New competition rules that came into effect Dec. 15 could significantly change the way commercial landlords and tenants do business.
Amendments to the Competition Act widen the scope of its application and could ensnare commercial landlords and tenants—particularly in the grocery industry, which is under close scrutiny by a federal government desperate to slow food inflation.
The changes affect “exclusivity clauses” and “restrictive covenants”—common features of commercial leases in North America that are in Ottawa’s crosshairs as they may reduce grocery store competition in given geographic areas.
Whereas these rules used to apply only to competing businesses, landlords and tenants can now be accused of anti-competitive conduct, even if they are not “competitors,” simply by virtue of signing leases that give a tenant the exclusive right to carry on their type of business in a retail setting.
“The new amendments allow the Competition Bureau to look at agreements between parties that are not competitors, in particular landlords and tenants,” said Justin Mooney, partner with DLA Piper (Canada) LLP.
“So now a landlord, unbeknownst to it, could get roped into an anti-competitive investigation by the Competition Bureau simply by virtue of it having granted an exclusivity right in favour of a tenant.”
It is common for commercial leases to contain exclusivity clauses, which are meant to attract and retain tenants by encouraging them to open in retail developments without fear of losing business to another similar tenant next door.
“I want to know that I’m your pet store at your shopping centre. I don’t want four more pet stores at [this] shopping centre. If a pet store wants to open up, they should open up down the street,” explained Peter Tolensky, partner with Lawson Lundell LLP and adjunct law professor with University of British Columbia (UBC).
Exclusivity clauses are typically negotiated when a tenant signs a lease with a commercial landlord. In a new shopping centre, usually the first or largest tenant gets the first kick at the can. This tenant, such as a department store or grocery store, can craft their desired restrictions, provided the landlord allows this sort of negotiation.
The second tenant gets to specify their own restrictions, provided they don’t conflict with the first tenant’s lease. The third tenant goes next, and then the fourth, and so on.
“It’s definitely the tenants that want [these clauses],” said Tolensky. “If a landlord had their choice, they wouldn't agree to any of these because then they could have more flexibility in who they can lease their shopping centre to and have even more control over their tenant mix.”
Property controls only last as long as the lease. Although some grocers have already announced they will no longer enforce their exclusivity rights, Mooney said he is unsure how much of a difference the new legal rules will make in the aggregate.
“You’ve got the practical application and the political considerations,” he said.
Practically, the amendments could pave the way for greater grocery competition in certain markets.
“Whether or not it’s going to have an actual, practical effect on competition in the grocery industry, frankly I think remains to be seen,” he said, noting that Ottawa is under pressure to address high food prices.
Tolensky agrees the changes may be more political than economic.
“You can see pretty easily why the Competition Bureau is doing this,” he said. “Personally, I think this is a political adventure. To me, you’re going to have a very hard time proving that restrictive covenants increase the price of food.”
The use of property controls in the grocery sector has attracted the ire of the federal Liberals and NDP, which have directed personal attacks at some grocery CEOs in response to inflation.
In Canada, the consumer price index rose 3.9 per cent on an annual average basis in 2023, following a 40-year-high increase of 6.8 per cent in 2022 and a 3.4 per cent increase in 2021, according to Statistics Canada.
Amid steep inflation during the pandemic, the Competition Bureau launched a study of grocery store competition in Canada and released a report in June 2023 calling for more competition. In response, the federal government introduced the Affordable Housing and Groceries Act, which includes changes to the Competition Act.
The Bureau’s study focused on competition between grocery stores, but the amendments to the act will impact all landlords and tenants.
Experts say this language could ensnare a commercial landlord and tenant who reach what the government regards as an “anti-competitive” agreement.
It remains unclear how these new rules will be interpreted by the Bureau, and whether it has sufficient resources to meaningfully enforce them. The Bureau has published draft guidelines for how parties should start thinking about their property controls.
For example, there are instances where property controls could be beneficial, such as where a property control is necessary for a party to start up a business in an area in which the party would not otherwise start up the business.
In determining legality, the Bureau will also look at whether a property control could last for a shorter period of time, whether it could cover fewer products and services, and whether it could cover a smaller geographic area.
