Landlords and tenants often agree that the landlord will not let to certain competing tenants and/or that tenants will limit the scope of their activities so as to avoid competing with certain other tenants. In a judgment dated 26 November 2015, the Court of Justice of the EU (CJEU) gave guidance as to how to determine whether such clauses are compatible with EU competition law.
Maxima Latvija (ML), a Latvian entity carrying out business predominantly in the food retail trade, operates large shops and hypermarkets. It concluded a number of commercial lease agreements with shopping centres in Latvia to rent commercial premises. 12 of the 119 leases granted ML, as the anchor tenant, the right to veto proposed lets within the remainder of the shopping centres. The Latvian Competition Council had concluded that these agreements had the object of restricting competition and breached Latvian competition law without it being necessary to consider whether they had restrictive effects.
The CJEU has the ability to rule cases inadmissible if they do not affect trade between Member States. On this occasion, the CJEU considered that the issues raised related to the interpretation of EU law and so the CJEU had jurisdiction to rule. Given that EU competition law has a binding effect on national competition authorities and courts, this judgment is equally applicable to the interpretation of UK competition law as well as in other European jurisdiction.
Turning to the substance, the CJEU noted that “the mere fact that a commercial lease agreement for the letting of a large shop or hypermarket located in a shopping centre contains a clause granting the lessee the right to oppose the letting by the lessor, in that centre, of commercial premises to other tenants, does not mean that the object of that agreement is to restrict competition within the meaning of that provision.” In other words, the CJEU disagreed with the Latvian Competition Council that the relevant clauses of the agreements were a breach of competition law by object. The leases would only be capable of breaching competition law if actually or potentially they had restrictive effects.
The CJEU then provided guidance of the factors that should be taken into account in determining whether an agreement has the requisite actual or potential restrictive effects. It is necessary to “take account of all the factors which determine access to the relevant market, for the purposes of assessing whether, in the catchment areas where the shopping centres which are covered by those agreements are located, there are real concrete possibilities for a new competitor to establish itself, including through the occupation of commercial premises in other shopping centres located in those areas or by occupying other commercial premises located outside the shopping centres”.
In practice this means that it will be necessary to carry out a case-by-case analysis of the actual or potentially restrictive effects of any such clause. Factors which are likely to be relevant to any assessment include:
- the availability and accessibility of alternative premises;
- how far customers may be willing to travel to obtain the goods/services;
- customer loyalty to existing brands and consumer habits;
- the number and the size of operators present on the market for the goods/services;
- the degree of concentration of that market; and
- whether there are any economic, administrative or regulatory barriers to new competitors in the relevant market.
From a competition law perspective, the ruling of the CJEU does not come as an enormous surprise, confirming as it does a number of established lines of authority. It should, however, reassure landlords and tenants that, provided proper consideration is given in advance as to why a particular restriction is appropriate and necessary, the application of competition law to land agreements will not bring about any great revolution.