Exclusivity clauses in leases – unlawful restraints of trade?


Our team: Nick Wood


Summary

It is common for an anchor tenant to seek an exclusivity clause in a lease. These are clauses that prevent the landlord from permitting parts of the relevant site (be it a shopping centre, a retail park, a leisure park or otherwise) from being used in competition with the anchor tenant. However, these clauses should be drafted with care. There is more to them than meets the eye!

For example, exclusivity clauses will be void and unenforceable where they engage the “restraint of trade” doctrine because they are either:

(a) not designed to protect a legitimate business interest;
(b) wider than is reasonable to protect that legitimate business interest; or
(c) contrary to the public interest.

Further, in some circumstances, exclusivity clauses in land agreements are vulnerable to competition law challenges.

The law on this continues to develop. Last year the Supreme Court established certain principles on this in Egon Zehnder Ltd v Tillman. This year, the Supreme Court has clarified the law around exclusivity clauses further, in Peninsula Securities Ltd v Dunnes Stores (Bangor) Ltd (the Peninsula Case).

The Peninsula Case principally concerned two parties. One, a retailer acting as the anchor tenant of a shopping centre. The other, their landlord, who saw the exclusivity clause in the retailer’s lease as an unreasonable restraint of trade that stunted its attempts to revive the failing shopping centre in a difficult retail environment.

The landlord brought the claim seeking a declaration that its covenant in the lease’s exclusivity clause was an unreasonable restraint of trade, and therefore unenforceable. However, the Supreme Court found for the tenant and upheld the lease restrictions.

Detail

The shopping centre was consented in the late 1970s and built in the early 1980s in Springtown, Londonderry, a time and a place the court described as “an economic and political wasteland”. To facilitate the development the landlord needed a reputable anchor tenant and the tenant in this case was at the time, in the words of the landlord, “the only deal in town”. The landlord therefore jumped at the chance to sign them up, notwithstanding the exclusivity provisions the tenant required in their 999 year lease. This exclusivity provision stipulated that the shopping centre: “shall not contain a unit in size measuring 3,000 sq ft or more for the … purpose of trading in textiles, provisions or groceries in one or more units”. The tenant built its own store and contributed to certain other construction costs for the estate, while the landlord built and paid for the rest.

The success of the shopping centre in Springtown has declined in recent years and the landlord considers the reason for that to be its inability to construct new stores that compete with the tenant. Defending the landlord’s claim, the tenant felt “it would have been unpalatable and commercially offensive for the landlord to put direct competition on [its] doorstep, as [it] had come to an untested location and had invested significant sums in buying the site, building the store and contributing to the costs of the car park”.

In deciding whether the exclusivity clause was void and unenforceable, the court had to consider the 1960s House of Lords decision Esso Petroleum Co Ltd v. Harper’s Garage (Stourport) Ltd (the Esso Case). The context in the Esso Case was oil companies insisting that petrol station leases contained covenants requiring the operators to purchase petrol only from that particular oil company. In the Esso Case the majority in the House of Lords set the “pre-existing freedom” test for determining whether it could consider if an exclusivity clause was unreasonable. This prescribed that the court would only consider if an exclusivity clause was unreasonable where the weaker party (in this case a petrol station operator) was giving up a “pre-existing freedom”.

The Peninsula Case is significant if only because it offers a rare glimpse of the Supreme Court unanimously invoking its power to depart from a prior House of Lords precedent; the court disposed of the “pre-existing freedom” test, in favour of the test advocated by Lord Wilberforce in his minority speech in the Esso Case. This test, the “trading society” test, suggests that the court should only consider whether an exclusivity clause is unreasonable where the restriction imposed is not “accepted as part of the structure of a trading society”, meaning it is not ordinary in the market.

In the Peninsula Case, the court found that the relevant covenant in the lease was ordinary in the market. It formed part of “the accepted and normal currency of commercial or contractual or conveyancing relations”. The court was therefore proscribed from considering the clause’s reasonableness. It was separately found to protect a legitimate business interest and not to be contrary to public interest.

Otherwise, the landlord withdrew its argument that the exclusivity clause violated competition law. The parties seem to have agreed that the exclusivity clause would be exempted from restrictions under competition law because of its pro-competition benefits. The Competition and Markets Authority recognises that without such covenants in favour of anchor tenants shopping centres such as this one may not get constructed at all. It is also relevant that the tenant in this case was not one of the “Big 7” supermarkets, and so this falls outside the ambit of the Controlled Land Order 2010.

Finally, the Supreme Court did note that the landlord could apply to the Lands Tribunal for the modification or discharge of the restrictive covenant under the Northern Irish equivalent of an application under section 84 of the Law of Property Act 1925.

Conclusion

The Peninsula Case is a welcome decision for anchor tenants who rely on exclusivity clauses to ensure the commercial viability of their businesses. It is also a welcome decision in the context of a need for contractual certainty; these clauses do what they say. Developers and landlords should therefore be careful before agreeing exclusivity clauses like the one agreed in this case, and should think twice before granting leases that breach them.

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