- What exclusivity clauses can be found in rental agreements
In multi-page leases for retail and commercial premises in shopping malls, it is common to see so-called "commercial contracts". exclusivity clauses. These types of clauses can work both ways which depends de facto on which party to the contract (landlord or tenants) negotiated the introduction of the clause:
# Exclusivity clause negotiated by 'strong' tenant (e.g., a reputable drugstore) - usually stipulates that the landlord of the premises may not, without the prior written consent of the tenant, lease another premises in the shopping center to another tenant with an identical or similar object of business. To simplify: however, there is to be only a drugstore in the shopping center. The intention of such a clause is usually to limit competition and ensure that customers visiting the mall buy certain products only from the tenant who introduced the clause. Of course, such clauses are not encountered in large shopping centers, e.g. in the clothing industry - because there are simply too many stores of tenants with such a business profile, and they are the foundation of these centers. The less common the type of business of the premises in a given center - the greater the chance of an exclusivity clause - found especially in such areas as grocery stores, drugstores, pharmacies, cinemas, laundromats, service outlets, sporting goods stores, construction/garden stores.
# Exclusivity clause introduced in the landlord's contract template -. which imposes on the tenant, for example, the prohibition of running another establishment in the territory close to the shopping center - e.g. within a radius of 2 kilometers from the center. In this case, the landlord's aim is to increase the popularity of the shopping center, as well as that of the premises themselves (recall that a significant portion of tenants pay a two-tier rent - which also includes a rent calculated 'on the turnover' of a given tenant's premises). With these provisions, the centers are trying to guarantee their popularity in the long term.
- Can such clauses violate the law
Depending on the specific situation, the aforementioned exclusivity clauses could be interpreted as agreements that restrict market access, or divisive agreements that are prohibited without regard to the size of investors' market share.
A key issue is the compatibility of the exclusivity clause with competition law. Based on Article 6 of the Law of February 16, 2007 on Competition and Consumer Protection, all agreements between investors that would seek to eliminate, restrict or otherwise violate competition in the relevant market are prohibited. The introduction of an anti-competitive exclusivity clause is to make it difficult, or impossible, for other companies to enter the relevant market, which in turn may lead to an increase in prices, or to some extent limit the consumer's choice of products in a given shopping center. This is especially true of such clauses that prohibit the tenant from engaging in the same or similar business activity that was practiced by the above entity in the shopping mall, either directly or indirectly (this issue is addressed in the decision of the President of the OCCP of 31.08.2005, No. RŁO-28/2005).
- What sanctions may face those who use the clauses
An entrepreneur using prohibited exclusivity clauses must face potential financial liability - on the one hand to the OCC, and on the other hand to third parties (e.g., tenants, potential tenants and their customers).
If an entrepreneur violates a prohibition under the Law on Competition and Consumer Protection (even inadvertently), he should expect to run the risk of the OCC imposing a ban A penalty of up to 10% of the revenue generated in the fiscal year preceding the year in which the penalty is imposed. Fines can therefore be gigantic. Moreover, under Article 8 of the cited law, it is forbidden to abuse the dominant position in the relevant market by one or more entrepreneurs that prevent the emergence or development of competition.
In 2014, Directive 2014/104/EU of the European Parliament and of the Council of November 26, 2014 on certain rules governing the recovery of damages for infringement of the competition laws of the Member States and of the European Union (the so-called "Private Enforcement Directive") was adopted, which introduces regulations harmonizing in all EU member states the rules for the recovery of damages resulting from the violation of prohibitions on anti-competitive practices. In Poland, Directive 2014/104/EU was implemented through the Act of April 21, 2017 on Claims for Remedy of Damage Caused by Breach of Competition Law. The above law significantly facilitates the assertion of claims against an exclusive clause holder - including third parties and, in the present case, tenants and potential tenants and even their customers. The law provides for a presumption that a violation of competition causes damage to the claimant - which the clause's applicator must rebut. The law also provides the possibility for non-governmental organizations to bring lawsuits. It also provides for a number of facilitations for the claimant, including, among other things, a new mode of disclosure of evidence.
- How to verify the legality of exclusivity clauses
In verifying the compatibility of exclusivity clauses with competition law, one should keep in mind the position of the Court of Justice of the European Union ("CJEU") in the case of SIA "Maxima Latvija" v. "Konkurences padome" (the Latvian equivalent of the OCCP) (judgment in Case C-345/14 of November 26, 2015). The Latvian authority conducted a competition inspection from which it emerged that twelve contracts contained provisions that granted "Maxima Latvija" - the privilege of formally agreeing to the malls' leasing of vacant retail space to target tenants. This fact was justified by the fact that the above brand was recognized by the mall as a "reference tenant." In the aforementioned judgment, the case focused on the contracts between the Latvian company operating the "Maxima Latvija" multisite stores and the shopping centers. The CJEU's task was to verify whether this provision by its mere existence restricts competition due to its identical nature, or whether a specific analysis of undesirable effects on the market is necessary. The CJEU indicated that the contractual clause under scrutiny could be considered a prohibited agreement if there were specific adverse effects, or those that could be caused by the existence of such a clause within the relevant market, taking into account the legal and economic context. In addition, a mere provision containing an exclusivity clause does not immediately imply a restriction of competition. Subsequently, the CJEU ruled that the Authority should conduct a test through which it will verify whether anti-competition is spreading as a result of such clauses. Moreover, an important determinant is also to assess the extent to which the agreement creates economic, administrative and legal barriers in the market. Next, the Authority should assess whether, under the lease agreement, the clauses will be the basis for restricting access to the relevant market, taking into account, among other things, the size of the shopping center's sales area, the number of entities operating in the market, the extent of customer preference for existing brands, and the state of concentration. In a situation where an assessment of the above issues would prove a reduced opportunity to enter the market, and consequently would relatively limit the ability to compete, then it would be necessary to examine the issues where it can be proven that the agreements between the landlord and tenant contribute to the introduction of barriers in the market - taking into account the dominant market position and the reference in time.
The entity applying the exclusivity clause should define its scope precisely, because too general content may result in a situation that, for example, a potential tenant will be deprived of the opportunity to conclude a lease agreement in a given shopping center, despite the fact that theoretically it does not compete with the current tenant due to the different nature of business activities (example: a supermarket that also sells baked goods imposes a clause excluding the possibility of operating a bakery in the center due to a partial overlap in the scope of activities).
Both landlord and tenant, when concluding an exclusivity clause, must take into account market situations and the undesirable consequences that may result from it. It is only on the basis of the market context that it is possible to assess whether an exclusivity clause will violate competition law in a particular case.
Any entity using an exclusivity clause should perform a professional legal review of the provisions used to avoid the risk of liability.
- Who in particular should beware of exclusivity clauses
Large entities. On the investor/funding/owner side of shopping centers - entities with several dozen centers each. On the tenant side (retail chains) - entities with significant market share (20% upwards) - especially those tenants that can be found in almost every newly opened shopping center.
- Do exclusivity clauses only apply to shopping centers?
No. However, due to the nature of the business and concentration - in this industry they show the greatest risks. There is slightly less impact in the warehouse space industry, and even less impact in the commercial office space industry.
- Summary
To sum up - the evaluation of exclusivity clauses in lease agreements must always be done on a case-by-case basis and taking into account the broad context of their application. The jurisprudence of the OCCP and the CJEU provides some guidelines for formulating an assessment of the compliance of such agreements with competition law.
