In the first case subjecting a permitted user clause in a lease to scrutiny under the Competition Act, a landlord local authority seeking to impose use restrictions on its tenant (to promote mixed use in a parade of shops) lost its case on the grounds that it would breach competition law by doing so and that it had not proven that the requirements for individual exemption under the Act were met
Whilst this decision may ultimately be appealed, at present the decision in Martin Retail Group Ltd v Crawley Borough Council serves as a warning that the Courts are prepared to find restrictive user covenants in land agreements to be in breach of competition law and therefore unenforceable.
The absence of a robust analysis of the likely restriction of competition on the relevant economic market concerned and whether this could be said to be appreciable, leaves little guidance for landlords and tenants as to the boundaries of the user restrictions that may, under competition law, legitimately be agreed between them (and in what context).
However, the case cautions against the use of restrictive user covenants without due consideration for the resulting restrictive effect on competition in the relevant economic market concerned.
The case also serves as a reminder that, where a restriction of competition is found, the burden of proof in demonstrating that the cumulative conditions for individual exemption are met rests firmly with the party seeking to benefit from it.
In this case the landlord opined (but without expert evidence) that there were benefits to the community from a series of restrictive user clauses in the shop leases for a parade of 11 shops (such as facilitating access to a range of goods and services within a local community, and promoting small businesses). However, the landlord had not documented its lettings policy and failed to demonstrate any written evaluation of the competitive effects of its scheme.
Landlords and tenants investing in new developments are advised to understand the economic market in which they operate and to fully analyse the potential anti-competitive effect of any restrictive covenants they seek to obtain. We have posted previously on this subject and this case does not change the conclusions we reached then.
For full detail and critique on the case and on the criteria considered when justifying a clause that may be restrictive of competition, follow this link to read our Client Alert.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
