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The groceries sector: Addressing competing interests

03 June 2010

Large supermarkets must act to address the anti-competitive effect of restrictive covenants and exclusivity agreements in the groceries sector.

The Competition Commission re-issued the Order referred to in this article on 10 August 2010, with no substantive amendments."

It is the result of a Competition Commission Order that will also have a longer term impact on the terms of property deals.

The Order was issued at the end of April, and is part of a package of measures put in place by the Competition Commission following a market investigation which concluded there were features of the UK groceries market that restrict competition.

The supermarkets currently affected by the Order are: Asda, Co-op (including Somerfield), Marks & Spencer, Morrisons, Sainsbury, Tesco and Waitrose. They are collectively known in the Order as Large Grocery Retailers.

The Order contains a list of restrictive covenants benefiting the Large Grocery Retailers which must be released within six months of the date of the Order. It also opens the way for other existing restrictive covenants to be challenged by owners of land affected by them. These covenants must also be released if the Office of Fair Trading (OFT) considers that they meet criteria which would render them anti-competitive.

Large Grocery Retailers must use best endeavours to comply with the requirement to release restrictive covenants. A title investigation will be required to determine which owners of nearby land are affected by the restrictive covenant, and a deed of release entered into with those owners without any charge to them.

The retailers must also apply to remove the Land Registry entries for the covenants. If it is not possible to comply with these obligations within six months, the Large Grocery Retailers must execute declarations that they will not enforce the covenant, and ensure that any future owners of their land agree likewise.

It is clear from the Order, however, that the Large Grocery Retailers are not required to make any payments to procure another party to consent to the release.

Exclusivity agreements are treated in a similar way, although there is a time limit for enforcement rather than an outright release. The Order contains a list of existing exclusivity agreements that cannot be enforced after a period of five years.

There is also a right of challenge to other existing exclusivity agreements. If the OFT agrees that an exclusivity agreement fulfils the anti-competitive criteria in the Order, it will only be enforceable for a limited period.

Future property deals are also caught by the Order. Large Grocery Retailers are prohibited from imposing new restrictive covenants that may restrict grocery retailing or have equivalent effect, and they will not be able to enforce new exclusivity agreements after five years from the opening of the benefiting store.

There is also a requirement for Large Grocery Retailers to notify the OFT of acquisitions of new large grocery stores within four weeks.

Large Grocery Retailers must stop and consider the potential impact of the Order on their business and land holdings.

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