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.”
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.