Co-authored by Sara Edwards, Trainee Solicitor at Reed Smith LLP
Placemaking?
Mixed-used developments in and around London are in the midst of a golden era with the creation of mega-schemes such as those in Nine Elms and Old Oak. The new Wembley Park Development will see the creation of an unprecedented 7,000 apartments, surpassing the Olympic Village scheme in Stratford by some 4,000 residential units.
Key to the success of these developments will be the ability of the developer or landlord to 'placemake', i.e., create a sense of community or culture in sites that must be transformed from brown site to the hottest new postcode in a matter of months. An essential element to placemaking is the ability to attract and curate a roster of popular commercial tenants that in turn draw the desired crowd of residential tenants or buyers.
Anti-competition clauses, and predominantly exclusivity clauses, are of great importance in attracting desirable commercial tenants to letting schemes. However, it is essential not to fall foul of competition law. Although originally excluded from the Competition Act 1998, since 6 April 2011 land agreements have also been subject to competition restrictions[1].
Why the concern?
Should competition law be breached, you could face:
- Investigations and fines: the Competition and Markets Authority (CMA) can launch an investigation and impose fines of up to 10 per cent of global turnover, irrespective of profits made.
- Third party claims: other tenants and competitors excluded by the provision may bring a claim for damages (i.e., losses suffered as a result of the breach).
- Unenforceability: the provision will be considered void and unenforceable, thereby making it totally ineffective.
How can you mitigate the risks?
When negotiating these types of clauses with preferred tenants there are a number of points to consider:
Geography and the Local Market
Can competitors occupy alternative schemes within a reasonable distance of the development? If so, a provision is less likely to be deemed anti-competitive as compared to a situation where competitors are totally excluded from operating in a local market.
Therefore, limiting a provision to allow competitors to operate either in a separate part of the same scheme or within the same local geographical market, means it is less likely to fall foul of the legislation.
Limitation in Time
Provisions that are unlimited in time are more susceptible to being held in breach of competition law. Limiting a provision to a specific time period is therefore recommended. There is no guidance as to what the CMA will view as a 'reasonable time'. However, consideration should be given to the period of time to allow a tenant's business to stabilise or for a tenant to recoup its initial investment.
Be Specific
Limiting the provision to a specific product, competitor or part of a scheme has a better chance of being enforceable because the adverse effect on competition is reduced. Making the provision personal to a specific tenant (rather than benefitting successors in title) may also assist in ensuring the provision is enforceable.
In conclusion
Exclusivity clauses can be a powerful tool in placemaking when done right. When done wrong, they can expose the developer or landlord to a great deal of risk.
To avoid issues:
- Consider exclusivity clauses early on in negotiations and review the scope of them
- Review existing clauses and amend if necessary, as the Competition Act 1998 also applies retrospectively
For more information and guidance on the Competition Act 1998 and its application to land agreements, please follow the link to the published CMA guidance or speak with your Reed Smith contact.
[1] Planning obligations (including section 106 agreements) are still excluded from the competition regime.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
