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Restrictions in lease agreements: Competition law matters

The Competition and Markets Authority (CMA) has announced that Heathrow Airport Limited (HAL) has settled a competition law investigation into its lease agreement with a hotel operator, Arora.[1] The settlement was reached on the basis that HAL accepted it had breached the competition law rules, paid a fine of £1.6 million, and removed the offending restriction. Arora also admitted the breach, but escaped any financial sanction as it was granted leniency for bringing the matter to the CMA’s attention in the first instance.

This is the first time that the CMA has brought competition law enforcement action in a case involving a land agreement. Prior to April 2011, such agreements were exempt from the prohibition on anti-competitive agreements (as set out in Chapter I of the Competition Act 1998). That exemption was removed and land agreements are now subject to the same rules as all other types of agreement.

The specific restriction in this case was contained in a lease agreement between HAL as freeholder and Arora for the Sofitel hotel at Terminal 5. Included in the lease was a clause restricting how parking prices should be set by Arora. Specifically, Arora was prevented from charging non-hotel guests cheaper prices than those offered at other car parks at Heathrow.

No doubt the restriction was in place to make sure Arora did not undercut HAL’s other car parks, prices for visitors to the airport. However, the competition law rules make clear that in vertical agreements such as a lease agreement, one party cannot impose restrictions on the other party’s freedom to set prices. Although there is scope within the rules to apply a so-called “individual exemption” to allow such restrictions to fall outside the prohibition, the relevant criteria are narrowly drawn and generally very difficult to satisfy, particularly in the context of pricing restrictions.

Many pre-2011 lease agreements are still in existence and would not originally have been subject to competition law scrutiny. Often, any competition law issues only come up where one party or another wishes to challenge the enforceability of the agreement – for example to avoid certain covenants or other restrictions on their use of the land.

The HAL/Arora case is a useful reminder of the risks involved should any restrictions come to the attention of the competition authorities. Certainly the CMA and the Civil Aviation Authority (CAA), who assisted the CMA in its investigation in this case, think that this is far from an isolated occurrence. The CMA has sent letters to other hotels and airport operators warning them against similar anti-competitive agreements, whilst the CAA issued an “open letter” encouraging the airline industry to be vigilant in its efforts to ensure full compliance with competition law.

Issues regarding lease provisions’ compliance with competition law are also able to be litigated, as demonstrated by the Martin Retail Group v Crawley Borough Council case where a newsagent successfully challenged a user restriction clause in its lease with the Council. In 2016, an action brought in the Competition Appeal Tribunal by a property developer, High Peak, against Tesco concerning the enforceability of a covenant in Tesco’s lease prohibiting the sale of food or pharmacy products was settled before it went to a full trial.

Land agreements are therefore vulnerable to competition law challenges, whether by the courts or competition authorities. Parties to such agreements should be well aware of the risks involved and need to scrutinise their agreements accordingly, but also be aware they could deploy competition law arguments to refuse to enter into/remove otherwise onerous provisions.


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