02 Nov 2020

Unfair restraint?

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Can a landlord of a shopping centre wriggle out of restrictive covenants given to a tenant on the basis that they are in restraint of trade?

Ripe for development

You’re an investor and you’re keen to buy a competitively priced shopping centre. With the difficult trading environment for retail, exacerbated by Covid, you find one that fits the bill. With some substantial changes in the layout and tenant mix, this could be a lucrative project. 

Your due diligence reveals that the anchor tenant benefits from a restrictive covenant which prevents lettings of any other substantial units in the centre for competing purposes. Enlarging neighbouring units and letting for a variety of uses, some of which might compete with the anchor store, is a core part of your strategy if the project is going to be viable. So, is there a way round the covenant which is restricting your ability to trade as you would like?

Competition law

Can you argue that the restriction is anti-competitive?

No. The Competition Act does apply to land agreements and it prohibits agreements which have as their object or effect the restriction of competition. But guidance from the OFT indicates that letting restrictions in favour of anchor tenants, which effectively facilitate the building of the centre, are unlikely to be caught. You can see that, at the time the centre you’re looking to buy was built,, the anchor tenant wouldn’t have signed up without such restrictions, so you decide not to pursue that line.

But what about restraint of trade?  Isn’t there a more general rule that prohibits acts in restraint of trade?

Yes. Generally speaking any agreement which limits or restricts trade will be invalid unless the agreement protects a legitimate business interest in a manner no wider than reasonably necessary, and the restraint is not against the public interest.

"Trade" is construed widely, so the doctrine would potentially cover and assist a property developer, who may not "trade" in the conventional sense.

So was the covenant limiting unit size and competition in restraint of trade?

No. This question was recently addressed by the Supreme Court in the case of Peninsula Securities Ltd v Dunnes Stores (Bangor) Ltd

The court explained that in order to work out whether particular agreements were in restraint of trade, the test to be applied was the “trading society” test. In other words, what is accepted market practice for normal trade?  If a particular approach or provision has “passed into the accepted and normal currency of commercial or contractual or conveyancing relations” then it will be assumed to have taken a form “which satisfies the test of public policy.”

It is common market practice for leases of units in shopping centres to contain restrictive covenants limiting the use of other parts. Such restrictions are particularly likely to be imposed in anchor leases, especially if the anchor tenant is paying a premium for a long lease or contributing to the construction costs. Without such restrictions, anchor tenants would simply not sign up.

So on that analysis, the covenant did not engage the doctrine of restraint of trade. 

So is all hope lost? 

No. There may be other ways to get round restrictive covenants in leases granted for terms of 40 years or more and where at least 25 years of the term have expired. The Supreme Court noted that an application for modification or discharge of the covenant could be made by applying to the Lands Tribunal. Details of that process were set our January real estate briefing

Moral

Even if you come across seemingly damning covenants in a lease, there may be ways around them. A huge amount will depend on the precise facts and circumstances. Our expert team can guide you through the possibilities to make sure that you don’t miss out on valuable opportunities.

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