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Lease agreements in light of competition law

Issues

In lease agreements we can often face provisions requiring the tenant’s consent to letting other premises within the building or in the nearby area by the landlord to a future tenant of similar or same business activity as that of the already existing tenant. 

Dr. Szilvia Andriska, Attorney (H), Noerr & Partners Law Office
In most cases, these contracts concern commercial, sometimes office buildings. Although such provision may be advantageous for the tenant which results in benefits on the landlord’ side, the possible effect of restricting competition shall also be taken into consideration in applying such condition, according to the judgment of the European Court of Justice (ECJ).

The case (C-345/14) which was referred to the ECJ for preliminary ruling, concerned a Latvian entity carrying out business in food retail trade, operating large retail stores and hypermarkets in Latvia. These stores sell FMCG and in most cases occupy a significant part of shopping centers. The food retailer company concluded several lease agreements with shopping centers upon renting commercial premises, some of which agreements included a clause granting the food retailer company the right to provide its consent to the lessor letting those premises to third parties which have not been taken in lease by the food retailer company.

The Latvian Competition Council qualified the lease agreements containing this clause as infringing Latvian competition law rules. According to the decision of the competition authority, the object of these agreements was to prevent, restrict and distort competition, therefore it was not necessary to provide evidence with regard to that in fact the lease agreements made it more difficult for a third party to enter the market.

A fine was also imposed in the Latvian competition proceeding. The company appealed against the decision and the Latvian Supreme Court referred the case to the ECJ.

The most important question of the Latvian Supreme Court was, if the mere clause of a lease agreement restricting the lessor in deciding to let premises to potential competitors of an existing tenant freely, without the consent of such existing tenant, can be qualified as of aiming at the prevention, restriction or distortion of competition. Once the object of an agreement is demonstrated to be anti-competitive, it is not required to review and demonstrate whether it actually prevented any competitor from entering the market or actually restricted competition.

The ECJ ruled that by the mere fact that commercial lease agreements contain a clause granting the tenant the right to protest the rent of commercial premises in the same building to other tenants by the lessor, is not to be considered so that the object of such agreements is to restrict competition according to Article 101 (1) Treaty on the Functioning of the European Union. It was stated by the ECJ that even if the clause could potentially have had the effect of restricting the access of the tenant’s competitors to some shopping centers, the degree of harm of the agreement was not sufficient to constitute a restriction of competition by object in this case.

However, the ECJ also stated that the impact of an agreement upon competition must be assessed in its economic and legal circumstances together with the cumulative effect of other agreements. Consequently, the availability of the commercial real estate properties in the vicinity shall be taken into account with any administrative, legal or economic barriers hindering the entry into the market by a competitor. The examination of the relevant market is also necessary, in the course of which the number and size of the operators, customer brand fidelity and consumer habits also have to be reviewed and assessed. If as a result of the assessments these agreements may contribute to the fragmentation of the market, the measurement of such effects have to be decided based on the market position of the parties and the duration of such agreements.

In order to avoid a competition law infringement, aspects defined by the ECJ shall not be forgotten in the course of negotiating upon and the drafting of lease contracts. 

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