Chapter 1: What is competition and how can land agreements lessen this?
Covenants and other land agreements may limit competition.
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Competition exists where businesses compete with one another to provide goods and services that consumers want and need. Common ways to compete are by offering lower prices, or better quality products, both of which are good for consumers. In certain circumstances, land agreements can be used in a way that makes it harder for new business to enter a market, or for an existing business to expand. Where this happens, consumers will have fewer options to choose from and existing businesses who hold these restrictions can take advantage of market power by raising prices (or keeping prices high) and / or lowering quality.
Having multiple businesses in a market encourages businesses to compete with each other to offer good prices and products.
When customers can choose between different providers, they benefit, and so does the economy as a whole. Their ability to choose forces firms to compete with one another, and the simplest way for a company to compete for customers is to offer a better price than its competitor. Businesses may also be encouraged improve the quality of goods and services they sell or offer a greater range.
Where it is difficult for new businesses to enter a market, or for existing businesses to expand, a market may be concentrated (dominated by a few businesses). If this happens and competition is reduced, one business may be able to maintain or increase its market share, and there is less incentive for that business to offer lower prices.
There are various factors that can prevent or impede newcomers into a market, and so limit competition. If these factors are a cost or an impediment that an entrant faces in a market that an incumbent (existing business) does not face, we call these factors ‘barriers to entry’. A high entry barrier is likely to benefit the incumbent and reduce competition, whereas if entry barriers are low, we would expect to see new players increase supply and push prices down.
Restrictions on land, such as covenants, can reduce competition and exacerbate barriers to entry.
We are interested in how land agreements can create barriers to entry or otherwise reduce competition. We use ‘land agreements’ as a general term to mean any legal agreements that a party (individual, business or organisation) can enter into, to either restrict the way land can be used, by whom, or require it to be used in a certain way.
Land covenants are one type of what we are referring to as land agreements. A covenant is ‘a promise’, and there are 2 types of covenant relevant to our work:
- Restrictive land covenants – a promise not to do something on the land being used or developed. Restrictive covenants usually happen when somebody selling land wishes to restrict what the buyer can do with it. However, sometimes the vendor will agree to restrict their own use of the land they are keeping.
- Positive land covenants – a promise to do something in relation to the land.
A land covenant can be made between the owners (or occupiers) of 2 or more land parcels. A land covenant can also be given ‘in gross’. A covenant in gross benefits a specific person or legal entity, rather than being attached to benefited land.
These types of land agreements can be used across the whole economy, and we want to hear from a range of businesses, both retail and non-retail (for example, manufacturing or processing), and urban and rural communities.
Land agreements can restrict access to suitable sites for new and expanding businesses.
In each of its market studies, the Commission identified access to suitable sites as one of the potential barriers to entry and expansion of businesses. Finding a good site is important to a business – they need a property with suitable characteristics at as low a cost as possible. Not every site will suit every business, but there are features that will mean certain locations and sites are appealing to similar businesses for example:
- high foot traffic
- good accessibility
- parking space
- proximity to complimentary services.
For example, sites suitable for building supplies merchants may differ from those suitable for other retailers: street location and foot traffic may not be paramount considerations for a building supplies merchant who focuses on trade customers and/or operates on a delivery-based model, and the land needs to be in a suitable location for customer traffic and/or to facilitate delivery of materials to building sites. Service stations on the other hand would be likely to select sites based on high traffic volumes and accessibility.
If one business takes action to prevent existing or potential competitors establishing themselves on sites that have already proven to have desirable characteristics, entry to a market is made more difficult. The Commission identified land agreements that could have this effect in the retail fuel, groceries and residential building supplies sector. This included:
- Covenants on land which contained clauses or terms which prevent or restrict the site from being used for operating a similar business.
- Leases with landlords containing exclusivity clauses or terms which prevent or restrict the operation of businesses selling competing products or services nearby (we call these ‘exclusive leases’).
In the markets the Commission investigated, land agreements which appeared to be used in ways that restrict access to sites were found across the country. In the grocery sector, the Commission identified over 100 exclusivity covenants in leases and more than 90 restrictive covenants, and it saw around 60 store covenants and around 80 exclusive leases benefitting major building supply merchants.
These types of land agreements can create a deterrent effect.
We consider that their presence alone would be likely to dissuade a party from buying or leasing a site. For example, if someone who is looking to develop a retail store sees (for example, on the Record of Title) that their preferred site is subject to a land agreement that prevents their desired use of the site, they might decide early on in the process not to pursue that site as an option. The existence of the land agreement could be enough to divert the potential competitor to a different location (either another site nearby, which may be less desirable than the original, or even moving even further away and into a different geographic market area). This could impact competition and may mean that there are situations where older land agreements continue to have an anti-competitive effect by deterring new development. This deterrent effect can be occurring without the landowner or benefitting party even being aware.
Location matters
For consumers – travel is costly, so consumers tend to favour businesses near their work or home.
For businesses – finding a site with the right characteristics is important, and, for many businesses, their strongest rivals are those geographically closest.
A land agreement might not have a significant impact if there are many equally attractive locations for a businesses. For example, there may be many locations appropriate for a coffee shop, so a land agreement on a high street property may be unlikely to have an effect on competitors, as they could find other suitable properties.
In contrast, supermarkets tend to be built on large footprint sites in urban or peri-urban areas, so there are a limited number of sites that are viable for supermarket development. This means that anything that impacts the availability of these sites is more likely to have an impact on competition than a restriction which prevents an individual high street unit from being used as a particular type of business. This is because there are likely to be fewer alternative sites suitable for a superstore development, and more alternative sites suitable for a high street store.
Question 1
Have you ever been deterred or prevented from using a site or property for your business as a result of a land agreement? If so, what did it say and what was the nature of the land agreement?
Question 2
What features did you require for the site, for example access to foot traffic?
Question 3
What impact did this have on your business, for example, did you find another suitable site?
Question 4
Is there a sector you consider is more likely to be impacted by difficulty accessing a suitable site?
What features of the sector makes you think this and how is this problematic?
Land agreeements may prevent competitors attracting customers, or restrict customer choice.
The Commission also identified a type of land agreement that it called ‘land development covenants’. These were covenants on land zoned for residential buildings, which contained clauses or terms giving a building supplies merchant preferential rights to provide key building supplies for any housing to be constructed on the land (for example, a promise that the owner of occupier of the land would use one business to source their building supplies, or to give that business the option to provide the first and last quote).
These types of covenants and agreements could make it difficult for other businesses to attract customers. If a customer has to give a particular business the opportunity to give them a first and last quote on something, this could have several effects:
- There is less incentive on that business to initially quote a competitive price.
- A customer may only get one quote, meaning they might not get the best price, and other businesses are denied the opportunity to compete.
- A customer may get several quotes, but the business with the option of providing the last quote has the opportunity to offer a better price at the end (as it is provided visibility of quotes provided by other merchants).
- There will be a smaller contestable market, potentially making it less attractive for new businesses.
While the Commission did not identify the use of these covenants to be widespread in the residential building supplies sector, it did note that covenants intended to influence customers’ choice of which merchant (or other retailer) they purchase from were of particular concern.
We consider there is potential for a similar type of agreement to be in place in other sectors – agreements that require all tenants of a particular retail development to use the same company for cleaning services, for example.
Land agreeements may also put other restrictions in place.
We do not have evidence of these types of land agreements being used in a way that restricts competition, but we would like to hear from business where their ability to operate and compete effectively has been impacted by:
- reverse sensitivity covenants (sometimes called a no-complaints covenant), which prevent future owner or occupiers objecting to certain activities or effects (often noises or smells)
- obligations in a lease that require one party (either the tenant or landlord) to object to future developments.
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