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Restrictive clauses are common in commercial lease agreements.
Such clauses can limit a landlord's ability to lease property to other tenants, restrict a tenant's business activities to a certain geographical area or control the subleasing of property. Breaching such a clause can often lead to strict contractual penalties.
Restrictive clauses in lease agreements may appear to be problem-free and reflective of the contractual freedom of the parties, which forms one of the pillars of civil law. However, when certain restrictive clauses are scrutinised, a number of issues can become apparent.
The Czech Competition Authority (CCA) recently dealt with the restrictive provisions in lease agreements for the first time. As in other European jurisdictions, these restrictive clauses can raise concerns about possible infringements of competition law. For example, restrictive clauses may create barriers to entry, preventing the opening of new business centres or the entry of retailers (tenants) into existing business centres. At the same time, some clauses can limit competition between competitors – both within and between brands.
The CCA fined a company leasing commercial premises in an outlet centre near Prague for violating the Czech Act on the Protection of Competition. The company concluded lease agreements with the tenants, which restricted them from operating in another outlet centre in a certain geographical area. In so doing, the landlord wanted to ensure the exclusivity of its outlet centre.
However, the CCA viewed these restrictions as prohibited agreements which distorted competition in the market for the leasing of commercial spaces in outlet centres within a 60-minute driving distance and on certain localised commercial lease markets outside the area. The CCA imposed a fine of Kc1.012 million (€40,000) on the landlord and prohibited the inclusion of restrictive clauses in the lease agreements. However, the decision is not yet final and conclusive.
Other European authorities have also addressed the issue of restrictive clauses in lease agreements. Similarly to the CCA, the German Federal Cartel Office (BKA) prohibited outlet shopping centre operators from using so-called 'radius clauses' in lease agreements that forbid tenants from operating shops in another outlet centre or a separate shop within 150km of the outlet centre concerned. According to the BKA, such a prohibition is permissible only up to 50km from the outlet centre and with a maximum lease term of five years.
The European Court of Justice (ECJ) has also dealt with restrictive clauses. The Latvian Constitutional Court asked the ECJ whether clauses in lease agreements, which prohibit the landlord from renting additional commercial premises to the tenant's competitors in the same shopping centre without the tenant's consent are by their nature anticompetitive. The ECJ decided that, by their very nature, restrictive clauses in lease agreements do not distort competition and that their effect on competition must be examined on a case-by-case basis.
In light of the CCA and ECJ decisions, lease agreements with restrictive clauses that last for a period of more than five years should be avoided. In addition, when it comes to restrictive clauses, the market share of the particular tenant and landlord should always be taken into consideration.
For restrictive clauses in favour of the tenant, the tenant's market power should be considered. This is assessed particularly in relation to other competitors (ie, the strength of competitors, the number of competitors and the barriers to entry for new competitors). If the tenant has a strong market position, it should use restrictive clauses only in relation to equally strong business partners.
Landlords should also consider their market position in relation to the type of space leased under the lease agreement. For example, a restrictive clause will not significantly affect competition if its reach is limited to only one of the landlord's buildings or a certain geographic area, which may be set by distance in time or kilometres. However, in light of the above it will always be necessary to examine the circumstances on a case-by-case basis.
This article was first published on www.internationallawoffice.com