Concrete Analysis | Does ‘radius clause’ in shopping centre leases breach Hong Kong’s Competition Ordinance?

Travel 50km in most European countries and there is a good chance you will encounter no more than one major city. Apply that same radius to Tsim ShaTsui and you would cover all of Hong Kong’s major islands, the entire New Territories and a good corner of mainland China.

The radius clause, a non-compete provision where the landlord restricts a tenant from opening another similar business within a prescribed radius, is a common feature in shopping centre leases in Hong Kong, as it is elsewhere.

But whilst a 50km exclusion zone may be commonplace for shopping mall tenants in other parts of the world, Hong Kong’s cramped geography and high population density means a standard radius clause could fall foul of the city’s new anti-trust regime.

In Hong Kong, as in other common law jurisdictions, landlords often insist on a radius clause before granting retailers a space in their shopping centre. By ensuring there will be no other competing locations offering the same merchandise, the landlord aims to protect its income from the widely used turnover rent arrangement, under which it earns a share of the tenant’s gross sales.

The Competition Ordinance (Cap 619) came into full effect on December 14, 2015, setting out a cross-sector anti-trust regime. Drawn heavily from the European model, the ordinance prohibits restrictions on competition in Hong Kong through three competition rules.

The First Conduct Rule, which originates from and is similar to Article 101 of the Treaty on the Functioning of the European Union, is the rule that limits trade-restriction clauses and prohibits anti-competitive agreements, providing that: