Damage Warning: Get ready for land and lease law changes*

Next April’s inclusion of land and lease agreements in competition legislation is likely to affect businesses and their banks, warns ALEX INNES.

From April next year, competition law will have a greater impact on all businesses, as the existing exclusion of land agreements from the Competition Act 1988 will be revoked. The definition of land agreements includes any lease or agreement to transfer property, so this change is likely to affect a significant number of businesses. What’s the likely impact on banks and their customers?

In essence, the change will mean that any provision in a land agreement which restricts use or trade may be prohibited. An example would be a landlord undertaking to a tenant not to let any other unit in a development to any competing tenant; or a party selling land subject to a title restricting its use for a certain purpose, such as a supermarket. There are some exceptions, including where the restriction does not have an appreciable effect on trade, or where the positive benefits of the restriction outweigh any consumer disadvantage.

It is important to note that the exclusion will be revoked with retrospective effect which means that any offending provision in either a new or existing land agreement will be void and unenforceable from 6 April 2011. Also, if the offending provision cannot be severed from the agreement, then the whole agreement may be at risk. Therefore, even though the parties have agreed and documented a transaction, it may be altered by subsequent legislation which was not contemplated at the time of reaching the commercial deal.

Another adverse consequence is that, while the parties to any particular land agreement may be subject to sanctions under the Competition Act, they may also be subject to actions by third parties who consider they have suffered a loss by virtue of the existence of the offending provision.

A successful damages claim could result in a significant liability, which is in excess of the perceived benefit gained by imposing the restriction.

From a bank’s perspective, therefore, this change could have an adverse affect on a number of borrowers, either by increasing the costs, and/or decreasing the profits of the business, as well as reducing the asset value of the business. So banks should be aware of this when considering any loans to businesses anticipating reasonable trading profit based on some form of restriction or exclusivity. This will be particularly relevant in the retail sector, where most restrictions are imposed. But it may also have an impact on development deals.

It’s possible that the change may be advantageous to a bank: where it has control of a property asset that may be subject to a restriction imposed by an offending provision, for example, the asset may become more marketable after the April deadline. Similarly, a borrower may gain if a restriction is removed from its business, and it is free to expand its trade.

It is therefore important to consider the impact of the change in advance, so that businesses can take action before the change takes effect. Also, in all future security transactions, it would be worth the banks seeking reassurance that the implications of the Competition Act have been fully considered by the borrower.

As always, until the final detail of the legislation has been published there will be a degree of uncertainty. However, banks should consider informing their customers that it is an issue to be considered, especially where the customer is likely to be either seeking to impose, or may be restricted by, any such provision.

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Semple Fraser LLP is one of Scotland's leading commercial law specialists, offering advice of the highest quality across a range of areas. With lawyers qualified in both Scots and English law, we are able to deliver a full banking service throughout the UK. The Banking & Finance Group of Semple Fraser LLP has expertise in all areas of banking and property finance, and works closely with the other specialists areas of the firm to provide the complete service to clients.

For more information on these topics, please go to www.semplefraser.co.uk, or contact Alex Innes on 0131 273 3771 or alex.innes@semplefraser.co.uk

Alex Innes is Head of the Banking & Finance Group of Semple Fraser LLP

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