In October 2022, the federal Competition Bureau (the
"Bureau") launched a market study of grocery store
competition in Canada in response to cries from the Canadian public
for lower prices, more convenience and greater innovation. The
Bureau is an agency created under the auspices of the Competition
Act (the "Act"), and it describes itself as the
"watchdog" of competition. The role of the Bureau is to
monitor whether commercial competitors are complying with the Act
and to bring parties in front of the Competition Tribunal (the
"Tribunal") if they are not. The Tribunal is the federal
adjudicative body in Canada responsible for cases regarding
infringements upon the Act. The Act contains both criminal and
civil provisions aimed at preventing anti-competitive practices in
the marketplace and empowers the Bureau and Tribunal to
investigate, monitor and adjudicate anti-competitive matters.
On June 27, 2023, the Bureau released the Competition Bureau Retail
Grocery Market Study Report aptly named "Canada Needs More
Grocery Competition". This report contained recommendations to
the government, including that the Tribunal take measures to limit
exclusive use covenants (referred to in the Bureau's report as
"property controls") in the grocery industry. An
exclusive use covenant grants to a tenant the right to be the only
tenant to conduct a particular use within a prescribed set of
lands.
On September 14, 2023, the federal government announced its
intention to amend the Act and, shortly thereafter, Parliament
introduced Bill C-56, dubbed the Affordable Housing and Groceries
Act. If enacted, it will empower the Bureau to take action against
agreements that "lessen competition". It is a given that
the Bill has its eye on major grocery retailers, intending to
promote competition for the benefit of consumers. Bill C-56 will
expand the Tribunal's power to issue orders against
anti-competitive agreements under Section 90.1 of the Act.
In its current form, Section 90.1(1) of the Act allows the Bureau
to apply to the Tribunal for an order that a particular agreement
prevents or lessens competition in those cases where at least two
parties to the agreement are competitors. As an example, an
agreement between competitors to set the pricing on a particular
product is caught by the current version of Section 90.1(1). The
type of order that may be issued ranges from prohibition to
criminal prosecution.
Bill C-56 amends Section 90.1(1) to permit the Tribunal to make
such an order where the parties to the agreement are not
competitors. The proposed Section 90.1(1.1) states:
"if the Tribunal finds that a significant purpose of
the agreement or arrangement, or any part of it, is to prevent or
lessen competition in any market, it may make an order under
subsection (1) even if none of the persons referred to in that
subsection are competitors." This
provision, if enacted, will expose exclusive use covenants to
sanction.
Although the common law holds that covenants in restraint of trade
are generally considered unenforceable and void, courts in Canada
have upheld agreements restraining competition such as exclusive
use covenants, in certain circumstances. For example, in Russo v.
Field, the Supreme Court of Canada upheld an exclusive covenant in
the context of a shopping centre. It noted that if a limited number
of prospective purchasers in a small shopping centre are faced with
several prospective vendors of the same goods and services there
may not be enough business to support the vendors, causing both
them and the landlord to suffer.
It is indisputable that Bill C-56 will, if proclaimed into force,
empower the Tribunal to find that an exclusive covenant violates
the Act. If it so finds, it may prohibit enforcement of the
exclusive, effectively nullifying it.
At this point, it is pure speculation as to how the Bureau and
Tribunal might exercise the new powers. Due to its limited
resources, it is hard to imagine that the Bureau will embark on a
document review of leases of private developments.
Here are some questions that come to mind: Will operators of a
business that contravenes an exclusive use covenant tip off the
Bureau for action against the landlord and tenant, just to turn up
the heat? Will tenants such as fruit and vegetable stands,
bakeries, dollar stores, convenience stores and bulk food stores
contact the Bureau with a roster of desirable locations and ask the
Bureau to demand disclosure by landowners of all restrictive use
covenants? Will landlords and tenants take matters into their own
hands by issuing demands that the grocery store operators relax
their rights, or risk being reported to the Bureau? Or, in
instances where there is express wording in the exclusive covenant
to the effect that it need not be enforced if doing so would be an
offence under the Act, will that wording serve to nullify the
covenant?
At this time, we have no legal outcomes to report as Bill C-56 has
yet to be proclaimed. However, current lease negotiations suggest
that Bill C 56 has already induced some level of nervousness among
grocery store tenants. We also know that similar developments in
the law in the U.K. and Australia have been significantly impactful
on the retail sector. For example, when the Australian Competition
and Consumer Commission ("ACCC") considered exclusive use
covenants to be an impediment to competition, the ACCC pursued the
matter until two of Australia's largest grocery retailers
agreed to phase out exclusive use covenants and not enter into new
ones. These agreements are enforceable by the courts.
Takeaways
If enacted, Bill C-56 will provide the Bureau and Tribunal with
greater power to intervene in anti-competition agreements. These
changes may place landlords and tenants at risk of the Bureau and
Tribunal attacking exclusive use covenants. Although these proposed
changes to the Act theoretically apply across all retail sectors,
it seems that the current focus on grocery competition has placed
grocery store tenants in the crosshairs.
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