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Disputes over “restrictive covenants” fuelled by increase in empty space
Landlords cite competition law changes
Growth in the amount of empty retail space has led to a huge increase in the number of law suits over commercial leases.
The number of cases in the High Court in London over restrictive covenants has more than doubled over the last year, jumping from 11 in 2009 to 25 in 2010. There was only one such case in 2007.
Retail and restaurant companies often demand restrictive covenants in their leases to prevent landlords from selling or renting space to competitors of businesses within a defined area. For example, they are widely used by supermarkets to forbid the landlord from renting space to competitors in the same retail park or shopping mall.
Tenants could also restrict the sale of certain competing products within their surroundings. For example, a coffee shop in a shopping centre may only agree to sign a lease that requires that no other shop sells hot drinks on the same floor.
Landlords may have been forced by the economic situation to overlook restrictive covenants in an attempt to fill vacant units or accommodate existing tenants seeking to diversify their business e.g. bookshops opening coffee bars.
Comments Geoff Willis, Real Estate Principal: “Vacancy rates in retail property have risen sharply over the last few years. The need for landlords to find new occupiers or retain existing ones is far greater now, so they might not be as rigorous as they used to be in making sure they comply with restrictive covenants.”
“They are also less likely to take notice of restrictive covenants when they didn’t sign them themselves but have “inherited” them when they acquired the properties.”
Change in competition law prompts breach of lease agreements
Until earlier this year, most restrictive covenants relating to property were valid under competition law[1], even if they had the effect of limiting competition. However, since April 6 2011, all existing agreements “restricting competition in the production or sale of goods or services” have become void and unenforceable in the courts.
Geoff Willis comments: “This has prompted some landlords to start ignoring restrictive covenants which they believe breach competition law. However, tenants who disagree with that interpretation, thinking it an excuse to breach their lease agreement, may decide to take it to the court to determine.”
“Landlords may have pre-empted the change in the law before it actually came into force in April 2011 as there was a transition period from April 2010 to April 2011 to give businesses time to review their contracts.”
Landlords have been anticipating this change in competition law for some time.
In April 2008 the Competition Commission published the Groceries Report in which it declared that land agreements relating to the groceries sector should no longer benefit from the exclusion from completion law. It also stated that there may be other sectors where land agreements might have adverse effects on competition, recommending that Government repeal the provision in the Competition Act 1998 that excludes those agreements from being subject to competition law, which is what happened in April this year.
Cases over “restrictive covenants” in the High Court (London)
© EMW 2012