Competitively Challenging Restrictive Covenants

The Competition Appeal Tribunal (CAT) has issued an order consenting to the settlement of proceedings brought by property developers, Shahid Latif and Mohammed Abdul Waheed (the Claimants) against Tesco Stores Limited (Tesco) under section 47A of the Competition Act 1998. (Case 1247/5/726, Shahid Latif & Mohammed Abdul Waheed v Tesco Stores Limited).

In 1997, Tesco purchased land from the Claimants and under the transfer agreement, the land retained by the Claimants was subject to a restrictive covenant “not to use or permit any of the retained land to be used for the sale of food convenience goods or pharmacy products.” Subsequently, in 2015, the Claimants entered into a conditional agreement with a discount chain to build a shop on the land. In order to satisfy the conditions, the Claimants sought to be released from the restrictive covenant.

Tesco did not give in during negotiations and as a result, the Claimants brought proceedings. They alleged that the transfer agreement and/or the restrictive covenant constituted a breach of the Competition Act by Tesco, as well as the common law doctrine of restraint of trade.

Regardless of when restrictive covenants are entered into, since 6 April 2011, they have been subject to compliance with UK competition law. This was following an investigation by the Competition Commission, which concluded with a 2010 order that forced supermarkets to remove certain clauses where they “prevent, restrict and distort competition”. It became apparent that the use of restrictive covenants became commonplace within the grocery sector. At the time, Tesco, in particular, were named and shamed for their lack of compliance with the new directive.

However, the Claimants opted to bring proceedings instead of waiting for the Competition Commission to enforce its order. This was an attractive approach for the Claimants as not only could they claim damages but the new fast-track procedure allowed simple cases to be heard quickly (within six months) and also limited the amount of recoverable costs.

The Claimants strategy was successful and drove Tesco to settle the claim before the CAT could deliberate the case. Tesco released the Claimants from the disputed covenant and the claim was withdrawn in March this year after the CAT published an order permitting the settlement.

This case illustrates how competition law can be used as an effective negotiation tool within property transactions, particularly when it comes to the enforceability of restrictive covenants and land agreements.

For further information regarding this topic or any other property and construction matter, please contact Joanne McIvor – Partner, or any member of Edwin Coe Property team.

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