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English Court Applies UK Competition Law to Override Land Use Restriction




by:
Chimé Dorjee
Becket McGrath
Edwards Wildman Palmer LLP - London Office

 
June 11, 2014

Previously published on June 11, 2014

Although competition law claims before the English courts are becoming more common, ‘follow-on’ damages actions (i.e. claims for compensation for loss suffered as a result of an infringement that a public authority has determined took place) have been responsible for most of the recent growth. As a result, cases that consider the lawfulness of restrictive agreements remain relatively rare.

An recent judgment by the Central London County Court (the “Court”) (Martin Retail Group Limited v Crawley Borough Council, 24 December 2013) concerning the lawfulness of restrictions contained in a commercial lease granted by a local authority is therefore worth noting. The judgment in this case shows that, notwithstanding the relative rarity of such ‘standalone’ competition law arguments before the courts, non-specialist judges are quite prepared to apply competition law in a robust manner to overturn long-standing restrictive arrangements.

Background
Crawley is a so-called ‘New Town’ in the South of England that was created and developed by central Government after the Second World War as a planned alternative to continued expansion of London. The development process resulted in Crawley Borough Council (the “Council”) owning the freehold of a number of retail units that were created expressly to serve the day to day shopping needs of local communities. Since its creation, the Council has leased these premises to retailers under ‘letting schemes’ that closely specify the ‘permitted use’ for each shop. According to the Council, the intention behind such schemes is to preserve local retail diversity and thereby ensure that residents have easy access to a range of different traders in their immediate neighbourhood.

The trigger for this case was a request by the occupier of a newsagent within a parade of 11 retail units in Crawley, Martin Retail Group (“MRG”), for a new lease that permitted it to sell groceries, fresh foods, alcohol and household goods. Such use was prohibited by the Council’s proposed use covenant, which would have continued to restrict MRG to operating its shop (in the rather archaic and grammatically challenged language common in land law) “for the business of Newsagent Tobacconist Sweet Confectioner Stationer Bookseller and for the sale of toys CDs fancy goods greeting cards and the installation of an ATM and Lottery Sales”.

The Council maintained that it needed to keep such a restriction in place, since in its view permitting MRG to sell groceries would lead to it “undercutting and out-competing” the small family-owned supermarket that operated in the same row of shops and hence a loss of retail diversity. (The 11 units currently cover a truly diverse mix, including for example ‘Frizzy’s’ bakery, the ‘New Yummy’ Thai and Malaysian takeaway restaurant and the ‘Fish Plaice’ fish and chip shop.)

MRG commenced proceedings in the Horsham County Court for renewal of its business tenancy with a more liberal use covenant under the Landlord and Tenant Act 1954. These proceedings were duly transferred to the Chancery List of the Central London County Court, which was required as a preliminary issue to determine whether the Council’s proposed user clause contravened the Chapter I prohibition of the Competition Act 1998 (CA98), which prohibits anti-competitive agreements. Any agreement that infringes the Chapter I prohibition is void and unenforceable and it was assumed for the purposes of these proceedings that it would not be open to the Court to exercise its powers under the 1954 Act to impose a lease containing an infringing provision.

Judgment
At the trial of the preliminary issue of the user clause’s compatibility with the CA98, the Council conceded that its proposed user clause would be restrictive of competition. As a result, it was common ground that the Council’s proposed lease would therefore infringe the Chapter I prohibition, unless it could be shown to be exempt under section 9 CA98.

Section 9 CA98 provides that an agreement is exempt from the Chapter I prohibition (and therefore enforceable) if it: (i) contributes to improving production or distribution or promoting technical or economic progress; while (ii) allowing consumers a fair share of the resulting benefit; without (iii) imposing on the undertakings concerned restrictions which are not indispensable to the attainment of those objectives; or (iv) affording the undertakings concerned the possibility of eliminating competition in respect of a substantial part of the products in question.

Consistent with the position under EU law, the Court confirmed that the burden is on the party arguing in favour of exemption to demonstrate that all four criteria are met in the specific circumstances of a case. In the Court’s view, the Council failed on the first hurdle of proving the agreement’s efficiency gains to the requisite legal standard, by reference to “evidence of primary fact”. In his own words, the judge was “not satisfied 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”. Given the fact that the Council presented limited evidence to support its proposition that its restrictive letting schemes did in fact meet this test, and that such evidence that was presented largely comprised the “expression of subjective opinion”, the judge observed that acceptance of the Council’s argument on this point would have been “little more than speculating”.

For completeness, Judge Dight went on to consider whether the agreement allowed consumers a fair share of any resulting benefit and whether the Council’s objectives could be achieved through less restrictive means. He found that neither of these requirements was met, since the Council had not demonstrated that the local community would benefit from the restrictions in the proposed user clause and, in the Court’s view, a mix of retailers could be achieved by less restrictive covenants that fell short of conferring a local monopoly.

On the final criterion, in the Court’s view the proposed user clause clearly provided “a means of eliminating competition in convenience goods in the parade and within a relatively short walking distance”. Although this did not necessarily determine the question of whether the ‘no elimination of competition’ criterion was met, since the question of market definition had not been fully argued before the court, this was ultimately irrelevant given the Court’s conclusion that the other three criteria were not met.

For these reasons Judge Dight concluded that the Council’s proposed user clause, within the context of the letting scheme, did not meet the requirements for exemption and that the Council’s proposed lease would therefore infringe the Chapter I prohibition.

Comment
As noted in the introduction, this judgment is interesting primarily because it shows a non-specialist court being quite prepared to determine the compatibility of a lease with competition law, without any need for the involvement of a public enforcement body. In doing so, the Court applied domestic competition law, as it is empowered to do, by reference to the facts presented to it and relevant guidance (in this case, the guidance notice on the application of competition law to ‘land agreements’ issued in 2011 by the Office of Fair Trading (OFT), from which the Court quoted at length). The ability of courts to do this is an important and desirable development, particularly in a world where competition authorities generally need to prioritise the deployment of their limited resources to focus on a small number of high impact cases.

It is also interesting to note that, in applying general competition law to overturn a complex and long-standing system for controlling commercial land use, the judgment reflects a development that landowners were keen to avoid when the CA98 was first enacted. Restrictions on the use of property, which may in turn adversely affect competition, are inherent in many land agreements. While such restrictions may be objectively justifiable, by reference to economic factors or wider public policy goals such as those reflected in planning law, they may also simply reflect a landlord’s preferences or historical practice. Provided that they had no impact on interstate trade, such restrictions were largely safe from competition law scrutiny in the UK before the CA98 entered into force in 2000. The desire of landowners to preserve this situation, and hence to avoid restrictive (but potentially commercially desirable) arrangements in land agreements being undermined by competition law, was initially recognised by Parliament’s inclusion in the CA98 of an explicit exclusion of all land agreements from the Chapter I prohibition. However, this exclusion was removed in 2011, which made it possible as a matter of law for the Court to overturn the Council’s proposed user clause in this case.

Notwithstanding the fact that, in enforcing the letting scheme, the Council was purporting to be acting in the interest of local citizens in Crawley (including the residents of its own council estates), in its capacity as a local authority, the Court examined the legality of the lease as it would have done for any business tenancy between a tenant and a private landlord. As a result, the judgment adopted a standard competition law approach and did not contain any consideration of whether the lease might fall outside the CA98 on the grounds that the Council was acting as a public body, rather than a commercial undertaking, when enforcing the letting scheme. The Court’s approach to the legality of restrictive user clauses is therefore of general application.

Viewed in a wider context, the case shows the difficulty for any party wishing to enforce a restrictive agreement of discharging the burden on it of proving to the requisite legal standard that the requirements for an exemption are met. The Chapter I prohibition is closely modelled on Article 101 of the Treaty on the Functioning of the European Union (TFEU). For historical reasons, the structure of Article 101 TFEU is asymmetric, in the sense that it is often relatively straightforward to demonstrate that a clause that restricts a party’s commercial freedom restricts competition (and is therefore caught by Article 101(1) TFEU), whereas in practice it can be very difficult for a party to prove that each of the four criteria for exemption set out in Article 101(3) TFEU is met. While the Council’s apparent reliance on “expressions of subjective opinion” to support its case, and its failure to produce any evidence of primary fact including economic evidence, clearly did not help its cause, the underlying legal framework means that it would in any event have faced an uphill struggle to persuade the court of the user clause’s legality, once its anticompetitive effect was accepted.

The other wider aspect of competition law highlighted by this case is the inherent difficulty of taking non-economic factors into account when undertaking what is essentially an economic assessment. In proposing the restrictive user clause, the Council was seeking to perpetuate a letting scheme that was predicated on a value judgment, founded in the 1940s, that neighbourhood shopping parades containing a diverse combination of different shops with narrowly defined roles that together met residents’ day to day shopping needs were desirable and that this objective was best achieved by close central planning. In this respect, this outcome was viewed as ‘better’ for residents than a less diverse local shopping environment in which more than one shop in a parade might provide essentially the same selection, even if this alternative was more likely to lead to greater competition for the provision of certain goods and hence lower prices.

It is telling to note the judge’s observation that there was in his view “great force” to MRG’s submission that the user restrictions on the retail units “contribute to a particular model of distribution determined by the defendant local authority rather than by the market itself”. While he did not rule out that a local authority might on occasion be entitled to intervene to override the operation of the market, he clearly felt that modern competition law requires a presumption that the market should be left to provide the optimum outcome for consumers, unless otherwise justified by reference to compelling facts. (It is interesting to note in this context that, when the Competition Commission reported on its market investigation into the UK groceries sector in 2008, it had to make it clear that it was empowered by law only to consider competition issues, within an economic framework. As a result, various public policy issues that were presented to it, including “the social cohesion of urban and rural communities” and “the character of UK high streets”, were beyond its remit.)

As a more immediate matter, this judgment is likely to have caused jubilation among some commercial tenants, who will be searching their leases for restrictive user clauses that they would like to see removed. It will also have caused consternation among landlords, who may be dusting off their copies of the OFT’s 2011 guidance document and revisiting advice received on the introduction of the CA98 14 years ago.



 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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Chimé Dorjee
Becket McGrath
 
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