From exclusivity to fair play

For the past few years rising grocery prices have strained Canadian wallets, becoming a frequent news topic. What action is the government taking to address the lack of competition in Canada's grocery sector, and how will this effect landowners?

In June 2023, the House of Commons published a report on rising food costs in Canada¹. Following said report, in July 2023 the Canadian Competition Bureau (the “Bureau”) published a market study recognizing that, amongst other factors, the Canadian grocery industry is overly concentrated with entrenched large grocers². There are barriers to entry for smaller independent grocers and service providers, resulting in a lack of competition. The Bureau called for a crack-down on anti-competitive behaviour and by September 2023, the government proposed the Affordable Housing and Groceries Act (Bill C-56), which includes significant amendments to Canada’s Competition Act (the “Act”) and which amendments came into force on December 15, 2023.

The amendments have significant implications for how the Bureau addresses anti-competitive property controls in commercial real estate. This article explores the types of competitor property controls targeted by the Act, the Bureau's enforcement approach, and the potential justifications and remedies available to landowners.

Property controls

Property controls refer to contractual clauses and covenants that restrict competition in commercial real estate. The two types being targeted are:

1. Exclusivity clauses

These are clauses in commercial leases that restrict landlords from leasing space in their building or plaza to an existing tenant’s competitors. Landlords frequently agree to such clauses because they contribute to the tenant's success and ability to fulfil their lease obligations. Additionally, the tenant's success may mean more success for the landlord’s building or plaza.

Examples:
A commercial lease preventing multiple dental offices from opening in the same plaza, thereby preventing over-saturation in the area being serviced.

A large coffee shop enters a commercial lease with a landlord and insists on including a clause which prevents the landlord from leasing to other (potentially smaller) coffee shops or other tenants that have coffee services in the same plaza.

2. Restrictive covenants

These are potentially long-running restrictions registered against title to a property, limiting future owners or operators from competing with the interests of the former owner or primary tenant. Property owners often accept these restrictions either because: a) as a landlord, it allows them to secure a strong tenant right away, b) as a property buyer, the restriction does not negatively impact what they want to do with the land, or c) as a property seller, they want to ensure a competitor does not move in behind them.

Examples:
A large box store sells their property, but as a condition of sale, imposes a restriction on the property that prevents the new owner and subsequent owners from selling any of the same goods as were previously sold by said box store.

A large grocery store and their affiliates own and sell several neighbouring plazas, registering restrictive covenants over the lands thereby preventing other grocery stores from entering the same service area.

The issue: The Bureau's focus is on the anti-competitive nature of these controls, particularly when used by dominant businesses to abuse their market position. The Bureau will investigate whether these controls are intended to harm competition or have the practical effect of reducing competition.

Enforcement approach

The Bureau has identified several means of enforcing their objectives which are reflected by way of the following Act amendments:

1. Abuse of dominance: Sections 78 and 79 of the Act

The Bureau has characterized abuse of market dominance as a major barrier to competition. Dominance implies significant influence over market competition, often reflected in market share or the ability to create barriers to entry.

The threshold for establishing an abuse of dominant position requires the Canadian Competition Tribunal (the “Tribunal”) to find that.³

1. one or more persons substantially or completely control a class or species of business throughout Canada or any area of Canada, and
2. said person or personals have engaged in or are engaging in:
   1. a practice of anti-competitive acts; or
   2. conduct that has or is likely to have the effect of preventing or lessening competition (provided that the effect is not a result of superior competitive performance).⁴
      Note: Prior to the recent amendments, both elements of ii) had to be satisfied which was a far more stringent test.
      
      

The Act amendments have also provided certain expansions and clarity on the following matters: 
 

i) What constitutes an anti-competitive act,⁵ examples include:

• Margin Squeezing: A vertically integrated supplier squeezing the margin available to an unintegrated customer who competes with the supplier.
• Acquisition of Customers or Suppliers: Acquiring a customer or supplier to impede a competitor's market entry or expansion.
• Freight Equalization: Using freight equalization to impede a competitor's market entry.
• Fighting Brands: Introducing fighting brands selectively to discipline or eliminate a competitor.
• Pre-emption of Resources: Pre-empting scarce facilities or resources required by a competitor.
• Buying Up Products: Buying up products to prevent price erosion.
• Incompatible Product Specifications: Adopting product specifications incompatible with competitors' products.
• Exclusive Dealing: Requiring or inducing a supplier to sell only to certain customers or refrain from selling to a competitor.
• Predatory Pricing: Selling articles below acquisition cost to discipline or eliminate a competitor.
• Selective Responses: Selective or discriminatory responses to impede a competitor's market entry or expansion.
• Excessive Pricing: Imposing excessive and unfair selling prices
   

ii) Range of remedies:⁶

• The Tribunal can make orders to:
  • Prohibit the anti-competitive practice or conduct.
  • Direct actions, including divestiture of assets or shares, to overcome the effects of the practice
• The Tribunal can impose administrative monetary penalties if it finds that a person has engaged in anti-competitive acts that prevent or lessen competition substantially. The penalty can be up to $25,000,000 for the first order and $35,000,000 for subsequent orders, or three times the value of the benefit derived from the anti-competitive practice, or 3% of the person’s annual worldwide gross revenues

When dominant businesses employ property controls, the Bureau will investigate if said property controls either intentionally or unintentionally exclude competitors and reduce competition. If the Bureau concludes on all the facts and evidence that a competitor property control constitutes an anti-competitive practice by a dominant business, it may seek remedial orders and potentially impose administrative monetary penalties.

Based on the above amendments, the Bureau has advised that restrictive covenants used by dominant businesses will almost always be viewed as anti-competitive practices and will attract the Bureau’s attention.⁷

2. Anti-competitive collaborations: Section 90.1 of the Act

This section applies to agreements with significant anti-competitive effects, even if they do not directly involve competitors. This provision ensures that businesses cannot engage in practices that unfairly restrict competition, which can lead to higher prices, reduced choices, and lower quality for consumers. 

Similar to Section 79 above, the Act amendments have also expanded on the range of remedies available under this section:
 

i) Range of remedies⁸:

1. The Tribunal can:
   1. Prohibit any person from doing anything under the subject agreement or arrangement.
   2. Require any person, whether or not a party to the agreement or arrangement — with the consent of that person, and the Commissioner, to take any other action.
2. If the aforementioned remedies are not likely to restore competition, the Tribunal can direct actions, including the divestiture of assets or shares, to overcome the effects of the agreement or arrangement.
3. If an order is made under either of the above-mentioned remedies, the Tribunal can impose administrative monetary penalties of up to $10,000,000 for the first order and $15,000,000 for subsequent orders, or three times the value of the benefit derived from the agreement or arrangement, or 3% of the person’s annual worldwide gross revenues.
    

Based on this section, the Bureau may target both tenants and lessors involved in agreements containing anti-competitive property controls.

It is evident that the Bureau has a clear objective in mind, so how does this effect the existing property controls and, if they are so contentious, why were they permitted to begin with?
 

• Exclusivity clauses:
  Retail businesses often rely on a unique product or service offering to attract customers. An exclusivity clause can ensure that a tenant's business won't be directly undermined by a competitor opening a similar business within the same property. For example, a small café might be overshadowed by a major chain coffee shop moving in next door. Exclusivity clauses also benefit landlords in that a successful tenant means the tenant will meet their lease obligations and may even attract more foot traffic for neighbouring tenants, thereby enhancing the quality and value of the entire commercial space.
  
  Where this potentially becomes an issue for the Tribunal to investigate is in instances where an exclusivity clause is too broad and prohibits legitimate businesses from operating and benefitting the community. Think of a large grocery or box store with a hot food bar, pharmacy, lottery counter, floral section, and clothing/home section requiring an exclusivity clause that prohibits a landlord from accepting other tenants that sell groceries, home goods, clothing, coffee, flowers, any pharmaceuticals, certain prepared foods, lottery tickets etc. for the duration of their lease. We can immediately see how this would stifle smaller earnest players from entering the market and would encourage the surrounding community to become solely reliant on one store for all their needs, thereby capturing a disproportionate bulk of the Canadian revenue market.
  
  In a nutshell, exclusivity clauses may not be justified if they infringe on Canadian market competition or are narrowly tailored to encourage new investments or entries in Canada.
   

• Restrictive covenants:
  Historically, these covenants are registered on title and have been used to maintain standards, conditions, and uses for property. Owners and developers might impose covenants to require subsequent owners and tenants to maintain a certain standard or appearance within a commercial area, preventing actions that could devalue both the subject property and surrounding properties. For example, restrictive covenants could prohibit something like a mechanic shop from opening in a commercial plaza due to the unsightliness of broken-down vehicles or the increased potential for ground contamination. It is important for city planning that properties are used as intended.
  
  Unfortunately, what we have seen more frequently is the use of restrictive covenants by prior property owners to impose use restrictions on future owners. Let’s go back to the grocery or box store example above; if a large grocery store with all the bells and whistles owned a property but sold it to set up shop in a plaza down the street, they might install a restrictive covenant during the sale process. The restrictive covenant could prohibit future use of the land for any of the above-mentioned extensive purposes for an indefinite period, with added continuing contractual requirements (i.e. assumption agreements for future landowners). This is quite onerous and of course, serves to greatly restrict competition more and more over time.
  
  Generally speaking, the Bureau has advised that restrictive covenants will be considered unjustified outside rare cases, as they are inherently anti-competitive.
   

If you are a landowner/landlord using any of the afore-mentioned property controls, this is an ideal time to revisit them to ensure compliance with the Act. We strongly recommend consulting with a lawyer familiar with this practice area in order to assess the necessity, duration, scope, and geographic capture area of your property controls to avoid being hit with prohibitions, administrative penalties, or other corrective actions intended to restore fair competition.

^{1. Grocery Affordability: Examining Rising Costs in Canada (House of Commons Report)}

^{2. Government of Canada: Canada Needs More Grocery Competition (Competition Bureau Market Study)}

^{3. Government of Canada: Abuse of Dominance Enforcement Guidelines}

^{4. Competition Act (R.S.C., 1985, c. C-34), Section 79(1)}

^{5. Competition Act (R.S.C., 1985, c. C-34), Section 78}

^{6. Competition Act (R.S.C., 1985, c. C-34), Section 79 (2) and (3)}

^{7. Government of Canada: Competitor property controls and the Competition Act}

^{8. Competition Act (R.S.C., 1985, c. C-34), Section 90.1}