Competition Law & Land Agreements: OFT Issues Guidance – Is It Any Less Puzzling?

The Land Agreements Exclusion Revocation Order (LAERO) takes effect on 6 April 2011.

I referred to this in my January post Competition – OFT Deadline Looms.

LAERO revokes the special treatment given to land agreements under UK competition law, which up to now meant that restrictive covenants, exclusivity agreements and the like generally did not need to satisfy competition law requirements (save where there was an abuse of a dominant market position).

LAERO is retrospective, and so existing provisions, such as restrictions in shopping centre leases, need to be examined to see whether they comply.

For most property lawyers (me included) this is not going to be an easy call, and advice from a specialist competition lawyer may be necessary.

The OFT, to be fair, has recognised the need for clarification and on 24 March 2011 published the final form of its Guidance on how competition law will apply to land agreements once the LAERO takes effect.

The OFT has taken into account comments made during its consultation which ended in January. The result - a Guidance weighing in at 70 pages - is a hefty tome.

The OFT has also produced a quick guide, but that just tells you that “businesses should consider seeking legal advice on any agreements which they believe may raise competition law concerns and may need to alter or amend agreements as appropriate.”

The detailed Guidance is more useful, especially when you cut to the chase.

Section 4 sets out the main factors which the OFT believes are relevant in assessing whether a land agreement falls foul of competition law and whether it does so to an appreciable effect.

Section 9 sets out nine different scenarios, and in each case the OFT gives guidance as to what may or may not infringe competition law.

One example of a restriction which is likely not to comply with competition law is a restrictive covenant imposed by a seller on the disposal of surplus land which is designed to protect its business operations and prevent competition (see Example 9 in Section 9 of the Guidance) 

On the other hand, a restriction imposed on the sale of surplus land to protect the use and enjoyment of the retained land (for example by minimising disturbance – the OFT uses, as an example, a theatre) would be likely to comply (see Example 1 in Section 9 of the Guidance).

One issue that has not been clearly settled is - how long can an exclusivity covenant in a lease last before it becomes one that is regarded as anti-competitive?

The OFT says that the longer the duration of the restriction, the more significant the impact on competition is likely to be.

In Example 5 in Section 9 of the Guidance the OFT says:

“The appropriate duration of the exclusivity provision for the agreement to benefit from exemption needs to be determined taking into account the economic and commercial conditions in which the agreement will be implemented.”

 Eh?!

Unfortunately there is no firm or even approximate rule in terms of how many years that might be, and therefore, for a property lawyer, this is going to be very difficult to advise on.

The OFT expects that only a minority of land agreements will infringe competition law.

However, as you can see from the worked examples in the Guidance, some of the scenarios used by the OFT as examples of restrictions that would be found to be anti-competitive are not that unusual in the property world, and so from now on care will be needed when agreeing any restrictions.

Section 7 of the Guidance sets out what might happen if you breach competition law. The possible consequences include financial penalties (up to a maximum of 10% of worldwide turnover!), director disqualification orders, the unenforceability of an agreement and private actions (for damages or an injunction).

Whether a whole agreement would be rendered unenforceable or just the offending provisions, would be a matter for the court and is not something covered by the Guidance.

The Guidance is useful in helping to determine whether a term might give rise to a competition law issue. Where there is any doubt at all however, the services of a competition law specialist will be needed to help solve the puzzle.

UPDATE 15/4/11

Since drafting this post I have come across this very useful briefing note from Herbert Smith and this analysis by Wragge & Co that both give helpful commentary and guidance on these issues.

Is It Ever Too Late For Your Landlord To Trigger A Rent Review? Don’t Bury Your Head In The Sand!

If you are a business tenant, can it ever be too late for your landlord to review the rent payable under your business lease?

The issue has recently come to light in a commercial context in East London, as this report in the Estates Gazette shows.

When a landlord seeks to implement a rent review long after the last review date has been and gone, this can be a nasty surprise for any business tenant.

Your business will have become used to paying rent at a certain rate and the fact that your landlord seems to have ignored the last review date may lead you to believe either that it has been overlooked or that the landlord has chosen to forego a review.

However, unless there is an express term in your lease making “time of the essence” on rent reviews, your landlord will not necessarily lose its right to trigger a rent review from the distant past – and take you back to the future (albeit without the stainless steel sports car from Belfast).

Where the lease makes time “of the essence”

If time is made “of the essence” in a contract, it means that if the contract says that something must be done by a particular time and you do not do it by that time, then you lose the right to do it.

So if your lease does make time of the essence on rent reviews (which is possible, but would be unusual) then your landlord will have lost its right to implement a review where the deadline has passed.

Where the lease does not make time “of the essence”

Common law presumes that time is not “of the essence” in rent review clauses. Time will only be “of the essence” therefore if the lease says it is.

It is unusual nowadays for open market rent review clauses to make time of the essence. That is because landlords do not want to lose their right to implement a review by narrowly missing a review date.

But it also means that potentially the ability to review the rent stays alive for a long time.

A late review, where time was not of the essence in the lease, went to court just over a year ago in Bello v Ideal View [2009] EWHC 2808 (QB). It concerned a residential lease, but the wording was similar to the wording found in most commercial leases where there is an open market rent review.

In that case, the lease provided for a rent of £60 per annum to be reviewed in 1994. Mr Bello purchased the lease in 2005. When the freehold was purchased by Ideal in 2006, no review had taken place. Ideal sought to implement the 1994 review and invoked the arbitration provisions in the lease to settle the rent.

Mr Bello did not respond constructively to any communications on the review and did not get involved in the arbitration. The arbitrator increased the rent to £1,700 per annum. The lease provided, as is usually the case, that on the next rent day not only would the rent now be payable at the new higher rate, but that the tenant also had to pay an amount equal to the difference between the old rent and the new rent for the period since the review date, in this case 1994.

That’s a big expense to be landed with.

Commercial leases also usually provide for the difference between the old rent and the new rent to be paid following a review. Usually they even go a step further and require interest to be paid on that money as well (at base rate but sometimes higher).

The court in Bello v Ideal View  decided that the simple fact of the landlord’s delay, without more, did not mean the landlord had lost its right to review the rent.

But that does not necessarily mean all is lost if you are a tenant in this position.

To succeed as a tenant you have to be able to show that your landlord has either done something to waive the review or that is has done something, which you rely on, which means it is “estopped” or prevented from reviewing the rent.

To be able to prove that, you would need to have evidence of some kind of representation or conduct by your landlord, and that you had relied upon it as meaning the rent review would not be implemented.

And to be able to argue anything, it’s a good idea to turn up to the arbitration and get involved constructively. What appears to have been fatal to Mr Bello’s case is that he didn’t participate in the arbitration and hoped the problem would just go away.

It is common for commercial leases to provide for rent to be settled on review, in the absence of agreement, either by arbitration or by an expert.

What Bello v Ideal View demonstrates is that if you are faced with a late rent review, you must look for evidence of waver or estoppel if you can. In any case you should get involved, with your advisors, in the arbitration process to argue your case.

If determination of the rent is by an expert rather than by arbitration, you must use any powers given to you in the lease to make your representations to the expert.

Your landlord might still succeed in implementing the late review if you cannot produce any evidence that helps you, but it’s worth a try.

If you bury your head in the sand and hope the nightmare just goes away, it won’t. It will just get a lot worse and could be very expensive.

Enterprise Zones – Where, When & Why?

One of the measures announced in Wednesday’s Budget 2011, and specifically within the Plan for Growth, which will have significance to the property world is the setting up of 21 new Enterprise Zones.

Businesses moving into the zones will benefit from a full business rates discount, worth up to £275,000 per eligible business over five years, fast track planning, increased capital allowances and superfast broadband, amongst other things. Local authorities will be able to retain any increases in business rates in the zones for at least 25 years to support further economic development.

So it’s good news, at least in theory, for the areas lucky enough to be given the proverbial golden ticket.

The Budget confirmed that the first 11 Enterprise Zones would be based within the Local Enterprise Partnerships (LEPs) of Manchester, Liverpool, Birmingham and Solihull, Sheffield, Leeds, London, the Bristol area, the Black Country, Derby and Nottingham, Teesside and the North East.

The 11 zones are being selected on the basis of being urban areas with the highest need and potential.

The choice of the zone within London fell to the Mayor. After the Budget, Boris plumped for a 125 hectare Royal Docks site, to the east of Canary Wharf and close to City Airport, in Newham, to be London’s zone.

Yesterday, communities secretary Eric Pickles and business secretary Vince Cable also confirmed the exact locations of three of the other zones:

- Boots campus, Nottingham
- Manchester Airport
- Mersey Waters (comprising Wirral Waters and Liverpool Waters)

Pickles and Cable also announced the launch of a competition among LEPs to identify the locations of the remaining 10 enterprise zones in England by July 2011.

According to this report from the London Evening Standard, Boris plans to bid for two more Enterprise Zones in London. He wants to create Canary Wharf-style business neighbourhoods in Tottenham and Croydon. 

Is the Enterprise Zone policy a good thing? Or is it just Dave “firing up the Quatro” and reprising an old idea from the 1980’s?

The Enterprise Zone concept is by no means universally popular, with some indeed calling it a return to the policies pursued during the Thatcher era.

Canary Wharf is often held up as a dazzling example of what Enterprise Zone status can achieve. However, the Work Foundation make the point in Fresh business thinking.com that there were only 7,000 people employed in Canary Wharf at the time the Enterprise Zone expired — compared with 90,000 today. The key to success, it says, was investment in infrastructure, notably the Docklands Light Railway, and not the Enterprise Zone.

Others will say it was the giving of Enterprise Zone status to Canary Wharf which helped kick start its renaissance.

However, where there are winners there are inevitably also losers trailing in their wake. Styling the selection as a “competition” only seems to emphasize this. Maybe we’re not all in this together after all.

One example of an area already feeling left behind is the South West, as seen by this piece from thisiscornwall.

Is it fair to areas that miss out? Will it harm those areas on the edge of the zones, which will find it hard to compete with their favoured neighbours?

This piece in the Guardian reports that whilst commentators broadly welcomed the initiative, some said they ran the risk of simply shifting business from one area to another, rather than encouraging start-ups.

The Guardian reports that Andrew Goodwin, of the Ernst & Young Item Club forecasting group, said:

"Enterprise zones are a good idea, so long as they encourage new investment. Just moving business that would already have happened into an enterprise zone actually takes away from the macro-economy because of the incentives. On balance, I think the proposal has a fighting chance of success."

Whereas Mark Serwotka, general secretary of the Public and Commercial Services Union, said:

"While the 21 new enterprise zones have real potential, we question why the whole of the UK can't be an enterprise zone."

Which is an interesting question.

Why not turn the whole of the UK into an Enterprise Zone?

It could be argued that selective Enterprise Zones deliberately distort the free market and create a playing field that is clearly not level. It’s basically paying businesses to move to one location over another.

Shouldn't a growth strategy instead be UK wide, rather than restricted to arbitrarily chosen regions?

If that were the case though, some areas would have to be excluded from a planning free-for-all; like the Green Belt for example.

This article in the Financial Times welcomes the choice of zones so far. It says that choosing areas with immediate prospects for financial growth, rather than struggling locations, is in sharp contrast with the 1980’s era zones, established in run-down former industrial areas and criticised for sucking jobs from elsewhere and creating work that was not sustained after the tax breaks ran out.

Meanwhile, to plummet back down to ground nearer my own comfort, if not enterprise, zone – how will you be able to verify whether property you are buying or leasing is situated in an Enterprise Zone?

This ought to be revealed by your local search.

There is already an optional enquiry on the standard local authority search form dealing with the old Enterprise Zones established under 1980 legislation.

I have not seen any commentary on this yet, but I assume the search forms will be updated to deal with the new zones.

Properties that do fall within these zones will be heavily marketed as such.

However, as some of these zones will not necessarily fall within obvious geographical boundaries, it will be important to establish, as early as possible in a transaction, whether a property is in fact located in a spot deemed worthy of enterprise status...or not.