On the 25th of November 2019, the Competition Commission published its final report on the findings of the Grocery Retail Sector Market Inquiry. The headline finding from the report was that a combination of features present in the grocery retail sector, such as long term exclusive leases, may prevent or restrict competition. Indeed, the Commission has specified that long term exclusive lease agreements warrant remedial action. This may have important implications for supermarket chains and property developers in South Africa because parties to these leases could potentially have to terminate or amend their agreements as a result.
The Grocery Retail Sector Market Inquiry
On 30 October 2015, the Commission announced its establishment of the Grocery Retail Sector Market Inquiry. The stated aim of the Inquiry was to better understand how the grocery retail sector operates and whether or not there were any features which prevent or restrict competition. Long term leases which contain exclusivity provisions that prevent landlords from offering space to rival retailers have in the past been viewed by the Commission as problematic. For years shopping centres and property developers have entered into long term exclusive leases with large anchor tenants. The rationale for retailers demanding exclusivity is to mitigate their risk of entering into these long term commitments with new shopping centres.
The report on the findings
The Commission investigated these arrangements to determine whether they dampen competition by increasing barriers to entry and thus leading to smaller retailers including specialist stores such as bakeries, butcheries, liquor and fruit & vegetable stores being excluded from operating within those shopping centres. The Commission confirmed in its report that it was indeed the case that smaller and specialist retailers are experiencing high barriers to entry in a sector where barriers should be low. For example, it was found that a specialist retailer of liquor is likely to be refused a lease in a shopping centre which has an anchor tenant operating its own bottle store in that centre.
In addition to finding that such leasing arrangements restrict or prevent competition, the report indicated that consumers are harmed by limited choice and that these arrangements violate the purpose of the Competition Act, which seeks to ensure that small and medium sized businesses are given a fair opportunity to participate in the economy. Long term exclusive leases make this difficult.
The issue of long term exclusive lease arrangements has arisen as a consideration to merger approval. The Commission has historically objected to such leases in the course of investigating several mergers and imposed conditions to deal with these concerns, including requiring landlords, retailers and even financial institutions to approach their anchor tenants and negotiate the removal of exclusivity clauses.
The Commission intends to phase out these long term exclusive leases. It recommends that retail leases should not contain exclusivity clauses going forward and that existing exclusivity clauses no longer be enforced. These findings remain recommendations and are not enforceable at this stage. However, the Commission may, in conjunction with the Minister of Trade, prescribe regulations to enforce its recommendations and absent compliance, has indicated its intention to do so.. In light of this, it is advisable that retail landlords and tenants asses their leases and amend same before any regulations render them illegal.
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