Update: commercial property

Land agreements

Three months ago we wrote about how the revocation of the Competition Act 1998 (Land Agreements Exclusion and Revocation) Order 2004 on 6 April 2011 would impact on land agreements containing competitive restrictions. Now, with the publication of draft guidance by the Office of Fair Trading on 15 October 2010, further help is at hand.

Currently land agreements are excluded from the Competition Act 1998's prohibition against anti-competitive agreements (the chapter I prohibition). However, from 6 April 2011, with retroactive effect, land agreements that restrict, prevent or distort competition within the UK and have an effect on trade in the UK will be prohibited and such agreements will generally be unenforceable. Parties to an agreement prohibited under chapter I may face enforcement action by the OFT which can impose substantial fines and give directions to take steps to bring an infringement to an end. An agreement that does not infringe the chapter I prohibition at the time when it is entered into may, subsequently and asa result of changes in its economic context, infringe the prohibition.

Land agreements are defined as agreements that create, alter, transfer or terminate an interest in land. This includes transfers of freehold interests, leases and assignments of leasehold interests as well as agreements relating to easements and licences.

Practitioners will be familiar, in particular, with restrictive provisions in leases or freehold transfers that seek to restrict the use of the land let or sold (or land retained by the landlord/seller) for specific purposes to protect the commercial interests of one or more of the parties. The grant of exclusivity of use to a retailer within a shopping centre is an obvious example.

The difficulty is in understanding when such a provision will fall foul of the Competition Act when the chapter I prohibition starts to apply to land agreements. The stakes are high, not least because the fines that may be imposed for breach of the prohibition may amount to up to ten per cent of a company's worldwide turnover.

Draft guidance, still subject to consultation, has recently been published by the OFT. The concepts referred to in the draft guidance will be well known to competition specialists but much less so to commercial property solicitors. What follows is illustrative of some of the broad concepts emphasised in the guidance note.

According to the guidance, whether a land agreement infringes the chapter I prohibition will depend on the restrictions that it contains and the context in which it is implemented. Restrictions agreed between two parties who are in competition with each other are the most likely to constitute infringements, but anti-competitive provisions between non-competing parties may also have prohibited effects.

The OFT guidance explains that identifying restrictions that are anti-competitive in effect is only the first step. A restriction will only risk infringing the prohibition if its impact on competition is deemed 'appreciable'. Whether or not this is the case will depend on a range of complex factors.

One important concept is the 'relevant market' that may be affected by the restriction on trade. This may be a particular market sector and/or a geographical area within which the restrictions will have an impact. The degree of market power of the parties is also relevant: the greater the market power the more likely a restriction is to have an appreciable impact on competition.

For example, a restriction that prevents certain land from being used for a superstore in the future is more likely to have an impact on competition than a restriction that prevents an individual high street unit from being used as a particular type of retail business. This is because there are likely to be far fewer sites suitable for a superstore development and thus the relevant local market may be appreciably affected.

Even where a provision is considered to be restrictive, and to have an 'appreciable' effect, it may be saved by an exemption. In essence, an exemption may apply if the net effect of the prohibition is to benefit competition and the benefits are shared fairly with consumers. An example given by the OFT is a solus restriction demanded by a department store operator as a condition of taking on an anchor unit in a new shopping centre. If the whole development would not have taken place without the restriction being offered then the net effect may be beneficial to consumers since the availability of the new shopping centre may in the wider analysis benefit competition locally. However, even here, the nature and duration of such a restriction must not be greater than that which is 'indispensable' to achieve the beneficial objectives.

Exercising a break

Three recent cases have served as a nasty reminder of the dangers associated with exercising a break clause and the consequences of failing to correctly comply with its terms when trying to terminate a contract.

In McGahon v Crest Nicholson Regeneration Ltd [2010] EWCA Civ 842, the buyer had entered into a contract with a developer to buy a flat offplan. The contract was made conditional on the developer entering into a head lease and provided that if the head lease was not granted by 1 June 2008 either party could terminate the contract.

As a result of the property market downturn, the buyer found itself unable to obtain the mortgage it required. The 1 June deadline passed without the developer having entered into the head lease; however, the buyer was not aware of this and did not serve notice until after the head lease had been completed.

The buyer argued that it could give notice to terminate at any time after 1 June if the head lease had not been completed by then. The developer argued that the buyer could not give notice once the head lease had been granted.

The Court of Appeal noted that the contract contained no express wording to make it clear that it could be terminated at any time after 1 June regardless of whether the head lease had subsequently been entered into or not. Therefore, notwithstanding that the buyer had not been aware that the 1 June date had been missed until it was too late, the court held that it had lost the opportunity to terminate and remained bound by the contract.

The case serves as an important lesson to buyers, and their solicitors, of the need to act quickly if they want to rely on any failure by a developer to meet a deadline to terminate a contract.

In Hotgroup plc v Royal Bank of Scotland plc [2010] EWHC 1241 (Ch), the lease provided that any break notice had to be served on the landlord's managing agent as well as the landlord. The tenant served notice on the landlord giving the requisite nine months' prior notice, but did not serve a copy on the managing agent until there was less than nine months until the break date.

The tenant argued that it could copy in the managing agents at any time. However, the court held that notwithstanding that the omission caused no prejudice on the landlord, it invalidated the notice. Time was clearly of the essence and no term could be implied that the notice could be served on the managing agents just a reasonable time before the break date rather than at least nine months before.

In Aviva Life Pensions UK Ltd v Linpac Mouldings plc [2010] EWCA Civ 395, the lease contained a break clause personal to the original tenant. The tenant had assigned the lease to a group company which then wanted to exercise the break. The group company therefore assigned the lease back to the original tenant who then served notice to break on the landlord. The court held that a personal right to break granted to the original tenant does not revive on an assignment back. It is only exercisable by the tenant when it is the original tenant. The original tenant could have avoided this problem by subletting to the group company rather than assigning.

What is for sale?

In Wickens v Cheval Property Developments Ltd [2010] EWHC 2249 (Ch), a buyer sought a price reduction on the basis that fixtures and fittings worth around £300,000 had been removed from the property before exchange. From the buyer's inspection a couple of weeks before exchange of contracts, it was apparent that the property contained valuable fixtures and fittings, such as fireplaces and oak-panelled doors, albeit that some were damaged or had parts missing.

Unfortunately, the property was burgled between the time of the inspection and exchange. Three fireplaces were removed, along with a large number of the doors and carpets, and a chandelier.

The contract stated that the sale was to include all fixtures and fittings; however, there was no schedule detailing them attached. The buyer claimed that he had contracted to buy all the fixtures and fittings present during his inspection and sought to reduce the price to take account of their theft. However, the seller argued that all that the buyer had contracted to buy were those fixtures and fittings present at the time of exchange and that, as it was not responsible for the removal of the items or for misleading the buyer, the sale should be based on the state of the property at exchange.

The court tried to establish what the intentions of the parties had been. The seller claimed that the buyer had been alerted to the possibility that there had been a break in and of items having been removed, whereas the buyer claimed that he thought this was just a reference to pre-existing damage of which he was already aware and that the seller's agent had deliberately made him think this was the case.

The court held that the buyer was aware that some damage had been reported but, assuming that the damage was nothing new, had declined a further inspection. As the buyer was aware that something may have changed, and that the true facts were not known because the seller's agent had not inspected, the buyer could not have been proceeding on the basis that the position remained exactly as at when he had inspected.

In the absence of any duplicity or fraud by the seller, the court held that the fixtures and fittings intended to be included were only those there at exchange and not on inspection. The buyer had accepted the risk of a change by not re-inspecting.

However, this is not the end of the matter. The court has allowed the buyer to amend its case, and, if the buyer can prove that the seller's agent knowingly created the impression that nothing had changed, he may be able to establish that the intention was to include everything he had originally seen and that the contract should be construed accordingly.