Retailers have typically negotiated their leases with landlords to include clauses restricting competitors from operating in the same shopping centres. This is achieved through including negotiated exclusivity clauses, which in many cases, are registered on title as restrictive covenants. Although the use of these exclusives/restrictive covenants by retailers has been a common practice in Canadian retail leasing for decades, amendments to the Competition Act may bring an end to this practice.
Canadian politicians have responded to concerns about inflation, in part by linking the increase in the cost-of-living to the grocery sector's use of restrictive covenants. Parliament amended the Competition Act to expand the scope of its abuse of dominance provisions and anti-competitive collaboration provisions which now permits the Competition Bureau to investigate non-competitors with agreements that contain anti-competitive arrangements. The result is that the amended Competition Act exposes the landlord-tenant relationship to investigations and sanctions for their use of restrictive covenants in lease agreements.
Although the amended Competition Act does not explicitly refer to use of restrictive covenants in grocery store leasing, it appears that the Competition Bureau's current target is the grocery sector. The driving force behind the amendments was to "empower the Bureau to block collaborations that stifle competition and consumer choice, particularly in situations where larger grocers prevent smaller competitors from establishing operations nearby." The Competition Bureau has maintained this focus on the grocery sector, and in June 2024 launched an investigation into Sobeys and Loblaw's use of restrictive covenants in Halifax.
The Competition Bureau engages in a market analysis when enforcing provisions under the Competition Act and will review the impact of the applicable restrictive covenants, on a case by case basis, with a view to how such restrictions affect competition in a specific trade market.
If the Competition Bureau is able to establish a contravention of the amended provisions of the Competition Act, the Competition Tribunal has the power to issue any of the following penalties:
- An order prohibiting the use or enforcement of the restrictive covenant.
- An additional or alternative order to restore competition (e.g. divestiture of assets or shares).
- If an anti-competitive agreement, a monetary penalty of no greater than $10 million and three times the value of the benefit derived from the restrictive covenant.
- If an abuse of dominance, a monetary penalty of no greater than $25 million and three times the value of the benefit derived from the restrictive covenant.
The Competition Bureau has outlined its preliminary enforcement approach to restrictive covenants under the amended Competition Act (Guidelines). It remains uncertain whether the Competition Bureau's current investigations of landlords and tenants in the grocery sector will result in sanctions. Interestingly, certain retailers in Canada have already pro-actively written to their landlords and have unilaterally waived their exclusives in existing leases.
Although the Competition Bureau is currently focused on the grocery sector, the amended Competition Act is not limited to this sector, and therefore has the potential to impact all retail leases. Accordingly, landlords and tenants in all retail sectors must consider the risks associated with a potential Competition Bureau investigation when contemplating the use of exclusives in their leases. The only way for landlords and tenants to avoid any such risk is to eliminate the use of exclusives in their leases altogether.
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