What is ‘the Order’?
The aim of the Groceries Market Investigation (Controlled Land) Order 2010 (“Order“) is to restrict large grocery retailers (“LGR“) from requiring their landlord to enter into restrictive covenants to prevent its land being used by another LGR for grocery retail. Such use of restrictive covenants in leases is anti-competitive, as it distorts the market. The Order also covers extended exclusivity agreements (over 5 years) between landlords and LGRs, which have the same anti-competitive effect by another route.
As any landlord of a shopping centre or retail park will tell you, an LGR is incredibly appealing as an anchor tenant. They can bring regular footfall to a shopping centre from a range of socioeconomic backgrounds. One can see the attraction during negotiations with a LGR of agreeing to a restrictive covenant that, for example, limits access to neighbouring properties for certain sized vehicles in order to nail down a lease with a Tesco or a Sainsbury’s. If such a covenant makes it impossible for any neighbouring tenant to receive or distribute grocery deliveries via the ubiquitous vans, then prior to the Order, that would have been a happy accident and the end of the discussion.
Who enforces ‘the Order’?
The enforcement of the Order is led by the Competition and Markets Authority (“CMA“). The CMA will consider whether a a restrictive covenant put in place by the LGR has failed the ‘competition test’.
The ‘competition test’ is set out in Schedule 4 of the Order, and involves a review of the area around the relevant property via an ‘isochrone’ map. In plain terms, a map that shows the area accessible by car from the property within a 10 minute timeframe. If there are 3 or fewer LGRs within the area, or if the LGR in question has more than 60% of the groceries sales within that area, then the ‘competition test’ is failed. Such a test would include associated stores, so an M&S with an M&S ‘Simply Food’ within the isochrone would have to count those sales too.
What are the remedies under ‘the Order’?
If the LGR fails the ‘competition test’ they will be required, within a maximum of 6 months, to enter into a deed of release with the landlord to remove the restrictive covenant from the lease or other title document. In the relatively crowded UK groceries market, the negative press coverage that such uncompetitive practices can attract is also a deterrent.
In June 2023, a CMA investigation concluded that Sainsbury’s had breached the Order 18 times between 2011 and 2019, and Asda had breached the Order 14 times in the same period. The press release from the CMA stated that the restrictive covenants were ‘against the law, cause real harm to shoppers and will not be tolerated’.
A landlord should have this in the forefront of its mind at the outset of negotiations for a new lease or a lease regear with a LGR and we recently advised a landlord on a lease regear where the restrictive covenant point arose. The property was a distribution warehouse not a retail store but because the Order ban on restrictive covenants against the sale of groceries is absolute and not linked to the type of property affected and given the CMA scrutiny of LGR compliance with the Order, the LGR tenant insisted the permitted user clause was amended to confirm that notwithstanding the permitted B8 use, nothing in the lease would prevent the sale of groceries from the property. To restrict the use to B8 only could , they argued, be interpreted as a restriction on the sale of groceries from the site. In practice, a landlord may get comfortable with such a provision by making its application personal to tenants who are LGRs, so it would not apply if the lease were assigned to a 3PL for example. A B8 or B2 unit also may not be suitable for retail use, so the sale of groceries would not be permitted by the local planning authority were planning consent to be sought. Protections can also be built into the rent review provisions by for example requiring an additional upwards only open market rent review if groceries were to be sold from the property at any point during the term.
When looking to invest in a property with LGR tenants, the due diligence should flag restrictive covenants in a lease or on the title that could be targeted by the CMA. The new landlord might want to obtain the deed of release prior to completion or, it might be able to use it as a bargaining point with the LGR tenant in the future.