Commercial landlords are less exposed than retailers to the Competition Bureau of Canada’s crackdown on property controls, but investigators will be considering whether lease or transaction agreements contain a “significant purpose” to weaken other market players. Newly released guidance on how the Bureau interprets abuse of dominance also clarifies that reprieve could be given for exclusivity clauses in leases, while there will be little tolerance for restrictive covenants on land titles.

The guidance was published earlier this month following a public consultation and in the midst of an ongoing investigation into the use of two property-related mechanisms that could be helping some grocery retailers to undermine prospective competition. Those are:

• clauses within commercial leases that restrict the landlord’s ability to lease space to a retailer’s competitors and/or to retailers selling certain designated types of products; and
• restrictions on land that prevent new owners from opening or accommodating ventures that compete with the business interests of a previous owner.

“In most cases, we consider the party who proposed or benefits competitively from the competitor property control to be a potential target of an abuse of dominance investigation,” the guidance advises. “Restricting competition is the source of a competitor property control’s value. Competitor property controls may prevent competitors from entering markets in locations that would be competitively significant or exclude them from a market entirely.”

The Competition Bureau and Tribunal are the joint investigative and enforcement bodies authorized to ensure compliance with Canada’s Competition Act. For a first violation, organizations found to be engaging in practices that hinder or block market competition could be subject to administrative monetary penalties (AMPs) of up to $25 million and three times the value of benefits derived from thwarting competition, or 3 per cent of their annual worldwide gross revenues if the value of gains can’t be calculated. AMPs could then jump to up to $35 million and three times the value of misbegotten gains or 3 per cent of annual worldwide gross revenues for subsequent offences.

In considering abuse of dominance, the Competition Bureau examines the power that a company wields within a market — local, regional or national — and the tactics that help achieve that status. The investigation into property controls was launched after an earlier market study, published in 2023, flagged concerns about concentrated corporate ownership in Canada’s grocery retailing industry and its impact on food costs and consumer choice. The study’s accompanying recommendations also urged provincial/territorial governments, which have constitutional oversight of commercial property transactions, to review and possibly disallow exclusivity clauses and restrictive covenants. (Manitoba recently became the first province to do so.)

Considering the context

The new guidance acknowledges that exclusivity clauses can sometimes be “pro-competitive” if, for example, they draw a retailer that would not otherwise have opened a business in a particular locale or vicinity. Such clauses might also help insulate protected retailers to make investments that, in turn, enhance the overall social and business environment. That might apply for a particular development or within a designated economic development or community improvement zone.

The Competition Bureau confirms that it will consider such factors, but cautions that controls should apply:

• for a limited period;
• on select products/services so that competitors are not comprehensively blocked from business opportunities; and
• within the tightest geographic boundaries possible.

Property owners and local planning officials are also advised to consider if there are other ways to encourage investment or if there are other potential tenants that would not demand an exclusivity clause.

“We recognize that whether a different tenant would be appropriate may depend on a variety of factors, including the nature of their business, how they would fit within the mix of retailers in the area and how effective they would be at attracting customers to the development,” the guidance states. “Considering whether a competitor property control is justified because of a credible pro-competitive rationale is a key part of our analysis. We will not take enforcement action against competitor property controls that we believe are pro-competitive.”

There is far less latitude for restrictive covenants, which are characterized as an entrenched competitive advantage for business operators that have historically owned land in commercial districts. In such cases, retailers could move to new locations with assuredness that competitors could not set up on their former sites, or they could prevent competing infill businesses on portions of their land sold off to other investors.

“Restrictive covenants used by firms with market power are more likely to attract scrutiny. We do not consider their use to be justified outside of exceptional circumstances,” the guidance reiterates.

Grocery industry responses

Last year, the Competition Bureau obtained a federal court order compelling Empire Company Limited and George Weston Limited — the parent companies of Sobeys Inc. and Loblaw Companies Limited — to hand over documentation pertaining to their leases and land titles in the Halifax Regional Municipality. That’s one of the Bureau’s investigative procedures, which entails looking for evidence of intended anti-competitive behaviour. However, the new guidance notes that it also has flexibility to “infer that firms intended the reasonably foreseeable consequences of their actions”.

Both the scrutinized parties have since made moves to revise some of their practices. In January, Empire Company Limited, agreed to remove property controls in Crowsnest Pass, Alberta. In February, Loblaw announced plans to eliminate exclusivity clauses in leases for its stores in the Halifax Regional Municipality; to review similar clauses in all of its existing leases across Canada; and to reduce the scope and duration of exclusivity clauses in its new leases. It has also committed to removing or refraining from enforcing existing restrictive covenants and avoiding new ones in the future.

For its part, the Competition Bureau has said it will monitor those commitments. It urges other retailers to follow suit, and continues to gather public reports of possible anti-competitive property controls via an online submissions portal.

Unacceptable agreements

Situations in which a commercial landlord could be implicated in an investigation fall under the section of the Competition Act addressing anti-competitive collaboration. That’s generally applied to two or more competitors suspected to have colluded through mechanisms such as price-fixing, allocating markets to specified retailers or controlling the supply of goods/services coming onto the market. However, it also pertains to agreements or arrangements between non-competitors that have a “significant purpose” to harm competition.

In the latter case, the Competition Bureau may infer culpability from the outcome. All parties to the agreement — landlords and tenants related to exclusivity clauses; property buyers and sellers in the case of restrictive covenants — could then potentially be scrutinized.

“When assessing an agreement that contains a competitor property control, we focus on if the agreement has the effect of harming competition. If the agreement has the effect of harming competition, it will likely also have a significant purpose to do so,” the guidance states. “We may seek different remedies from different parties to an agreement, depending on the circumstances.”

At the moderate end of the spectrum, the Competition Tribunal can simply nullify the property controls in question. The more onerous possible remedies include AMPs of up $10 million and three times the value of the benefit derived from the agreement for a first occurrence or up $15 million and three times the value of the benefit derived from the agreement for subsequent occurrences.