Competition Bureau outlines strict approach to property controls in preliminary enforcement guidance

In response to recent amendments to the Competition Act (the Act), the Competition Bureau (the Bureau) has issued preliminary enforcement guidance (Guidance) outlining its strict approach to property controls (specifically, exclusivity clauses in commercial leases and restrictive covenants that run with lands) on commercial real estate. It discusses when they are justified and how the Bureau will pursue enforcement action with respect to potentially competitively harmful property controls. Final guidance will be informed by an ongoing public consultation process through which businesses and other stakeholders may make submissions up to October 7, 2024.

What you need to know

• New preliminary enforcement guidance on property controls. The Bureau takes the general view that property controls “insulate firms from competition” and “by their nature … can raise serious competition concerns”. As such, they see only limited instances in which property controls are justified—namely, to incentivize new entry or investment. The Bureau also sees their approach as keeping in step with global enforcement trends such as those in the UK and New Zealand.
• Property controls should be appropriately tailored. The Bureau is encouraging businesses to use property controls only to the extent necessary to induce entry or new investment, and to limit their duration, the products/services to which they apply, and geographic scope. The Bureau is also encouraging businesses to eliminate or modify existing property controls to make them less restrictive to conform with these considerations.
• Public consultation. The Bureau is conducting a public consultation on property controls and is accepting submissions from the public until October 7, 2024.

What are property controls?

Property controls are restrictions on the use of commercial real estate. The Guidance focuses on two types of property controls:

1. Exclusivity clauses in commercial leases, which restrict how property can be used by competitors to a tenant, such as prohibiting leasing to competitors of a tenant or providing incentives to avoid such leases.
2. Restrictive covenants that run with lands, which are restrictions on land that prevent a purchaser or owner of a commercial property from using the location to operate, or lease to operators of, certain types of businesses that compete with a previous owner.

When are property controls justified?

The Bureau recognizes that there are “certain limited situations” in which the use of property controls is justified:

• Exclusivity clauses may be justified where they protect incentives for a retailer to make investments in order to enter a market. The idea is that retailers may not be motivated to make an investment in a property if a competitor is freely able to open a store on the same property. With the protection of an exclusivity clause, a retailer will be more motivated to make the investment necessary to open its store and attract customers. However, the Guidance is careful to note that exclusivity clauses should “go no further than necessary”.
• The Bureau does not view the use of restrictive covenants as justified outside of “exceptional circumstances”. This is because they apply to the land itself and can restrict future owners of the land. They tend to be long-lasting and can create areas where no competitor can operate. This Guidance does create a marked divergence from common practice in the real estate market, particularly as it relates to major commercial uses, such as shopping centres (including, most notably, anchor tenants) and grocery stores.

Enforcement of property controls under the Act

The Bureau intends to take enforcement action in connection with property controls using the abuse of dominance and the new anti-competitive collaboration provisions of the Act. 

Abuse of dominance

The abuse of dominance provisions apply where a person with a dominant position engages in (i) a practice of anti-competitive acts (with predatory, exclusionary, disciplinary or anti-competitive intent) or (ii) conduct that has or is likely to substantially lessen or prevent competition in a market.

Generally, a firm must have at least a 50% market share in order to be considered dominant. Given that property controls are exclusionary by design, the use of property controls by dominant firms would constitute an anti-competitive act absent a legitimate business justification. However, the use of property controls by non-dominant firms would not be caught by this provision (though they may still be caught under the new anti-competitive collaboration provisions discussed below).

The Guidance states that the Bureau will generally consider the party who proposed or benefits competitively from the property control to be the target of an investigation (i.e., the tenant and not the landlord). The Bureau is currently investigating two major grocers’ use of property controls under this provision.

The Bureau may seek prohibition orders and, where a dominant firm engages in conduct that is both a practice of anti-competitive acts and has (or is likely to) substantially lessened or prevented competition in a market, other measures to restore competition and administrative monetary penalties (AMPs). Notably, the Guidelines emphasize that the Bureau is more likely to seek AMPs in cases involving restrictive covenants, due to the heightened concern with this type of property control. AMPs under the abuse of dominance provisions of the Act can be set at a maximum of $25 million ($35 million for subsequent orders) or up to three times the value of the benefit derived from the property control or, if that amount cannot be reasonably determined, up to 3% of the person’s annual worldwide gross revenues.

Anti-competitive collaboration

Starting December 15, 2024, the Act will extend to any agreement (i) for which a significant purpose is to prevent or lessen competition in any market and (ii) that has had or is having the effect of preventing or lessening competition substantially. This amendment to the Act was introduced specifically to target property controls in grocery store leases.

The Guidance states that the Bureau will generally consider all parties to the agreement to be the targets of an investigation (i.e., both the tenant and the landlord).

With the recent passage of amendments to the Act, the Bureau will be able to seek prohibition, behavioural, structural (i.e., divestiture) or AMP orders in connection with contraventions of this provision. AMPs under these provisions can be set at a maximum of $10 million ($15 million for subsequent orders) or up to three times the value of the benefit derived from the property control or, if that amount cannot be reasonably determined, up to 3% of the person’s annual worldwide gross revenues.

Conclusion

While there is still scope for targeted property controls that can be justified to encourage entry and are circumscribed in terms of time and scope, businesses should expect increased scrutiny of standard and long-standing tools associated with protections of retail owners and tenants (including the use of exclusivity clauses in leases and restrictive covenants registered on title to commercial properties). Caution is therefore advised when using such tools, and it will be important for parties to take this new Guidance into account.

Therefore, as a matter of best practice, businesses should consider reviewing and, where necessary, modifying existing property controls to ensure that they do not harm competition and will not be challenged under the Act. Businesses should also ensure that any new property controls are appropriately tailored to limit the provisions to only the extent necessary to promote new entry and investment. Limitations could be by duration, the products/services to which the controls apply, and their geographic scope. If a property control is determined to be reasonable with respect to a particular arrangement, its pro-competitive justification should be well documented.