ABSTRACT
Lease Agreements may have legally invalid
provisions in the meaning of law of obligations and may gain the feature of breaching
the competition rules with ‘non-competition’
clauses. However, when considering the
views in the doctrine, in the meaning of law of
obligations and in the bounds of competition
law, it can be legal and possible, according to
the decisions and guidelines of the Turkish and
English competition authorities.
I. INTRODUCTION
In recent years, commercial companies operating in
the same market have started to use the lease agreements as a direct or indirect instrument in order to
increase or strengthen their market power. Those
applications have shown themselves in various
ways. For instance, some brands have stipulated in
their lease agreements which they have signed with the
shopping malls, they only shall operate in the relevant
market, otherwise the rent shall be reduced or the sale
of certain products shall be prohibited. Even if competition prohibitions are included in the lease agreements,
these provisions may be invalid and subject to the prohibition of tied up agreements which will enter into
force in 2020, when the law of obligations is taken into
consideration. In terms of considering the competition
law, Turkish Competition Law does not count the lease
agreements one of the vertical agreements that violate
competition; while the British Competition Authority
(OFT) has clearly stated that the lease agreements may
restrict competition in its Guidelines. For these reasons,
the “non-competition” provisions in the lease agreements may be invalid either in the law of obligations or
the law of competition.
Due to the fact that there is no judicial decision on this
issue because the prohibition of the tied up agreements
will only come into force in 2020, in this article we it try
to clarify the subject in question by referring to the dominant opinion in the doctrine. Moreover, the decisions of
the Competition Authority regarding this subject were
examined and a comparison was made with the guidelines published by the British Competition Authority
(OFT) and the approach in Turkish competition law by
stating in which terms and conditions lease agreements
violate the non-competition rules.
THE NON-COMPETETION LIABILITY WITH RESPECT TO THE RENTAL LAW
Prohibition of the Tied Up Contract
The Turkish Code of Obligations No. 6098 (“TCO”) entered into force on 1 July 2012. Article 53 of the Law No. 6353 on Amendments to Certain Laws and Decree Laws and the execution of certain articles of the TCO relating to the lease agreements were postponed for eight (8) years (up to 2020), where lessees are merchant and legal entity’s workplace within the context of the rents. The Article 340 of the TCO titled as “the Tied Up Contracts”, hereby has been counted as one of the postponed provisions, and this provision shall be applied on the workplace lease agreements, where the lessee is a merchant and legal entity, from 1 July 2020. For this reason, there is no judicial decision with respect to the prohibition of the tied up contract yet and in this Article, dominant opinions in the doctrine are reviewed.
The Article 340, which is a mandatory provision of the TCO, stipulates that (i) if the establishment or continuation of the lease agreements (ii) with regard to residential and roofed workplace (iii) is connected to any liability which is not directly in relation to the usage of the leased property without the benefit of the lessee, the contract tied up to the lease agreement shall be deemed invalid.
i. Lease Agreement with respect to Residence or Roofed Workplace
The first condition for the implementation of prohibition of the tied up contracts is that the leased property shall be a residence or a roofed workplace. Accordingly, the prohibition in question shall not be applicable to the lease agreements regarding land or movable rents.
ii. The tied up Contract (Setting a Condition to the Establishment and/or the Continuation of a Lease Agreement)
Establishing a separate contract, in addition to the lease agreement and subjecting the establishment or continuation of the lease agreement to this separate contract, is the second condition. In other words, if establishment of a tied up contract is a condition sine qua non for the establishment of the lease agreement, this situation will be considered as a tied up contract within the scope of Article 340 of the TCO1.
Even though the Article 340 of the TCO is titled “tied up Contract”, the doctrine asserts that it is more appropriate to understand the term of tied up contract as “all kinds of legal proceedings” as in the reference code, Swiss Code of Obligations2. Accordingly, for the implementation of the prohibition of the tied up contract under Article 340 of the TCO, it is not necessary to conclude a separate contract, which requires a condition for the establishment or the continuation of a lease agreement. If the establishment or continuation of lease agreements is essentially bound to the performance of another act and there is a close connection between this act and the lease agreement, then the provisions referring to the tied up contracts shall be applicable.
iii. Lack of Benefit of the Lessee and Undertaking an Obligation which is not in Direct Relation to the Usage of the Leased Property
The lessee must be under any liability, which is not in direct relation to the use of the leased property through the tied up contracts. In other words, if such liability undertaken by the lessee is related to the direct use of the leased property, then the Article 340 of the TCO cannot find a field of application3. Nonetheless, in accordance with the dominant opinion in the doctrine, it is determined that in case an another debt obligation within the scope of lease agreement exists the obligation will be considered as having a direct relation with the lease agreement and will not be considered under Article 340 of the TCO4.
In the doctrine, some examples are particularly elaborated with respect to whether there is a direct relation to the use of the leased property. One of those particular examples is related to the prohibition of competition. Accordingly, for the cases where the lessor gives exclusivity to the lessee for the sale of a particular good or service, especially in the lease agreements for the shopping malls, it is the dominant opinion that the non-compete liability in other lease agreements is directly connected to the usage of the leased property, in other words, the prohibition of competition cannot be acknowledged as a tied up contracts5.
ASSESSMENT OF LEASE AGREEMENTS IN TURKISH AND ENGLISH COMPETITION LAW
Due to the exclusivity provisions in lease agreements, especially the lease agreements for shopping malls, not leasing the shops/stores or not allocating the areas by the administration of shopping malls to the competitors, have caused certain applications to be submitted to the Competition Board (“Board”) by the competitors. The Board, in its decisions regarding these applications, made assessments, especially in the context of Articles 4 and 6 of the Law No.4054 on the Protection of Competition (“Law No.4054”),6 as to whether the contracts/ decisions/actions subject to the application are in violation of competition or not7.
Consideration with respect to Article 4 of the Law No. 4054
Certain agreements among competitors and vertical agreements between undertakings at different levels of production and distribution chain are considered under Article 4, if they have a restrictive effect on competition.
In order for an agreement to be considered as a violation of competition as per Article 4 of the Law No. 4054, the agreement in question, (i) shall be intended to aim directly or indirectly to prevent, disrupt or restrict competition in a particular market of goods or services, and (ii) must have this effect on such market. Pursuant to the subparagraph (d) of the same article, it is considered as a violation of competition that the activities of competing undertakings are hardened, restricted or the undertakings operating in the market are taken out of the market through boycotts or other conducts.
In a similar way, in the Board decision dated 07.03.2013 and numbered 13-12/185-99, Burger King allegedly claimed that Burger King was prevented from operating in shopping malls by stating that McDonald’s imposes exclusivity clauses (non-compete liability) in relation to hamburger sales, made from the red meat, in the lease agreements signed between some shopping mall administrations throughout Turkey. In continuation of Burger King’s claim, it is stated that those lease agreements also include penalty clauses, against shopping malls, to be applied in case of breach of such exclusivity clause. Additionally, Burger King claimed that each shopping mall should be defined as a separate geographical market8. In the aforementioned application, Burger King made an assessment on the issue that whether lease agreements have a restrictive effect on competition: “irrespective of whether the lease agreements are included in the Group Exemption Communiqué on Vertical Agreements No. 2002/2, there have not been a violation of Article 4 of the Law by such lease agreements”. Burger King also stated that the lease agreements may have a preventive effect on the competition as they increase the barriers to market entry with reference to the Land Agreements Guidelines (“Guidelines”)9 of the British Competition Authority [Office of Fair Trade (“OFT”)]10.
The British Competition Authority (OFT) has envisaged in the Guidelines that the lease agreements may restrict, prevent or impede competition under certain conditions and in certain ways. Accordingly, it is stated that in assessing the issue whether the restriction violates competition or not, the purpose of the restriction, the relationship between the parties of the lease agreement and the main reason for the restriction should be examined. When assessing whether competition rules are violated, it will be considered that the situation in which the lease agreement has not been concluded, creates a more positive effect on “the party claiming a violation of competition”. According to the Guidelines, it is stated that (i) if the parties of the lease agreement operate in the same market, and (ii) in case the lessor, in order to maintain, strengthen or increase the power of one of its lessees in the relevant market, (a) gives an exclusivity or (b) does not act equally to its lessees, the restriction could lead to a significant violation of the competition. The wording “lessees” here refers to the lessees that the lessor had signed a lease agreement with and whom own a certain market power.
The first paragraph of the “Scope Group Exemption” of the Communiqué on Vertical Agreements No. 2002/2 published by the Turkish Competition Authority clearly states that the lease agreements cannot be regarded as vertical agreements, on the other hand, in the Guidelines, The British Competition Authority (OFT) stated in the Guidelines that a small portion of the lease agreements may lead to violation of competition. In this respect, it can be said that there are interpretational differences between the Turkish Competition Board and the British Competition Authority with respect to whether the lease agreements are in violation of competition. However, there are similarities with regarding to the evaluation criteria between the Board’s event-based assessments within the scope of Article 4 of the Law No. 4054 and the OFT’s suggestions that the lease agreements may be in violation of competition, if they occur in terms and conditions set out in the Guidelines.
The Board, in response to the claim of Burger King, made an assessment that the exclusivity clause imposed by McDonald’s in the given shopping mall was not designated on the purpose of violation in competition with reference to McDonald’s statement of “McDonald’s would have exclusively operated in the fast service restaurants market with high sales and therefore, it accepted a rent price which is above the market price in favour of the shopping mall, but when Burger King entered into the relevant shopping mall, the sales of McDonald’s dropped thus it requested a discount on the rent price from the administration of shopping mall”11. In this context, Burger King’s assessment on that the lease agreements might lead to violation of the competition, considering the terms and conditions in the Guidelines, may be uncompleted.
Consideration According to the Article 6 of the Law no. 4054
The effects that occur subsequent to the abuse of a dominating enterprise, either on its own or through agreements with others are considered within the scope of Article 6 of the Law no. 4054.
In order for an agreement to be considered in terms of Article 6 of Law No. 4054, must have two conditions must exist. The first of these, (i) the enterprise in question should be dominant in the market and the second is that, (ii) this dominant enterprise should have the intention of abusing its dominant position. In accordance with Article 6 (a) of the Law No. 4054, to prevent, directly or indirectly, other enterprises in its area of commercial activities or practices which aim to impede the activities of the competitors in the market are considered as abusive practices.
In its decision no 06-90/1145-339, dated 14.12.2006 of the Board, McDonald’s alleged a violation of Article 6 of the Act no 4054, when Tepe Nautilus Mall (“Tepe Nautilus”), owned by Tepe Real Estate Investment Construction Trade Inc. (“Tepe Emlak”) refused McDonald’s to open a restaurant in the food and drink section.
In the aforementioned application, the Board determined that the reason after Tepe Emlak did not prefer to enter into a contract, did not arise from the intention to push McDonald's out of the market but connected it to rational and just reasons within the framework of real estate management business. Hence, the Board emphasized that the alleged dominant position was not abused in the case. The selection of the restaurants to be included in the food and drink section which has a limited area is shaped by mutual bargaining and the strategic decisions of the parties and Tepe Nautilus wanted to offer as much variety as possible in the limited area specified, therefore did not prefer to have two restaurants of the same type12. The British Competition Authority (OFT) also stated that, in order to provide retail shop / store diversity in shopping malls and make the malls more attractive for consumers, restricting the shops of the same kind should not be considered as a violation of competition13.
Having said that, the Board, made a remark that Tepe Emlak is not in a dominant position in the fast-service restaurants market as claimed by McDonald's and stated that even if Tepe Emlak is in a dominant position, it is necessary to make an evaluation in the case of whether or not it is a “mandatory element”14 of the food and drink section of Tepe Nautilus. In this direction, the Board decided, McDonald's can exist in the fast service restaurants market without operating in Tepe Nautilus, thus Tepe Nautilus cannot be regarded as a necessary element; and with respect to the case assessed in terms the geographical market was not only Tepe Nautilus but the whole of Turkey15. As well, The British Competition Authority (OFT), in their evaluation; stated whether the blocking of an area to be rented by an enterprise by its dominating opponent, prevents competition or not depends on the economic activity and the geographical location of the area available for rent16.
Besides, The British Competition Authority (OFT) also states: (i) where an enterprise must have access to a specific area to enter a specific market, to restrict the enterprise’s access to this area or (ii) where there are restrictions due to ground planning, and in case there are enterprises which cannot perform their activities based on these restrictions, competition violations between competitors are possible. In addition, it has been added that the duration of the rent may also lead to a violation of competition.
In this context, the assessments of the Board as regards the violation of competition with a lease agreement by abusing its dominating situation in the market, regarding the resolution in question within the scope of the article 6 of the Law No. 4054 share similarities with the evaluations of the British Competition Authority (OFT) in the Guidelines. Both sources have an emphasis on the matter “mandatory element”, the economic activity of the market and so the geographical market.
CONCLUSION
As there is no judicial decision due to the fact that the judgment as regards whether or not the non-competition rule in lease agreements can be regarded as a tied up contract within the scope of Article 340 of the TCO, an evaluation can be made pursuant to the opinions in the doctrine. According to the opinions in the doctrine, it should not be considered as a tied up contract under Article 340 of the TCO, since the prohibitions on competition are considered directly related to the leased property.
In terms of Competition Law, in the evaluations made in accordance with the Group Exemption Communiqué on Vertical Agreements numbered 2002/2 which lease agreements are not considered as tied up contracts, the Board decided that lease agreements, lessors or lease tenants whom has exclusivity with the rental contract, do not violate competition violation under the Law no.4054 Articles 4 and 6. Even so, in the applications submitted to the Board refer to the Land Agreements Guidelines of the British Competition Authority (OFT), on the purpose to strengthen the claim that the lease agreements may also restrict competition; it is clearly written in the said Guidelines that certain conditions must exist in a lease agreements to violate competition. In this context, when the conditions in the aforementioned Guidelines are examined, it can be said that the approach of the Board and the approach of The British Competition Authority (OFT) regarding the prohibition of competition in lease agreements are similar.
BIBLIOGRAPHY
İnceoğlu, M, Baş, E. "Kira Hukukunda Bağlantılı Sözleşme Yapma Yasağı". İstanbul University Faculty of Law Journal 70 (2013): http://dergipark.gov.tr/iuhfm/ issue/9187/115138
İnceoğlu M. (2014), Kira Hukuku (Volume 2). İstanbul: 12 Levha Publications.
Gümüş M.A. (2012), Yeni Türk Borçlar Kanunu’na Göre Kira Sözleşmesi, İstanbul: Vedat Publications.
Land Agreements, The application of competition law following the revocation of the Land Agreements Exclusion Order. (March 2011). London: Office of Fair Trading.
Communiqué No. 1997/1 on Mergers and Acquisitions.
Competition Board Decision dated 07.03.2013 and numbered 13-12/185-99.
Competition Board Decision dated 14.12.2006 and numbered 06-90/1145-339.
FOOTNOTE
1İnceoğlu, M, Baş, E. "Kira Hukukunda Bağlantılı Sözleşme Yapma Yasağı". İstanbul University Faculty of Law Journal 70 (2013): http://dergipark.gov.tr/iuhfm/issue/9187/115138
2 İnceoğlu M. (2014), Kira Hukuku (Volume 2). İstanbul: 12 Levha Publications, p:39
3 İnceoğlu, M, Baş, E. "Kira Hukukunda Bağlantılı Sözleşme Yapma Yasağı". İstanbul University Faculty of Law Journal 70 (2013), p.168: http://dergipark.gov.tr/iuhfm/issue/9187/115138
4 Gümüş M.A. (2012), “Yeni Türk Borçlar Kanunu’na Göre Kira Sözleşmesi”, İstanbul: Vedat Publications, p.50
5 İnceoğlu M. (2014), Kira Hukuku (Volume 2). İstanbul: 12 Levha Publications, p:43
6 The rental contracts are not only significant for Articles 4 and 6 of the Law No.4054, but also have a crucial place under Article
7 with regarding the control of mergers and acquisitions. 7 In the Communiqué No. 1997/1 on Mergers and Acquisitions, the relevant geographical market is defined as “the regions that the undertakings operate in the supply and demand of their goods where the conditions of competition are sufficiently homogenous and especially the conditions of competition are considerably different the neighbouring regions.”
8 Land Agreements, The application of competition law following the revocation of the Land Agreements Exclusion Order. (March 2011). London: Office of Fair Trading.
9 Competition Board Decision dated 07.03.2013 and numbered 13-12/185-99, p. 2, pars. 6 and 7.
10 Competition Board Decision dated 07.03.2013 and numbered 13-12/185-99, p. 3, pars. 14 and 15.
11 Competition Board Decision dated 14.12.2006 and numbered 06-90/1145-339, p. 4, par. 190.
12 Land Agreements, The application of competition law following the revocation of the Land Agreements Exclusion Order. (March 2011). London: Office of Fair Trading. p.32, par. 4.30.
13 It is the legal principle that foresees where it is not possible for a competitor or customer to continue its activities without benefiting from the factors, which can be defined as an entity/ facility/ infrastructures, these factors should be open to sharing mandatorily.
14 Competition Board Decision dated 14.12.2006 and numbered 06-90/1145-339, p. 4, par. 180.
15 Land Agreements, The application of competition law following the revocation of the Land Agreements Exclusion Order. (March 2011). London: Office of Fair Trading. p.32, pars. 4.19 and 4.20.
