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user and exclusivity clauses – are they still unenforceable?

8 August 2014

Update in the light of experience following the County Court judgment in Martin Retail Group Limited v Crawley Borough Council (Martins case).

Introduction/Background
User restrictions are frequently imposed by landlords and, until April 2011, were not subject to UK competition law due to a specific Exclusion Order for land agreements. Since April 2011, leasehold restrictions have become subject to the Competition Act 1998 but, in most cases, it has been considered as unlikely that these restrictions and, in particular, user clauses will infringe the Act.

However, a recent case involving the national newsagent chain, Martins, has ‘muddied the waters’. The court decided that a permitted user clause which limited the type of goods sold from a shop infringed the Competition Act and was unenforceable.

On the basis that the grant of exclusivity to a retail tenant requires the imposition of user restrictions on other tenants, the Martins case has prompted some landlords to either resist such clauses or require an indemnity from the tenant in respect of any costs and damages incurred in enforcing user clauses against other tenants on the estate.

This article provides some context to the case in order to assist retail property teams who are faced with landlord resistance to exclusivity clauses or who want to argue that a user clause in their own lease should be relaxed.

Brief facts
Martins was re-negotiating a lease for a retail unit in a small parade of shops in a residential area of Crawley. Crawley Borough Council sought to impose a permitted user clause which Martins challenged on the basis that the clause prevented the use of the shop as a convenience store and selling groceries, spirits and household goods. The dispute was referred to the County Court for resolution under the LTA 1954. Martins claimed that the clause breached the Competition Act and the court heard this as a preliminary issue.

The council conceded that the permitted user clause could have the effect of restricting competition. As a result, the court only ruled upon whether an individual exemption under the Competition Act was available and concluded that one was not available. The judge considered that the user clause had the effect of eliminating all competition for convenience goods because people would be unlikely to walk further than their local shops for products such as a pint of milk or a box of eggs.

Are user clauses no longer permissible? Has everything changed?
The short answer is no. There is no doubt that the case means that competition law will increasingly be raised by landlords and tenants as a means of resisting user and exclusivity provisions. However, it is a step too far to draw the conclusion from the case that user and exclusivity restrictions are no longer permissible on competition law grounds.

The case is based on very specific facts and did not contain a lot of the analysis that would normally be expected in a competition law case. It is worth highlighting the following points:

1. As noted, the case is very specific to its facts and, in particular, convenience goods. Most user clauses will concern different goods or services.

2. The definition of the market for convenience goods was not considered in great detail by the court. The court reviewed competitive conditions for convenience goods in a very narrow catchment area which was at odds with UK merger control cases which have reviewed competition amongst convenience stores against a wider geographic market.

3. The court followed some aspects of the Office of Fair Trading’s (OFT) guidance on the application of competition law to land agreements but did not consider the fundamental point that the guidance also states that in “most cases, permitted user and restricted user clauses are unlikely to restrict competition”.

4. The council conceded that the user clause was likely to come within the scope of the Competition Act and did not put Martins to the test of proving the necessary anti-competitive effect. Normally, the claimant would be expected to prove that the clause has an anti-competitive effect.

How do we deal with a landlord’s reluctance to grant exclusivity/enforce user restrictions?
Notwithstanding the above points, the Martins case has made landlords more cautious about granting exclusivity to tenants.

As noted above, in some cases, landlords are simply refusing to grant exclusivity but more often they are seeking an indemnity from the tenant for any costs associated with defending a competition law case. Inevitably, the respective negotiating strength of the parties is important but there are a number of steps that a tenant can take to seek to deal with the landlord’s concerns and assess the risks of seeking exclusivity/providing an indemnity. In this respect, it is important to bear in mind that the costs of defending a competition law action are high and, as such, the risks associated with the provision of an indemnity must be assessed carefully.

The following points are relevant:

1. The Martins case is specific to its facts and did not contain the level of analysis that would normally be expected. These are important initial points to be made to the landlord.

2. A review of the market affected by the proposed restrictions is of key importance as it directs the subsequent assessment of the potential anti-competitive effects of exclusivity and user restrictions. Most goods/services are unlikely to be assessed against as small a catchment area as was the case in the Martins case (unless you’re operating in the convenience sector) but the identification of the geographic market requires careful thought.

3. Once the market has been identified, the number of existing competing outlets in the affected market should be considered as part of the assessment of potential anti-competitive effects. The OFT’s guidance indicates that where there are three of more other outlets in a retail market, competition concerns are generally unlikely.

4. It is also important to consider the availability of other suitable land where competitors could establish a store. Factors such as the goods/services concerned and the size of premises required will be relevant to this assessment.

Does the Martins case help us to challenge a user restriction?
The Martins case is of some potential use if you are seeking to challenge/extend the scope of a user clause during negotiations for a new lease or the renewal of a lease and may be enough to sway/pressure a landlord to relax the provisions – particularly if the landlord sees no particular benefit in maintaining the restriction. However, our view is that the Martins case is very specific on its facts and a well advised landlord is unlikely to relax its provisions without additional analysis by the tenant.

However, the breach of a user restriction on the basis that the clause is unenforceable due to the Martins case is a very high risk strategy. A thorough analysis of the relevant markets and the effects of the restriction on the affected markets should be undertaken before any decision is made in this respect.

Conclusion
The Martins case does not constitute a radical development in the treatment of user and exclusivity clauses but it will prompt more use of competition law arguments in the course of the lease negotiations. As such, while specialist competition law input on lease negotiations should remain the exception rather than the rule, there will undoubtedly be more occasions where a considered review of the market and possible effects on competition will be required.

If you would like to discuss this in more detail please contact us.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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