Irish Competition Authority Decisions

Decision No. 431

1. Notification was made by Norish plc on 30 September, 1992 with a request for a certificate under Section 4(4) of the Competition Act, 1991, or, in the event of a refusal by the Competition Authority to issue a certificate, a licence under Section 4(2), in respect of a building agreement and an agreement for a fee farm grant between Norish plc (Norish)and Biko Farm Limited, (Biko). Following the issue of a Statement of Objections on 16 May, 1995 Norish agreed to amend the agreement to meet the Authority's concerns.

2. The notification concerns the agreement dated 13 May 1982 for a sale, subject to a fee farm grant, of a site described as unit 16 at Norish Food City, Tullynamalra, Castleblayney, Co. Monaghan between Norish as Grantor and Biko as the Grantee. The site was sold for the purposes of development as a factory.

3. Norish is engaged in the provision of blast freezing and cold storage facilities and equipment at locations at Norish Food City, Dublin, Cork and Kilkenny with 3 similar facilities in the UK including 1 in Northern Ireland. Its turnover in 1993 was £11m. Biko was engaged in food processing and following the appointment of a receiver, its business and assets were taken over by Anglo Irish Meats Ltd, which was part of the Goodman Group. Irish Food Processors Ltd. is now the current grantee.

4. The notified arrangements relate to what is in effect, the leasing of land in a rural area for construction of premises to be used for manufacturing purposes with a right to the grant of a fee farm grant of the leased land. The main market effect of the notified agreement relates to the provision of freezing and cold storage facilities for the food industry. It has been estimated that there are around 45 cold store facilities in the State with a storage capacity in excess of 20 m cubic feet. This includes storage capacity in a number of meat plants.

5. (I) The notified building agreement was made on 13 May, 1982. Under this agreement a licence was granted to Biko to enter the lands and erect Works by 1 September 1983 in accordance with plans attached to the agreement. On receipt of planning permission Biko would have the right to call on Norish for the grant of a fee farm grant in the form set out in the schedule to the agreement. In the event of a breach by Biko of the agreement or the grantor's conditions in the fee farm grant, the grantor, its successors and assigns may enter the lands and the fee farm grant shall absolutely determine.

(II) Under the fee farm grant, set out in the schedule to the agreement, provision is made for the sale of the lands subject to the fee farm grant and a Contract of Tenancy with a landlord/tenant relationship is created. The sold lands are conveyed to the grantee "to hold the same unto and to the use of the grantee its successors and assigns for ever" subject to a nominal annual rent. The grantee also enters into covenants to pay service charges related to the maintenance of the estate by the grantor, to pay rates, maintain the property in good repair and permit entry to the grantor to inspect the premises and maintain common facilities in the estate.

(III) The fee farm rent agreement also contains the following restrictive clauses:

Under clause 2 "The grantee for itself its successors and assigns so as to bind the owner for the time being of the Sold lands and so that the covenants hereunder shall be of the benefit and protection of the Estate and the other units comprised in the Estate....hereby covenants with the Grantor its successors and assigns and as a separate covenant with each of the Grantees Transferees and Lessees of the other units comprised in the Estate as follows:

(10) (a) Not to use or occupy the Sold lands or permit the same to be used or occupied otherwise than for the purpose of carrying on the business of manufacturers, processors, packers, exporters, importers, producers, salters, importers of and dealers in salt, pickles, processors and dealers and agents for animal and meat products and by-products of every kind, fish, farm and garden produce of every kind and bacon, pork and meat products in whatever form and shape and general wholesale and retail distributors of food and food products of every kind and to act as factors and agents for the manufacturers and producers of all wholesale dealers in salt pickles, preserves, animal and meat products and by-products of every kind, fish and farm and garden produce, bacon and any other commodity which may eventually be dealt with in conjunction with any of the foregoing or for any purpose or in any manner inconsistent with such user or occupation or inconsistent with the development or good estate management of the Estate as a Food City Complex."

(10) (c) Not without the Grantor's previous consent in writing (such consent not to be unreasonably withheld) to use or permit the Sold lands to be used other than for the purpose or purposes provided for in clause 2(10)(a) hereof ... Where the Grantor refuses consent such consent shall not be deemed to have been unreasonably withheld if the Grantee applies for a consent to use the Sold lands for any purpose which would be inconsistent with the development or good Estate management of the Estate as a Food City Complex.

(11) (c) Not to erect buildings upon the Sold lands for the purpose of carrying on a business and/or offering services similar to the business of or the services offered by the Grantor at that time regardless of whether or not the business and/or the services are for the Grantee's own requirements or that of others.

(11) (d) Not to have or use or permit to be on the Sold lands or used thereon blast freezing or cold storage facilities or any equipment capable of being used for carrying on blast freezing or cold storage or any of the services offered by the Grantor for the time being.

(11) (e) Not to engage in enter or compete whether directly or indirectly in the provinces of Ulster and Connaught or in the counties of Louth, Longford, Meath, Westmeath and Dublin (County or City Borough) and Kildare in any of the businesses carried on or the services offered by the Grantor for the time being in the Estate PROVIDED that this sub-paragraph shall not apply where the Grantee may at some future date purchase an existing business which at the time of purchase has a Cold Store in use as an integral part of that business. This exception shall not however apply to any extension or expansion that may be made by the Grantee to the said Cold Store.

(13) (a) Where the Grantee shall lease the Sold Lands the Grantee shall cause such lessee to enter into a direct covenant with the Grantor and the grantees or lessees of other Units in the Estate to perform and observe all the covenants and conditions herein .... and to include a covenant not further to assign underlet or part with the possession of the Sold lands or any part thereof in any manner.. ..."

6. In addition the agreement contains a number of other restrictions or obligations which would be standard in a commercial lease of land.

7. Norish stated that the cluster concept in food processing being developed at the Norish City food park was unique. It involved the central provision of specialist services which the food processors in the park could share leading to economies of scale. The food park is more than an industrial estate, not unlike a specialist industrial estate or specialist retail park, but with particular similarities to the Shopping Centre concept whereby a number of enterprises with a certain community of interest with an anchor tenant come together, with the anchor tenant given particular rights necessary to safeguard the viability of the centre. Norish claimed that the concept enabled food companies to concentrate on production and avoid capital expenditure through the availability of the centrally provided cold storage and distribution facilities at the food park.

8. Norish referred to the Notice of the Authority in relation to shopping centre leases and stated that the fee farm grant (a freehold interest in land subject to a perpetual rent) operates the same way as a lease and they submitted that it should be so construed for the purposes of the notification.

9. In regard to clauses 2 (11) (c) to (e) Norish referred to pro competitive aspects of industrial clusters and argued that the concept eased barriers to new companies for entry to the market. Norish argued that the need for a balanced user mix recognised by the Authority in relation to shopping centres should also apply to the food park concept as essential to ensure its development.

10. Norish in its submission also stated:

"4.3.6 It has been pointed out above that the Applicant has been trying since the early 1980's to develop the concept of the Food Park and success to date has not been satisfactory. There is also the obvious failure rate. Thus it is to be accepted that the concept whilst totally sustainable and fully justified on the basis of the Culliton Report and the Expert Group Report, it does require certain protections given the nature of the objects to be achieved. Accordingly, it is imperative that there should be permitted controls to the Applicant in selecting the nature of the occupants, the type of business to be carried on, to restrict the user thereof and to seek certain protections. It has further to be appreciated as has been stated that the whole nature of the concept is pro-competitive and requires that there be rights given to restrict the use of the relevant units.

4.4.1 In respect of [clause 2 (11) (e)] it is submitted that this is reasonable again having regard to the nature and concept of the Food Park. As the Authority accepted in its Notice on Shopping Centre Leases, the relevant geographic market for each shopping centre covers a much wider area than the Centre alone. This would equally apply to the Food Park and more particularly so. The Applicant given the investment and the development of the concept should be permitted to impose certain restrictions as to competing outside the Food Park. Otherwise, this could and would take fully away from its objectives. The Applicant should be entitled to have regard for the reasonable catchment area for its service.

4.4.2 Again, in its Notice on Shopping Centre Leases, the Authority recognised the importance of the anchor tenant. In the context of the Food Park, the Applicant is the vital anchor tenant upon which there is a great deal of dependence. It has to be protected in order to be able to achieve the admirable objectives of the Food Park and it is submitted that the obvious necessity of such makes the restrictions set out in {clause 2 (11)(c) to (e) fully justified.

4.5.1 The provisions of [clause 2 (11) (e)] are equally justified. In the case of that part of Ulster comprising Northern Ireland, it is submitted that the Authority is not empowered to consider this aspect. There are sufficient competitors of the Applicant in the areas the subject of [clause 2 (11) (e) ] and the limited restriction which is relative to a very small number of operators as would exist in the Food Park in comparison to the entire of the food processing industry could not to any degree be restrictive of competition particularly in the light of the proper interpretation by the Authority that Section 4(1) of the Competition Act can not be interpreted literally. This is further emphasised when one considers the possible diverse nature of the occupants (from pre-incubator units to established operations). Further, the effect of sub paragraph (e) is not as wide as one might initially consider in that the occupants in the Food Park will not be engaged in any event in the business of the Applicant and thus would not have entered or have the facilities without a great deal of investment to enter into the market. The restriction, as stated, is to create the proper and efficient working of the Food Park and to make each of its occupants competitive."

11. Following the issue of the Statement of Objections by the Authority, Norish informed the current grantee by letter dated 11 September 1995 that they would not enforce clause 2(11)(e) and offered to enter into a Deed of Rectification.

(a) Section 4(1 )

12. Section 4(1) of the Competition Act states that " 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 are prohibited and void".

13. 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 distribution of goods or the provision of a service".

14. Norish is engaged in the provision of cold storage facilities for food for gain and is an undertaking. Biko, at the time of the agreement, was engaged in the business of food processing for gain and was therefore an undertaking. Its successor in title Anglo Irish Meats Ltd is engaged in the processing of meat for gain and is also an undertaking. The notified fee farm grant is an agreement between undertakings. The agreement has effect within the State.

(c) Applicability of Section 4(1 )

15. The notified arrangements are effectively an agreement for the sale of land, which forms part of an industrial estate, for the particular purpose of development as a food factory and with the sale in the form of what is described as a fee farm grant, which is stated to create a landlord/tenancy relationship between the grantor and grantee and their successors in perpetuity. The Authority does not consider the sale, per se , of a property for specific purposes as raising any issues under the Competition Act.

16. The grant contains restrictions and provisions relating to the occupation of the land which would be standard in a lease, such as maintenance of the property in good repair, prevention of nuisance, access to and use of common facilities as well as the provision of common services by the grantor. These do not raise issues under the Competition Act.

17. Clause 2(10)(a) of the agreement sets out the permitted user which effectively restricts the use of the sold land to the processing and trading in a wide range of food products. The Authority has in a number of previous decisions indicated its opinion that the inclusion of such restrictive clauses in agreements for the sale of a particular property cannot normally be regarded as preventing, restricting or distorting competition within the State or any part of the State. The purchaser acquires land for a particular purpose, i.e., the erection of a food processing factory in an industrial estate which is designed and dedicated for the production of food and services ancillary to the food industry. The clause does not prevent him acquiring other property in the vicinity or elsewhere, which can be used for other purposes. Neither does it prevent any other undertaking competing with either the purchaser or the vendor. In any event clause 2(10)(c) provides that consent would not be unreasonably withheld for a change of user provided in effect the new use would not be inconsistent with the development or management of the estate as a food park. In the Authority's opinion therefore clause 2(10) does not offend against Section 4(1) of the Competition Act.

18. Clause 2(11)(c) prohibits the erection of buildings on the sold land for the purposes of carrying on of a business or the offering of services similar to those offered by the grantor at that time whether for the grantee's own requirements or for others. The food park cluster concept involves the coming together on the one site of undertakings engaged in broadly similar food businesses who share common facilities which are provided centrally. The particular undertakings targeted are those with a demand for freezing and cold storage facilities. By reason of the availability of central facilities the undertakings are able to avoid the large capital costs in providing the facilities themselves thus easing market entry while the provider gains from economies of scale. Without some restriction on the tenants providing their own freezing and storage facilities at the Food Centre it seems less likely that the provision of such facilities on a centrally shared basis could be done on a viable basis. Without the central facilities the food park concept would not develop. The restriction under this clause applies only to the sold land and the grantee is not prevented by this clause from using facilities provided elsewhere outside the Food Park by other undertakings. The Authority therefore considers that this clause does not offend against Section 4(1).

19. A similar position applies in relation to clause 2(11)(d) which prevents the grantee from having or using on the sold lands blast freezing and cold storage facilities or any equipment capable of being so used or any of the services offered by the grantor for the time being. The Authority takes the view that this would not prevent the grantee from engaging in the permitted user set out in clause 2(10)(a) or change of user for which grantor consent has been given. The Authority therefore considers that this clause does not offend against Section 4(1).

20. Under clause 2(11)(e) of the grant, the grantee or his successors covenanted " Not to engage in enter or compete whether directly or indirectly in the provinces of Ulster and Connaught or in the counties of Louth, Longford, Meath, Westmeath and Dublin (County or City Borough) and Kildare in any of the businesses carried on or the services offered by the Grantor for the time being in the Estate .....". Under this clause the grantee by reason of his ownership of the sold lands was effectively prohibited from undertaking activities, outside the Food Park, that compete with services offered by the grantor in the Food Park for the time being. Apart from Northern Ireland the area covered by this restriction represented more than half the land area in the State and contains 60% of the population of the State. The services currently provided by Norish include blast freezing, cold storage and certain distribution and marketing services but if Norish were to undertake other new central services at the Food Park the restriction would also have extended to the new services. Manufacturers at the Food Park itself gain from a ready availability of these services in situ and have less incentive to go elsewhere for such facilities. However if any of them established a new business far removed from the Food Park they would still have been precluded from supplying those services themselves even though the use of Norish facilities at the Food Park may not have been practicable. While the Authority accepts that restrictions on the use of sold lands within the Food Park does not offend, it took the view that a restriction on the activities of the grantee outside the sold lands imposed a supplementary obligation which by its nature and according to commercial usage had no connection with the subject of the agreement notified. In the Authority's view this provision was designed to prevent the grantee operating a business competing with Norish in almost half the State. The object and effect of clause 2(11)(e) was to prevent, restrict and distort competition within the State and it therefore offended against Section 4(1) of the Competition Act.

21. While the Authority regards any restriction on a grantee's activities outside the sold lands as offending against Section 4(1), Norish in its submission argued that the restriction in clause 2(11)(e) insofar as it related to Northern Ireland did not affect competition within the State. The sold land is close to the border with Northern Ireland and because of its proximity the grantee might well be involved in the development of sales to Northern Ireland. The grantee could be in a position to supply frozen goods to outlets within the State from facilities in Northern Ireland and to the extent that he was prevented from doing so by virtue of the clause, it offended against Section 4(1). This could have lessened his competitiveness within the State, compared to other producers within the State, and therefore affected competition within the State.

22. An exception to the restriction in clause 2(11)(e) is provided where the grantee may purchase an existing business containing a cold store which is integral to the business purchased. However in such an event the grantee is precluded from extending or expanding the said cold store. In such an instance the restriction on extension or expansion of premises outside the Food Park would also have offended against Section 4(1).

23. As the Grantor has now agreed not to enforce clause 2(11)(e) and has provided evidence that the grantee has been so informed by way of letter dated 11 September 1995, the clause no longer offends against Section 4(1).

24. In the Authority's opinion, Norish plc. is an undertaking and Biko Farm Ltd. was an undertaking within the meaning of Section 3(1) of the Competition Act, 1991 and the notified Building and Fee Farm Grant agreement is an agreement between undertakings. In the Authority's opinion, the notified agreement, as amended by letter of 11 September 1995, does not offend against Section 4(1) of the Act.

25. The Competition Authority has issued the following certificate:

The Competition Authority certifies that, in its opinion, on the basis of the facts in its possession, the notified Building and Fee Farm Grant Agreement dated 13 May, 1982 between Norish plc. and Biko Farm Ltd. (notification no. CA/668/92E) notified under Section 7(2) on 30 September, 1992 and amended by the letter of 11 September 1995, does not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority

Des Wall

Member

19 October 1995.