Irish Competition Authority Decisions

COMPETITION AUTHORITY

1. Notification was made by Naresa Ltd on 24 February 1993 with a request for a certificate under Section 4(4) of the Competition Act, 1991 in respect of a lease between RHM Ltd and Naresa Ltd . The Authority issued a Statement of Objections to both parties and no formal response to the Statement was received.

2. The notification concerns the lease of a shop at Pearse Street, Ballina, Co. Mayo between RHM Ltd as lessor and Naresa Ltd as Lessee.

3. RHM Ltd is the owner and landlord of the shop at Pearse Street, Ballina. Naresa Ltd trades as a newsagent at the premises.

4. The notified lease was made on 1 February 1993 for a term of 35 years from 1 October 1992. The restricted user clauses in the lease are as follows:

(a) Under clause 7 of the Second Schedule the lessee covenants "To use the premises for the lessee's business as a Newsagency, Tobacconist and Confectioner ......."

(b) Under clause 8 of the Second Schedule the lessee covenants "Not to assign, sub-let or part with or share the possession of the Demised Premises or any part thereof or permit any other person or Company to occupy the demised premises as a licensee without first obtaining the consent in writing of the Lessors which consent shall not be unreasonably withheld."

(c) The lease also contains a number of other standard restrictive covenants and obligations relating to the letting of the premises.

(d) In addition the agreement provides for an early surrender of the lease by the lessee including the following clause D1 (b)

"That the Lessee at anytime during this demise shall, on giving one months notice to the Lessor of its intention;

(i) to surrender the term then unexpired created by this demise and of its intention.

(ii) within 12 months from the date of surrender and within a radius of two miles of Ballina Post Office to carry on or be associated by any means directly or indirectly with a business to be carried on which will be in competition with the business at the date of such notice been carried on in the demised premises.

be entitled, on payment to the Lessor of all arrears of rent and other outgoings due pursuant to the terms of this demise up to the date of actual surrender and on payment to the Lessor in addition of a sum equal to the equivalent of twice the then current rent. To surrender to the Lessor the residue then unexpired of the term demised hereunder and the Lessor on compliance by the Lessee of these terms and on payment of the said moneys as aforesaid shall accept a surrender of the said term and shall enter into a suitable covenant with the Lessee that it shall not directly carry on or indirectly be engaged in or associated by any means with any business carried on by any person or Body in competition with the business carried on in the demised premises at the time of such surrender within a radius of two miles from Ballina Post Office for a period of twelve months from the date of such surrender."

5. In its submission Naresa stated "The premises in question have in fact been used as a newsagency for upwards of forty years but the range of goods on sale has expanded recently ..... In view of the position of the premises in the town and its long use as a general newsagents there is goodwill attached to the premises as a newsagents. During the term of the Lease Naresa Limited on giving notice and on paying the equivalent of two years rent to RHM Limited can surrender the Lease and can seek to move the goodwill to an alternative premises. In that event RHM Limited is prohibited from using the existing premises as a newsagency for twelve months and further is prohibited from carrying on a similar business in an alternative premises within two miles of Ballina Post Office during this same twelve month period. In short, the applicant Naresa Limited can buy the goodwill and seek to transfer to an alternative premises in the knowledge that it will have a reasonable opportunity to build up the business in a new location." Naresa also stated that there were 6 similar businesses within 400 yards of the premises.

6. Section 4(1) of the Competition Act, 1991 prohibits and renders void all agreements between undertakings, decisions by associations of undertakings and concerted practices which have as their object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State, or in any part of the State.

7. Section 3(1) of the Competition Act defines an undertaking as "a person being an individual, a body corporate or an unincorporated body of persons engaged for gain in the production, supply or distortion of goods or the provision of a service". RHM is engaged in the letting of premises for gain and is therefore an undertaking. Naresa is trading as a newsagent and is also an undertaking. The notified lease is an agreement between undertakings. The agreement has effect within the State.

8. The lease agreement contains standard restrictions and obligations on both landlord and tenant which are necessary for the maintenance of the landlord/tenant relationship in respect of the tenancy. These do not raise issues under the Competition Act. The very act of leasing the premises to a particular tenant prevents competitors of the tenant from using those premises to compete with the tenant. Clearly this cannot be regarded as preventing, restricting or distorting competition since it would imply that the leasing of a commercial premises in order to carry on a business therein was prohibited unless licensed under Section 4(2) of the Competition Act. Anyone wishing to operate a business in competition with the tenant may do so by occupying any other premises within the town of Ballina.

9. In addition the agreement also provides, by way of the permitted user clause 7 in the Second Schedule, restrictions on the use of the premises but which effectively allow the premises to be used for the purposes of the business of the tenant. Such permitted user clauses are normally based on the user proposed by the tenant at the time the lease is first executed but are also governed by considerations such as the physical characteristics of the premises, the requirements of the Planning Acts and the landlord's own policy, when granting the lease, on how the premises should be used. The Authority considers that such user restrictions in the letting of premises do not have the object or effect of preventing, restricting or distorting competition in the State or any part of the State. In taking up the lease the tenant negotiates the permitted user required for his business. This is reflected in the lease but if he were subsequently to seek a change of user he could in most instances have recourse to the provisions of the Landlord and Tenant Act 1980 which provide that a Landlord cannot unreasonably withhold consent to a change of user requested by a tenant. In addition the tenant is free to undertake other businesses in many other premises, both in the vicinity or elsewhere in the State. The object or effect of such permitted user clauses in lease agreements are not therefore anti-competitive. The Authority therefore considers that these clauses do not offend against Section 4(1) of the Competition Act, l99l.

10. Clause 1(b) provides that where the lessee seeks to surrender the lease before its expiry date with the intention of opening a similar business within a radius of 2 miles from Ballina, the lessor would accept this surrender on payment of a sum equivalent to twice the then current rent. The lessor would also enter a covenant not to become engaged in any way or associated with a competing business in the premises or within the same 2 mile radius for a period of 12 months from the date of such surrender. It has been argued that this clause, if exercised, would enable Naresa to purchase the goodwill and seek to transfer it to an alternative premises in the knowledge that it will have a reasonable opportunity to build up the business in a new location.

11. The Authority has dealt with restrictions on the vendor following the sale of a business on a number of occasions. In its first decision, Nallen/O'Toole (1), the Authority stated that it regarded some restrictions on the seller of a business as being essential in order to ensure the adequate transfer of the goodwill of the business. In its opinion provided such restrictions were limited in terms of their duration, geographic coverage and subject matter to what was necessary to secure the transfer of the goodwill of the business, they would not be in breach of Section 4(1) of the Act. In GI Corporation/ General Semiconductor (2), the Authority considered that a restriction of 2 years would generally be regarded as sufficient for the complete transfer of the goodwill of a business.

12. In this instance however the Authority is of the view that, on taking up the lease, the lessee had already acquired the goodwill of the business, which was attached to the premises in Ballina and that the object of clause D 1(b) is to prevent and restrict competition by ensuring that RHM Ltd may not compete with or allow its premises to be used to compete with Naresa for a period of one year after any exercise of the option. The Authority therefore considers that this clause offends against Section 4(1).

13. In the opinion of the Authority, RHM Ltd and Naresa Ltd are undertakings within the meaning of Section 3(1) of the Competition Act, 1991 and the notified lease agreement constitutes an agreement between undertakings. In the Authority's opinion the notified agreement offends against Section 4(1) of the Act. The Authority therefore refuses to issue a certificate in respect of the lease agreement between RHM Ltd and Naresa Ltd (notification no. CA/8/93), notified on 24 February 1993, under Section 7(1) of the Competition Act, 1991.

For the Competition Authority

Des Wall

Member

12, April, 1995.

(1). Competition Authority Decision No.1, 2 April, 1992

(2). Competition Authority Decision No.10, 23 October, 1992