[author: Deirdre Lyons Le Croy]

On 26 November 2015, the Court of Justice of the European Union (CJEU) handed down its judgment in Case C-345/14 Maxima Latvija on the application of competition law to a non-compete clause in a commercial property lease. The CJEU had assessed contractual clauses in commercial leases that enabled a Latvian food retail chain to oppose shopping centres’ tenancy agreements with competing retailers.

Background
In April 2011, land transactions were brought within the ambit of Chapter 1 of the Competition Act 1998, which prohibits anti-competitive agreements. Since then, any clauses in a lease or transfer which have as their object or effect the restriction of competition in the UK (or a part of it) will be void and/or unenforceable, unless they meet certain exemption criteria.

OFT guidance (now the Competition and Markets Authority) from March 2011 explained that not all restrictive or exclusivity clauses in land agreements will be deemed to be anti-competitive. In some cases, such clauses may not have an appreciable effect on competition in the relevant market. Exclusivity in favour of anchor tenants and provisions designed to achieve an appropriate tenant mix may be justifiable subject to the exclusivity being limited to a start-up phase, for example.

Maxima Latvija case
In Case C-345/14 Maxima Latvija, the CJEU ruled that a restrictive covenant in a retail lease agreement (a non-compete clause) was not drafted to exclude rival retailers ‘by object’ within the meaning of article 101(1) of the Treaty on the Functioning of the European Union, and was therefore not automatically void. An agreement between commercial entities is considered restrictive ‘by object’ where it harms competition, for instance, by having a negative impact on the price, quality or quantity of goods and services.

The CJEU judgment stated that the validity of a non-compete clause must be assessed according to its anticompetitive effects in the relevant market and the context in which the lease operates. It cannot be a foregone conclusion simply from the existence of the non-compete clause. Relevant factors for this assessment include the clause’s duration, the amount and size of the local competition to the party seeking to rely on the non-compete clause, the shopping centre’s catchment areas and whether there were other barriers to entry for new participants.

Similar cases
In 2014, a UK court struck down as void a proposed restriction on a tenant’s use of its property under competition law (Martin Retail Group Ltd v Crawley Borough Council [2013] WL 7090797) and the UK competition authorities have in the past challenged restrictive covenants imposed by major supermarket chains on the development of land.

Summary
In light of these rulings, developers and landlords should seek advice before using non-compete clauses in their commercial leases to reduce the risk of challenge.