Non-competition clauses are a matter of commercial negotiation. However, as Jenny Joint and Fiona Spencer-Jones explain, landlords and tenants must be careful
Everyone is familiar with landlords who restrict their tenant's use of a property. However, more and more tenants are insisting upon restrictions from their landlord to prevent competitive uses on the remainder of the landlord's premises. It is not unusual to find "non-competition" clauses in retail parks and shopping centres, and an incoming tenant may even be prepared to pay an increased rent for such protection.
Various issues arise from non-competition clauses. This article considers them from both the landlord's and the tenant's perspective.
Issues for the landlord
A landlord's acceptance of a non-competition clause forms part of the commercial negotiations, and will depend upon how much the tenant is prepared to pay and how valuable that tenant is. Once accepted, the clause can be made more palatable to the landlord.
- The landlord should ensure that ancillary uses in other premises are not prohibited: for example, does an electrical retailer who insists upon a non-competition clause really need to prevent a mobile phone outlet from selling phone chargers?
- Does the whole of the landlord's property have to be covered, or can the restriction apply only to particular units or sizes of units: a supermarket operator might not care what is sold from the small kiosk next door.
- Any units that are already let need to be removed from the scope of the restriction. The use of an existing unit may not breach the restriction, but it may do in the future if the lease permits a change of use.
- Could the restriction apply only to first lettings on the landlord's property? This type of restriction often appears in the relevant agreement for lease. Investors should remember that this means that agreements should not be ignored on a purchase even if all the leases have been granted.
- The restriction must be limited in time. This mitigates the likelihood of the landlord limiting its future pool of tenants in a way that it did not envisage when it entered into the restriction. Would every landlord have foreseen that coffee outlets would appear within bookshops or pharmacies within supermarkets?
- The restriction should be personal to the tenant that requires it.
The imposition of a non-competition clause on a landlord will not in itself have a substantial effect upon valuation. The caveats to this are the length of time for which the clause is imposed -- as mentioned above, this could restrict future potential tenants -- or where there is an existing breach. Also, voids on a scheme could have a greater effect because potential occupiers may be restricted.
Non-competition clauses may affect rent reviews. From a landlord's perspective, any restriction that benefits the tenant should be taken into account. This will not be the case with a restriction that is personal to the tenant unless the rent review provisions provide for this. Similarly, a time-limited restriction will not affect review if it falls away prior to the review date and is not repeated in the hypothetical lease. Tenants of other units will want to ensure that any deals offered as a comparable by their landlord do not have the benefit of a non-competition clause, which may have inflated the rent.
Once a landlord has granted a lease in which it has agreed to a non-competition clause, or has purchased a property with such a lease in place, management issues will go forward on the grant of new leases. It goes without saying that each new lease will need to replicate the non-competition clause within each tenant's user covenant. The risk for the landlord is in forgetting to do this. Managers' and lawyers' systems and associated files should highlight this issue.
Points for tenants
A tenant who has the benefit of a non-competition clause will be most concerned with compliance and enforcement.
Most problems arise because the landlord has failed to include the clause in a lease to another tenant, thereby breaching the non-competition clause, but the tenant trading in competition may not have done. This was certainly the situation in Oceanic Village Ltd v United Attractions [2000] 1 EGLR 148. In this case, the claimant tenant was unsuccessful in its claim against the defendant tenant, which was carrying out a competing use. The court felt that the landlord's covenant not to permit a gift shop to be operated in its building did not bind the defendant without there being an express provision in its lease to that effect. The landlord was still liable in damages, but the competing use that had constituted the real mischief could not be stopped.
Even if the premises in which the offending use is being carried out are not subject to a valid non-competition covenant, other tenants seeking to prevent this use may still have remedies.
Usually, a tenant will be successful only in preventing competitive uses on the property affected by the landlord's covenant. However, in Oceanic Village Ltd v Shirayama Shokusan Co Ltd [2001] EGCS 20 the tenant succeeded in enforcing the restriction beyond the area over which it had been given. The landlord had leased kiosks selling items that would have been in breach of the non-competition clause it had given to Oceanic Village only if the kiosks had been erected within the building to which the restriction applied. Even though the claimant tenant failed to show that the restriction did extend to the kiosks outside the building, it did succeed in establishing that the sale of certain items from the kiosks would be a derogation of grant by the landlord. This case is very unusual, and the tenant succeeded only in prohibiting the sale of a much smaller category of goods than covered by the restriction.
If the non-competition clause has been carried forward into further leases granted by the landlord and a tenant is trading in breach, the normal route for the tenant having the benefit would be to take action against the landlord to enforce its obligations. However, even in the absence of a specific landlord's non-competition covenant, a tenant may be able to stop a competing use. In limited circumstances, a tenant may also be able directly to enforce another tenant's user covenants, as was the case in William v Kiley (t/a CK Supermarkets Ltd) [2002] EWCA Civ 1645; [2003] 06 EG 147.
In this case, even though there had been no landlord's covenant preventing the competing use, one tenant was able to prevent another from selling goods in breach of the latter's own use restriction. This is the first English case in which, in the commercial context, a court has held that a letting scheme existed between tenants enabling this direct enforcement of covenants. The prime requirement for a letting scheme is reciprocity of obligations between the various tenants. Or, put another way, an intention to impose mutually enforceable restrictions in the interests of all the tenants. These circumstances, and the other requirements for a letting scheme, will exist only in very limited situations.
The Land Registration Act 2002 is likely to help tenants who have the benefit of a non-competition clause in two ways. First, because the Land Registry is now in the public domain, a tenant should be able to obtain copies of other leases on the development and to check which user covenants have been imposed upon the other tenants. Such copies will not be obtainable if the parties to the lease have applied for it to be confidential, but, at present, it is not clear how much this will happen in practice. Second, a tenant with the benefit of a landlord's non-competition covenant can bind other tenants by registering the covenant against the landlord's title. Indeed, a tenant must do so to ensure that its landlord's successors in title are also bound. Any lease granted by the landlord will similarly be subject to the covenant.
A tenant who is well advised will always protect its interest in this way in respect of its landlord. However, in addition, the mechanism is a useful fail-safe against the landlord forgetting to impose the necessary covenants in other leases granted after the registration.
The one enforcement issue that has not been mentioned is the effect of the Competition Act 2000. Although this excludes "land agreements" from its ambit, it is possible that non-competition clauses benefiting tenants could still be caught by the Act.
Conclusion
The imposition of a non-competition clause seems to be a simple matter of commercial negotiation. However, there are a number of issues, particularly for landlords, but also for tenants, that should be given careful consideration, both on the giving of such a clause and on the future management of the affected property.
For further information please contact Jenny Joint on + 44 207 367 3389 or email at jenny.joint@cms-cmck.com
Jenny Joint is a solicitor in the real estate group at CMS Cameron McKenna and Fiona Spencer-Jones is a director at CBRE investors.
This article first appeared in Estates Gazette on 3 April 2004.
