Property deals restraints, two sides of same coin

Posted On Monday, 14 March 2011 02:00 Published by
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Liberty Group has agreed to pay an administrative penalty of 2.5% of its retail property portfolio's total turnover for the financial year ended 2008.

In a consent order published on the Competition Tribunal's website, Liberty Group agreed to pay an administrative penalty of 2.5% of its retail property portfolio's total turnover for the financial year ended 2008, an amount of just more than 18 million rand.

It is apparent from the consent order that the Competition Commission had initiated a complaint against, among others, Liberty and Bedford Square Properties for alleged prohibited market division between them, arising from a notarial deed of restraint.

Petra Krusche, a director in the competition and regulatory practice at Cliffe Dekker Hofmeyr business law firm, explains.

"From the high court judgment handed down at the end of 2009, relating to the enforceability of the same restraint, it appears that Liberty and Bedford are both landlords of shopping malls in the same area, namely Eastgate and Village View.

"The notarial deed of restraint in favour of Liberty effectively precluded Bedford from letting premises in its centre to Woolworths and Mica for a period of 11 years from 2003.

"Bedford sought to have the restraint declared unenforceable as being against public policy."

However, the court found that the restraint was binding on the parties as public policy should only be invoked as a ground for the invalidity of an agreement in "clear cases in which the harm to the public is substantially incontestable as public policy generally favours the utmost freedom of contract, and requires that commercial transactions should not be unduly trammeled by restrictions on that freedom".

It was apparent from the consent order that the commission found the selfsame restraint to amount to prohibited market division under section 4(1)(b)(ii) of the Competition Act.

Krusche says that, in the consent order, Liberty also agreed with the commission not to enforce the restraint, that the conduct in question had ceased and that it would waive its entitlement to rely on these registered rights.

"Effectively through involvement of the commission, Bedford has managed to achieve the desired result not apparently possible through the high court," she says.

"The consent agreement also highlights the competition concerns that can arise from commercial restraints and non-compete clauses between competitors or potential competitors, in this case, landlords of competing shopping malls," Krusche notes.

She says that, commercially, non-compete clauses and restraints are typically entered into if parties seek to protect their interests in certain markets or to maintain value, for example in a sale of business agreement.

"This case illustrates that if parties to a restraint are competitors or potential competitors, and if their agreement has the characteristics of collusive market division by allocating customers, suppliers, territories or specific types of goods or services between them, they can be guilty of prohibited market division under the Competition Act, which attracts an immediate administrative penalty of up to 10% of a firm's annual turnover."

She adds that it is important to distinguish agreed restrictions between firms that compete from restrictions in other agreements that do not involve competitors.

In the property sector, leases typically may contain restrictions relating to the use the leased property may be put to, and also allow for exclusive entitlements on the part of tenants to conduct certain types of businesses in a mall or other development.

"From a competition aspect, contracted restrictions of this kind are fundamentally different from restraints between competitors.

"They are not prohibited as such and may only be considered as undesirable under the Competition Act in certain markets if there is a substantial preventing or lessening of competition or an anti-competitive effect in that market."

Krusche adds that the restrictions in a lease are also the subject of the commission's ongoing investigation into the retail sector.

Source: I-Net Bridge


Publisher: I-Net Bridge
Source: I-Net Bridge

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