The case between High Peak Developments and Tesco concerning restrictive covenants highlights that clarity in this area is long overdue.
The developer is claiming that the grocer’s refusal to release a restrictive covenant – which was put in place in 1997 – on adjoining land that prohibits the sale of food, convenience goods or pharmacy products, puts Tesco in breach of the Competition Act.
While this case covers land, the 2011 amendments to the act also encompass exclusivity agreements in leases, preventing other premises from being let to competing businesses.
As we approach the five-year anniversary of those changes, we see little let up in occupiers’ desire to try and introduce exclusivity arrangements in leases.
Clearly occupiers are trying to protect their investment, however this behaviour is what the amendments to the act sought to prevent. Landlords, as a rule, resist their inclusion as it fetters their ability to re-let as they wish.
Exclusivity clauses
The main proponents are particularly seeking to include exclusivity agreements in locations with the highest level of voids – vacant land or properties – where their negotiating strength is at its highest. This obviously impacts on void rates and ultimately the vitality of a shopping location.
Most agreements prevent a landlord letting to another party of the same trade within their ownership. But many parties have successfully circumvented the exclusivity clause by taking an assignment of another retailer’s lease.
Given the prevalence of such agreements, it is perhaps surprising that there has not been a case like High Peak Developments’s claim against Tesco put forward in the past.
Certainly, there are enough disappointed parties who could bring a case to tribunal if they wished.
One could argue it’s the cost of mounting such a challenge that’s prohibitive. Equally, it may be that, for all the times that an occupier is resisted by a restrictive clause, there are as many occasions where they’ve used it to their own favour by blocking an opponent entering a marketplace.
The result of restrictive covenants, regardless of whether they are made against land or contained within a lease, can increase void space and limit investment and growth in much needed locations.
Despite the legislation being changed in 2011, we are still seeing relatively little change in behaviour and until a firm challenge is put in place, this will only continue.
- Simon Morris is a director at retail property consultants GCW
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