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Competition law challenges to restrictive covenants
In 1997, Tesco bought land from a property developer in order to develop a superstore in Whaley Bridge, Derbyshire. Tesco obtained a restrictive covenant preventing the developer from using the surrounding land for the sale of food, convenience goods or pharmacy products. In 2015, the developer entered into a conditional agreement with a discount chain to build a new shop on the land – provided that the covenant was released.
Following the failure of commercial negotiations with Tesco for the release of the covenant, the developer brought a claim before the Competition Appeal Tribunal (the "CAT") to challenge the clause as anti-competitive under the Competition Act 1998. (Case 1247/5/7/16, Shahid Latif & Mohammed Abdul Waheed v Tesco Stores Limited.)
Since 6 April 2011, restrictive covenants (and other restrictions on the use of land) have been subject to the full rigour of UK competition law – regardless of when they were entered into and what the market circumstances were at the time. Despite this change in law, many potentially anti-competitive existing restrictive covenants remain in place and new ones continue to be agreed.
In 2010, following a three-year investigation, the Competition Commission (now the Competition and Markets Authority, the "CMA") ordered that supermarkets remove restrictive covenants which stopped competitors entering local markets where there was little consumer choice and to cease to enter into them going forward. Tesco was forced to remove restrictions across four sites. A process was set-up by which existing restrictive covenants could be notified to the CMA for assessment.
But in this case, the developer chose to litigate the issue before the CAT instead. This was in order to take advantage of changes to UK competition law last October which provide for a new fast-track procedure before the specialist CAT, meaning that simple cases can be heard quickly (within six months) and with capped costs.
The attraction of this route compared with the procedure under the 2010 Order referred to above is that it has a broader application (the 2010 Order narrowly defines the circumstances in which a covenant may be found to be anti-competitive) and that, by bringing a court claim, the developer could not only challenge the enforceability of the covenant but also seek damages, eg for the losses incurred as a result of its inability to develop the site (whereas an award of damages is not available under the 2010 Order).
It worked. Tesco chose to settle the claim rather than defend it in the CAT, and the developer withdrew its claim last month.
More claims to come?
Since the case settled, the opportunity of the CAT to provide more clarity on the circumstances in which a restrictive covenant may be considered anti-competitive did not arise. As such, the CMA's guidance on the application of competition law to land agreements remains the most important reference point for assessing how the Competition Act 1998 applies in this context.
However, the case provides a salutary reminder that land agreements remain subject to competition law scrutiny. It also demonstrates that there is now more than one relatively quick and cheap process by which parties can challenge the enforceability of restrictive covenants – and that, because of this, competition law can be used as an effective lever in the negotiation of land agreements.
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