), in the drafting of the Competition Act 1998 (Land and Vertical Agreements Order) and the original OFT Land Agreements Competition Act 1998 Guidelines. At that time, the developer community were very concerned with the impact of the Competition Act 1998 on restrictions in leases. In particular, they were concerned that what they regarded as valuable restrictions on competition might become void and unenforceable overnight. Such concerns focussed on restrictions like the one in this case concerning a shopping centre development, where the developer was concerned that it needed to be able to offer protection from competition for its key tenant. These types of concerns resulted in a specific article in the Land and Vertical Agreements Order, which ensured that the exemption from competition covered not just land being transferred to the tenant, but also ‘other relevant land’, including that which remained in the hands of the landlord. 

The Land and Vertical Agreements Order is now history (it was repealed in 2011). This does not, however, mean that all such restrictions are not enforceable. What it means is that it is necessary for the parties to carry out a self-assessment to check whether they are likely to benefit from exemption from the Chapter I prohibition in the Competition Act 1998. To qualify for exemption, any restrictions must:

Contribute to:

  • improving production or distribution, or
  • promoting technical or economic progress,
  • while allowing consumers a fair share of the resulting benefit; and

Not:

  • impose restrictions which are not indispensable to the attainment of those objectives; or
  • afford the undertakings concerned the possibility of eliminating competition in respect of a substantial part of the products in question.

This involves an assessment of the relevant markets and the extent of any restrictions of competition involved, and crucially a consideration of the impact on consumers. For example, if prices are likely to be higher than they would otherwise be as a result of the restriction in question, it is difficult to imagine the CMA or the courts readily accepting that such a restriction should qualify for exemption. Indeed, the CMA recently fined Heathrow Airport for granting a hotel lease that did not allow the hotel to undercut the airport’s car parking charges (we reported on this case here).

That being said, the CMA recognises that there are many legitimate reasons why a person or a business may impose or agree to restrictions that limit the way land may be used and such restrictions do not necessarily infringe competition law. A key element of the necessary analysis is market definition. In particular, considering whether there are a sufficient number of suitable alternative locations for competition to take place from. 

The Supreme Court’s judgment in Peninsular Securities v Dunnes Stores, which focusses on whether or not the doctrine of restraint of trade was engaged, nevertheless highlights that the courts seem unlikely to treat such restrictions as unenforceable restraints of trade (although this remains to be finally decided). Interestingly the judgement refers back to petrol filling station exclusive supply agreements (in connection with the classic Esso Petroleum v Harpers Garage case) and tied public houses cases. Both of these areas have seen extensive competition law scrutiny over the last 30 years and in both cases competition law has arguably replaced the common law concept of restraint of trade as the key standard from a public policy perspective. Perhaps competition law should have been the benchmark for the public policy assessment of the restriction in this case as well. 

At Burges Salmon we have considerable experience of assessing these types of restrictions having had many years of experience considering the relevant issues. If you do have any questions about the issues raised in this article please do not hesitate to contact Noel Beale or your usual Burges Salmon contact.

Key contact

Noel Beale

Noel Beale Director, Competition – Regulation

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