The Competition Bureau’s public consultation process in connection with new rules related to property controls on certain exclusivity and restrictive use provisions ends on October 7, 2024, and landlords and tenants alike have until that deadline to provide feedback to the Bureau on their enforcement approach as it relates to the proposed rules. If you have a vested interest in restrictive covenants as a landowner or tenant, you will want to get up to speed, and quickly. The following is an overview of where things are at.
Overview
On August 7, 2024, the Competition Bureau (Bureau) published draft guidelines outlining its preliminary approach to enforcement of competitor property controls under the Competition Act (Act). The issuance of these guidelines follows Parliament’s significant recent amendments to the Act in Bill C-59 and Bill C-56, which expanded the scope of the abuse of dominance and civil collaboration provisions, impacting the use of property controls in commercial real estate. Bennett Jones covered these amendments in detail in two previous blogs (Federal Government to Significantly Overhaul the Competition Act and Revamped Competition Act Radically Alters Canadian Competition Law).
Background
Currently, the civil agreements provision of the Act (Section 90.1) only applies to agreements between actual or potential competitors (i.e., horizontal agreements). Among its other significant changes, Bill C-56 introduced Section 90.1(1.1), a new civil competitor collaboration provision, which will come into force on December 15, 2024. Section 90.1(1.1) permits the Competition Tribunal (the Tribunal) to make an order against parties that enter agreements or arrangements with a significant purpose of harming competition, even if not between competitors or potential competitors (the New Civil Agreements Provision).
While the New Civil Agreements Provision does not explicitly reference or outright restrict “property controls”, this was the driving force behind this amendment. The federal government has stated on multiple occasions that it intends to target restrictive covenants, particularly those in the grocery sector in Canada.1 Further, while the provision has yet to come into force, the Bureau has already been investigating the use of restrictive real estate clauses in the Canadian grocery sector.2 Other jurisdictions, such as New Zealand and the United Kingdom, have also studied and implemented limitations on property controls.
Although the government has indicated a focus on the grocery sector, business in all sectors should be aware of how these new rules may impact their business practices, as recent amendments have significantly increased the potential penalties under the Act and parties may be subject to private litigation at the Competition Tribunal.3 As of December 15, 2024, these new rules relating to property controls will apply to both new and existing covenants, so businesses should review covenants in existing agreements and consider whether they may fall under the new rules.
The draft guidelines follow these recent amendments and are intended to provide some clarity on the Bureau’s approach to enforcement of competitor property controls under the Act.
The Draft Guidelines
As set out in the draft guidelines, competitor property controls are restrictions on the use of commercial real estate. The guidelines address two types of property controls, noting that these controls insulate firms from competition and therefore can raise competition concerns:
- Exclusivity Clauses: A clause within a commercial lease that limits how the land can be used by competitors to a tenant. This could prohibit the lessor from leasing a unit or a piece of land to a company that competes with an existing tenant, or limit what or how products can be sold. It could also be a clause that gives an incentive not to lease to competitors of a tenant.
- Restrictive Covenants: A restriction on land that prevents 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.
The draft guidelines confirm that the Bureau will consider property controls both under the abuse of dominance provisions and the New Civil Agreements Provisions.
- Abuse of Dominance: The Bureau takes the position that property controls can, in certain instances, create dominance on its own. Further, it considers the use of restrictive covenants by dominant firms an anti-competitive business practice in almost all cases.
- New Civil Agreements Provision: The Bureau’s preliminary view is that property controls will generally constitute anti-competitive business practices under section 90.1, meaning a property control raises risk where there is evidence that the agreement harms competition.
In either case, the draft guidelines outline key guiding questions that businesses using competitor property controls should consider to ensure compliance with the Act:
- Is the property control necessary to allow a new business to enter the market or to encourage a new investment?
- Could this property control last for a shorter period of time?
- Could this property control cover fewer products or services?
- Could this property control cover less geographic area?
The guidelines acknowledge that, in limited cases, these controls can be justified in the Bureau's view if they are “necessary for a firm to make investments that increase competition, such as to enter a market.” For example, this could be the case where, without the limited exclusivity clause, no retailer would make the necessary investments to become a key tenant in a new shopping plaza. Additionally, the Bureau states that given heightened concerns with restrictive covenants, noting it will likely seek administrative monetary penalties for such covenants where possible.
Next Steps
Businesses in all sectors should consider the potential impact of these new rules on their business, including in respect of covenants in existing agreements and any new agreements being entered into. That being said, the Bureau’s finite resources may constrain its ability to investigate, meaning investigations will likely focus on high profile industries, such as the grocery sector.
Given the potentially significant impact of these recent amendments, and the harsher penalties that are now or will be available under the Act, commercial landlords and retail tenants will need to carefully consider the Bureau's new positioning on exclusivity clauses and restrictive covenants when entering agreements containing such provisions.
The Bureau is conducting a public consultation on the draft guidelines until October 7, 2024, seeking feedback from Canadians who have experience with competitor property controls, such as tenants, lessors, and landowners. It is our hope that following the consultation the final guidelines will provide additional clarity on the Bureau’s enforcement approach to property controls and these recent changes to the Act.
1 See for example: the Canadian government’s press release announcing Bill C-56 in September 2023, which specifically highlights “situations where large grocers prevent smaller competitors from establishing operations nearby.”: Press Release; and Minister Champagne’s comments before the House of Commons, “Lastly, Bill C-56 would remove restrictive covenants that we can currently find in leases. We have seen in the member’s riding, as in my own, a grocer in one shopping centre. Today, there are some restrictive clauses in leases that would prevent an independent grocer from going and competing with them. We need to put a stop to that.”: House of Commons Debates, 44-1, Vol 151, No 254 (23 November 2023) at 1100.
2 See media coverage: https://www.cbc.ca/news/business/competition-bureau-investigating-grocery-sector-1.7109362.
3 Potential administrative monetary penalties (“AMP”) for abuse of dominance have increased to C$25 million for a first offence and $35 million for subsequent offences. Under section 90.1, the range of potential AMPs is now the greater of (1) C$10 million for a first order ($15 million for subsequent orders) and (2) three times the value of the benefit derived or, if that amount cannot be reasonably determined, 3% of the person’s annual worldwide gross revenues. In June 2025, Bill C-59 will expand the right of private access to section 90.1 and permit the Tribunal to make “disgorgement” orders in private actions.
