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Commercial Property Alert: Landlords and developers liable under Competition and Consumer Law - 14 Feb 2012

Those who breach Australia's competition and consumer protection laws face serious consequences. In addition to damaging their reputation and 'brand', a breach of the laws can mean significant fines and other financial liability for those involved. If you intentionally participate in price fixing or other cartel type behaviour with your competitors, you can even be sent to jail.

It's not just the 'big end of town' that needs to consider how these laws will affect them. Landlords, shopping centre owners and property developers - indeed, anyone involved in the property industry - need to understand the legal boundaries within which they must operate.

The Competition and Consumer Act 2010 (formerly the Trade Practices Act 1974) contains a number of prohibitions on anti-competitive behaviour, misleading conduct and unfair conduct. Here, special counsel Brett Bolton explains what these prohibitions mean and why you need to be aware of them.

Key points

  • The Competition and Consumer Act 2010 applies to the goods (the tenancy) and the services (the tenancy services) supplied by landlords to tenants. However, the Act doesn't just apply to landlords when they are negotiating and managing a lease with tenants. It also imposes restrictions on landlords' dealing with their competitors.
  • There are five specific prohibitions that landlords need to ensure they do not breach when dealing with tenants and competitors.
  • In addition, the Australian Consumer Law 2010 contains further rules that apply to those engaged in leasing negotiations.
  • The Australian Competition and Consumer Commission has a range of options at its disposal if it has concerns about a business's conduct, including taking court action and imposing substantial fines. Individuals involved in cartel conduct can be sent to jail.

The competition prohibitions

There are five specific prohibitions of which you need to be aware.

1. Price fixing and other arrangements with competitors

It is illegal to liaise with competitors and agree on the prices you will charge your tenants. Any arrangement between competitors which amounts to 'cartel conduct' (eg price fixing or market sharing) is absolutely prohibited by the Act. Anyone found to have been involved in such conduct will be liable to heavy fines and penalties and, in some cases, terms of imprisonment for the individuals involved.

For example, any agreement between the owners of two shopping centres in close proximity to one another about the price of the office space they would each offer, or the amount they would pay to a security company for providing security services to each of their shopping centres, would be a clear breach of the cartel laws. It is therefore vital that you do not discuss your prices with other shopping centre owners or ask them, for example, what amounts they are paying for security services and why.

2. Market sharing and arrangements to exclude

It is illegal to make arrangements with, for example, other shopping centre owners to blacklist certain suppliers or refuse to deal with certain tenants. You may have a very good reason for not wanting to deal with, for example, a particular security company - perhaps because it supplies incompetent or overly aggressive staff or charges too much. You may also have a very good reason for not wanting to deal with a particular tenant - perhaps because you see it as a bad credit risk or you have legitimate concerns about the legality of its business. The legal breach occurs when shopping centre operators agree to act collectively to boycott the security company or tenant in the examples described above. There is, however, nothing illegal about an individual shopping centre owner making its own decision unilaterally.

3. Lease restraints

Many commercial and retail leases contain restrictions on how a tenant can use the premises or include other restrictions on the tenant's behaviour. There are often sound commercial reasons for shopping centre owners to impose such restrictions (such as to achieve the right 'balance' of stores within the centre). However, in some instances, these restrictions can breach the exclusive dealing provisions in the Act and therefore be unenforceable.

The risk is particularly acute where the shopping centre owner occupies a dominant position in the market (because, for example, of the absence of any comparable shopping centres in close proximity which exert any competitive pressure, or because its unique location makes it essential for tenants to secure space in that location).

Particular caution is also needed where the landlord offers a lease on the condition that the tenant will not also take a lease from an adjoining shopping centre.

Of course, shopping centre landlords can be the victims of the market power wielded by some tenants. A good illustration of this was the former practice of the major supermarket chains (ie Coles and Woolworths), who insisted, as a condition of taking a lease at a shopping centre, that the landlord agreed not to lease space to other grocery retailers. Coles and Woolworths found themselves under investigation by the Australian Competition and Consumer Commission (ACCC) and eventually gave legally binding promises to the ACCC to abandon these practices. However, the major supermarket chains are not the only organisations with the ability to use their appeal as 'anchor tenants' to insist on leasing arrangements that contain similar types of restrictive provisions.

4. Third line forcing

It is illegal to require a tenant to buy goods or services from a third party as a condition of agreeing to grant a lease, or to give extra discounts or rebates if the tenant agrees to acquire goods or services from another supplier. For example, it would be third line forcing if your lease contained a condition requiring the tenant to acquire cleaning services from an unrelated cleaning company.

It is sometimes possible to 'bundle' the tenancy goods and services with another supplier's goods or services and offer them as a package, but that should not happen without first obtaining legal advice.

5. Resale price maintenance

Leases frequently give the tenant the right to sub-let the premises on certain terms and conditions. The important point to note is that the landlord cannot tell the tenant the price that it must charge the sub-tenant for rent, as that amounts to resale price maintenance.

Consumer protection

Consumer protection laws are now contained in the Australian Consumer Law 2010. These laws are very broad in scope and apply to all Australian businesses, no matter how big or small.

The Australian Consumer Law says that a person must not, in trade or commerce, engage in conduct that is misleading or deceptive, or is likely to mislead or deceive. In addition, the Australian Consumer Law has a specific provision which makes it unlawful to make false or misleading representations in relation to the supply of goods or services. This prohibition is of particular relevance to landlords, especially during the negotiation stages of a lease. You need to be particularly careful to ensure that, in your desire to close the deal, you do not misrepresent what is being offered or what can be delivered regarding such matters as foot traffic, operating costs, expected turnover and floor space.

The Australian Consumer Law also prohibits unconscionable conduct. These provisions have been around in one form or another for many years, and it is surprising how few landlords appreciate the impact of these laws on their activities in commercial and retail leasing.

The unconscionable conduct provisions are designed to prevent stronger parties from taking unfair advantage of weaker parties in their business dealings. The application of these laws to negotiations between shopping centre owners and their potential small business tenants is obvious. Landlords need to be careful to ensure that they observe the terms of the lease and relevant industry codes of conduct, especially when considering whether or not to renew a lease. The unconscionable conduct laws do not make it unlawful to 'drive a hard bargain'. However, the line can sometimes be blurred between legitimate (albeit hard) commercial negotiation and illegitimate or unfair tactics, especially when the so-called 'weaker' party is in a commercially vulnerable position and the stronger party takes unfair advantage of that vulnerability.

A check list of 'warning signs' should be part of any compliance system adopted by landlords when conducting negotiations with tenants and potential tenants.

The impact of a breach on your business

Landlords and shopping centre owners are frequently surprised at the reach of Australia's competition and consumer protection laws, and the impact these laws have on their business activities. Occasionally, that surprise stems from the fact that some of the unlawful practices described above are prevalent throughout the industry. That may be so. However, the chances of those parties who engage in these practices being caught out have increased in recent times. This is because the ACCC now has a range of options at its disposal if it has concerns about a business's conduct. These options are not just limited to taking court action, but can include:

  • commencing a formal investigation by issuing notices compelling the business to produce information and/or documents in relation to its behaviour; and
  • issuing substantiation notices and/or infringement notices.

If the ACCC successfully brings court action, the penalties which can be imposed on the wrongdoer are significant. A breach of the competition laws discussed above could lead to a fine on the company of either up to $10 million, three times the benefit gained from the breach, or 10 percent of the annual turnover of the business (whichever is the greater). Individuals involved in the breach can be fined up to $500,000, banned from managing a company, and, where they have engaged in cartel conduct (eg price fixing, market sharing or bid rigging), they can be sent to jail.

A breach of the laws relating to false representations and unconscionable conduct discussed above can result in penalties of up to $1.1 million for companies, and $220,000 for individuals involved in the breach.

For more information on Australia's competition and consumer protection laws, please contact HopgoodGanim's Competition and Trade Practices team.