Getting your house in order

The public sector could face multi-million pound fines in the biggest shake-up of property law since 1925, argues Neil Warwick.

More than a dozen years after the introduction of the Competition Act 1998 there is still a misconception that competition law does not apply to the public sector. With legal changes expected in April however, there is a clear but subtle way the public sector can fall foul of competition law which could leave it facing huge fines or even the possibility of custodial sentences for its staff.

From 6 April the application of competition law to the public sector will become more pertinent when the Land Exclusion Revocation Order (LERO) is due to be implemented. It will revoke the Block Exemption which currently applies to property law so that commercial property transactions, including those in the public sector, will become subject to scrutiny under the Competition Act 1998 and the Enterprise Act 2002, whereas previously they were exempt.

For the public sector, the LERO represents an additional administrative burden just as the first wave of cuts imposed by the CSR will bite. In an environment of cuts and reduced resource when additional care is required in property transactions, this could lead to crucial mistakes.

Not only is this the biggest shake up in property law in nearly 100 years but perhaps it is also the straw that could break the camel’s back for the sector if it doesn’t adequately prepare now.

To some degree, it is difficult to predict the extent of the effect of these changes and there is always the possibility that it could end up being a big white elephant. However, learning from experience of similar events in the past, it would be wise to take action now to prepare for the changes.

When the government originally introduced the Competition Act in 1998 to ensure fair play in marketplaces, it paved the way for an entirely new type of legal system for the UK which had no precedent and was open to multiple interpretation. The Act brought into play the idea that criminal sanctions could be levied against organisations, including those in the public sector, which either entered into anti-competitive agreements with another organisation or abused a dominant position.

However, in order to deal with the inevitable problems of interpretation, the full effect of the Act was suspended until March 2000. When it eventually came fully into force, initially not a great deal happened. For over eight months many people wondered whether the Act would ever be used to prosecute a company or authority. By the end of 2000 however, the first raids and prosecutions had taken place and there followed a period of intense activity for breaches of competition law.

From this experience, a similar pattern could well be replicated when the LERO comes into effect in April. So whilst little has been said about it to date, it will undoubtedly be well known by 2012.

What will the LERO mean and who does it affect?

The LERO will mean that from 6 April onwards, UK competition law will apply in full to land agreements. It will affect any undertaking involved in commercial property transactions, the development of commercial property, those involved in owning or leasing commercial property and of course those advising in relation to commercial property matters. The sorts of agreements that will be affected by the LERO include transfers, leases and assignments as well as the creation of easements and licences.

If a public sector body (which includes everything from a Government Department to a non-departmental public body and, crucially, local authorities) is acting qua government it is not subject to scrutiny under the Competition Act 1998. However, if the same public sector body is acting in an economic context it can fall foul of the legislation just like any other undertaking. Acting in an economic context does not mean the undertaking must make a profit; it must simply generate an income.

A simple example of this distinction is a local authority acting in relation to car parking. When a local authority imposes a parking order it is acting qua government and therefore is not subject to competition law. However when the same authority runs a car park and charges for vehicles to park there it is acting in an economic context and is therefore capable of breaching competition law. Get the pricing structure wrong (for example charging excessively cheap prices on a Sunday), distort the market and a local authority can face a multi-million pound fine.

According to the OFT consultation, the removal of the exemption should not effect the vast majority of transactions like domestic conveyancing. However, transactions which logically ought to be too small to be caught by competition law could in fact pose a problem and potentially cause a breach. For example, restrictions placed on leases in out of town shopping centres, incentives offered to department stores in inner city shopping centres and restrictions placed on small commercial properties in isolated geographic markets.

In the context of a local authority one area which will become more confusing in the short term will be s.106 agreements in relation to planning. How these are constructed and how they are brought about will require careful thought in the initial phases of competition law applying to land transactions.

As there is now no notification system for agreements, it is up to the parties to the agreement (and all parties are included in this) to self assess and ensure that no breach of competition law has taken place. This potentially extends to the owner of the land, any tenants of the land and possibly even agents negotiating on behalf of either party. It is therefore important that people dealing with land transactions understand the potential impact of the law and also understand when self assessment may be required.

What happens in the case of a breach?

Competition law is an important economic/legal mechanism to ensure fair play in marketplaces and the results of any breaches reflect this level of importance. Aside from the fact that land agreements may be declared unenforceable or void, a breach could land an authority with a fine of up to 10% of its budget/turnover. Combined with a breach of the Enterprise Act 2002, this means that individuals could also be fined and imprisoned for any breaches.

It is the potential severity of these sanctions that should encourage local authorities to act now to prepare for the Revocation Order in April.

What can be done now?

There are numerous steps that can be taken to protect land interests in the face of these dramatic changes.

One of the first things to do is ensure that employees are trained and knowledgeable when it comes to compliance with competition law. This will mean that the negotiation and management of current and future land agreements will comply with the changes.

All future land agreements should be risk assessed against any potential commercial implications of competition law. However, when it comes to existing land agreements, think about undertaking a full audit so that any areas of concern can be identified now.

If currently negotiating any land agreements, make sure that this is on the basis of future compliance with competition law and make sure that any amendments necessary to existing agreements are considered to ensure that they remain enforceable once the Revocation Order is in place.

Whether this turns out to be a white elephant or not, by taking action now, the public sector can ensure that it is in the best possible position to avoid any breaches of competition law in what could be a potentially devastating and additional cost to the sector.

Neil Warwick is an expert in competition law at national law firm, Dickinson Dees (www.dickinson-dees.com). He can be contacted on 0191 279 9375 or by email at This email address is being protected from spambots. You need JavaScript enabled to view it..