Lease User Clauses and Competition Law
Those involved with asset management of retail property should be aware of a recent County Court judgment which has highlighted some important points to consider when enforcing lease user restrictions. Such restrictions limit the type of goods that a retail tenant can sell from the premises.
Martin Retail Group Limited v Crawley Borough Council  EGILR 17 was the first case to consider whether a lease user clause was anti-competitive under the Competition Act 1998. The outcome of the case may assist retail tenants when negotiating lease user clauses where landlords are attempting to implement "tenant mix" schemes.
Martin Retail Group Limited was a tenant in a parade of shops owned by Crawley Borough Council. The permitted use under the lease was as a newsagent and post office. Upon lease expiry, the tenant tried to extend the permitted use to a convenience store including sale of groceries. The parade already included a convenience store and Crawley as landlord therefore sought to rely on its existing tenant mix policy where every shop in the parade should have a different use. The various leases for the parade contained reciprocal drafting to ensure that every tenant in the parade could not compete with one another. The other nearest convenience stores were over 1km away from the parade in question.
Since April 2011, all property agreements are subject to anti-competition regulations. Chapter 1 of the 1998 Act states that, an agreement which prevents, restricts or distorts trade within a UK market is anti-competitive. In brief, to be exempt from the restriction, an anti-competitive agreement must satisfy all of the following criteria listed in Section 9: (a) production and distribution efficiency gains (b) share of benefit for consumers (c) indispensability to achieve efficiency gains and (d) no elimination of competition of a substantial element of the products in question.
Office of Fair Trading guidelines indicate that very few property agreements will fall foul of competition law and it was surprising therefore in this case that Crawley admitted at the outset that the restriction was non-competitive. The Court considered whether the Section 9 exemption applied. Crawley relied on subjective evidence from within the Council to assist its case whereas the Court suggested it should have used wider objective evidence from the local community. The Court was satisfied that none of the Section 9 criteria were met and held that Crawley's proposed user clause was void as it contravened Chapter 1 (by admission) and was not exempt.
Points to Note
Being a County Court decision, the judgment is not binding but it may well be persuasive for future cases involving lease user clause arguments.
The case did not feature detailed discussion on competition law but does offer an insight into how use restrictions may be analysed by Courts going forward.
Competition cases will always be judged on their own facts and merits and in this case the location of the store and alternative options for consumers was very relevant.
- Landlords should check that their tenant mix schemes are properly researched, documented and updated. They will also need to produce evidence of the benefit of such schemes. Also refer to the case of Crown Estate Commissioners v Signet Group plc  2 EGLR for similar discussion.
- Parties should take specialist competition law advice on property agreements at the outset to avoid breaching the Chapter 1 prohibition.
- Courts do expect to see objective independent evidence from local communities and occupiers.
- When imposing user restrictions, landlords must look at the location and nature of competing goods or services in the local market.
- Better choice of retailers is not in itself a reason to limit competition.
- It may be easier for tenants to prove a restriction on user is anti-competitive under Chapter 1 rather than prove that such restriction is individually exempt under the Section 9 criteria.