The European Court of Justice has confirmed that granting exclusivity to anchor tenants does not automatically infringe competition law, but such agreements must still be approached with caution, writes Bill Chandler of Hill Dickinson.
Exclusivity agreements, also called non-compete clauses, are frequently demanded by anchor tenants, particularly in the retail sector. To secure the signature of a prominent occupier, which may be the key to unlocking funding for a new development, the developer-landlord agrees that the retailer will not be subject to competition from other tenants within the landlord’s scheme.
Since the only purpose of these agreements is to protect the tenant from competition, these types of arrangements have been considered ‘high risk’ ever since leases and other property contracts were exposed to full competition law in April 2011. The large supermarket chains are subject to additional restrictions on their use under the Controlled Land Order.
The European Court of Justice has recently been asked to decide whether such clauses infringe competition law automatically or only where they have an appreciable effect on competition in the relevant market.
‘Object’ or ‘effect’?
European competition law invalidates agreements that have the object or effect of preventing, restricting or distorting competition, but European law only regulates trade between member states. Certain member states have enshrined the same principles within their own domestic legislation, but have not always adopted a consistent interpretation of how they should be applied in practice.
Exclusivity agreements in leases are a prime example of this. While the UK authorities have taken the relaxed view that such clauses are only caught if they have an appreciable effect on competition in the relevant market, the competition authority in Latvia has adopted a more hard-line approach that such clauses are always offensive, since they have the clear ‘object’ of preventing, restricting or distorting competition.
And that is why a court case taking place a thousand miles away in Riga became significant for landlords and tenants in the North West of England and across the UK.
In 2013, the Latvia Competition Council commenced action against one of the country’s largest supermarket chains, Maxima Latvija, in respect of exclusivity agreements contained in several of its shopping centre leases.
When the case reached the Supreme Court of Latvia in July 2014, it referred to the European Court of Justice the fundamental question of whether such clauses are by their very nature anti-competitive, together with three supplemental questions seeking guidance as to how to assess validity if they are not inherently bad.
Although the proceedings against Maxima were brought under Latvian domestic law rather than European law, the European Court of Justice heard the case, on the basis that the domestic legislation followed European law and there is a benefit in ensuring that the law is applied consistently.
The European Court of Justice handed down its judgment on 26 November 2015.
The court noted from its previous rulings that the categories of agreements that are anti-competitive ‘by object’ should be construed narrowly and limited to certain types of particularly harmful behaviour, usually contained in horizontal agreements. While the court confirmed that vertical agreements are capable of falling foul, it considered that exclusivity agreements were not sufficiently harmful to be considered as being anti-competitive ‘by object’.
Exclusivity agreements in leases should therefore be judged not on their object, but on their effect. They will infringe competition law if:
‘… it is found, after a thorough analysis of the economic and legal context in which the agreements occur and the specificities of the relevant market, that they make an appreciable contribution to the closing-off of that market. The extent of the contribution of each agreement to that closing-off effect depends, in particular, on the position of the contracting parties on that market and the duration of that agreement.’
The court suggested several factors that need to be considered in conducting this analysis, including:
- The real concrete possibilities for a competitor to establish itself within the relevant catchment area (including the availability of premises and any economic, administrative or regulatory barriers)
- Existing competition within the catchment area (including customer loyalty and habits)
- Potential as well as actual effects on competition
- The cumulative effect of multiple agreements
Maxima may have won the battle, but they have not necessarily won the war. Exclusivity agreements may not fall foul of the prohibition on agreements which are anti-competitive ‘by object’, but the case now returns to Riga for the Supreme Court of Latvia to decide whether the agreements are anti-competitive ‘by effect’.
Meanwhile, back in the UK…
Exclusivity agreements live to fight another day. Had the European Court of Justice decided otherwise, shockwaves would have rippled across the continent and fundamentally changed the nature of lease negotiations between landlords and anchor tenants.
However, this case does not mean that exclusivity agreements will always be acceptable from a competition law perspective. They remain high risk and the potential anti-competitive effect of each and every proposed clause still needs to be assessed in light of their legal and economic context. Fortunately, the analysis suggested by the European Court of Justice largely mirrors existing UK guidance.
This article was originally published through Place Resources