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Competition Law and Restrictive User Clauses

Aug 4, 2014

The recent case of Martin Retail Group Limited v Crawley Borough Council has attracted a great deal of attention. It is the first reported case on how land agreements and lease covenants can fall foul of competition law - a concern for the property industry.

Crawley Borough Council owned eleven shops in a Parade in Crawley including a newsagent, baker, chemist, supermarket, takeaway and hairdresser with restrictions contained in the lease restricting their use. This is not an unusual situation where restrictions are used for good estate management to ensure a good mix of tenants. However in this instance a dispute arose between the Council and Martins the Newsagents over the restrictions on use contained in Martins' lease.

 

Martins covenanted in its shop lease not to use the premises for anything other than as a retail shop carrying out the activities of a newsagent and tobacconist i.e. selling confectionary, stationary, books, greetings cards, toys, CDs etc. On renewal of the lease, Martins wanted to extend the permitted user clause to include use a convenience store selling groceries, spirits and household goods. This was expressly prohibited in the original lease.

The Council refused to extend the user clause and remove the prohibition. Martins argued that the restriction prevented direct competition with the supermarket on the parade and was in breach of the Competition Act 1998 Act. The Act prohibits agreements whose object or effect is to prevent, restrict or distort competition in "an appreciable manner".

Crawley Borough Council conceded early on that the permitted user clause was in breach of competition law but were able to prove that any of the exemptions in the Act applied. However the judge agreed with Martins and the restriction on user was held to be void and unenforceable.

At first glance, this case is worrying for landlords. It appears to set a precedent for tenants to argue against use restrictions in leases. The impact could be lessened due to the specific issues surrounding the case but is still a huge wake up call for landlords. It is likely that other tenants will try to use this decision to attack letting schemes and restrictions on use in retail leases and some landlords may be inclined to allow tenants to have wider permitted user provisions for fear of being in breach of the Act.

However, it must be pointed out that nearly every retail lease in existence contains some kind of restriction on tenant's use of the property. Do the courts really want to allow the floodgates to be opened for every retail tenant to argue against permitted user clauses?


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