The End of Restrictive Covenants in Retail Leases?
Recent changes to Canada’s Competition Act could reshape the use of restrictive covenants in retail leases. These clauses, often used to prevent competitors from opening nearby, may now face increased scrutiny. Here's a closer look at what this means for landlords and tenants.
What are Restrictive Covenants?
Restrictive covenants are legal agreements that limit what a person or entity can do with a property. They are often used in commercial real estate to prevent competitors from operating in an area.
Why the Changes?
Amendments to the Competition Act were driven by concerns about rising living costs, particularly in the grocery sector. Restrictive covenants have been criticized for limiting consumer choice and keeping prices high by reducing competition.
The revised Act now allows the Competition Bureau to investigate agreements that may harm competition, including those between landlords and tenants. This marks a significant shift, as landlord-tenant relationships weren’t traditionally seen as subject to competition law enforcement.
Recent Investigations
The Competition Bureau’s interest in restrictive covenants isn’t just theoretical. In June 2024, the Bureau launched a formal investigation into Sobeys and Loblaw, two major grocery chains, regarding their use of exclusivity clauses in Halifax.
These clauses were allegedly preventing smaller competitors from opening stores in the same shopping centers, potentially harming competition and consumer choice. This probe signals that such practices will be closely scrutinized going forward.
What’s at Stake?
The penalties for violating the amended Competition Act can be severe. If restrictive covenants are deemed anti-competitive, the Competition Tribunal can:
Ban the use or enforcement of the covenant to restore fair competition.
Impose hefty fines, ranging up to $25 million or three times the financial benefits derived from the covenant.
Force actions to restore competition, such as requiring the sale of assets or other remedies.
These measures are designed to deter anti-competitive practices and ensure a fairer market.
Broader Implications
While grocery retailers are currently in the spotlight, these changes could ripple across the entire retail sector. Many leases in shopping centers, from clothing stores to fitness facilities, include similar exclusivity clauses.
In response, some retailers have begun proactively waiving exclusivity terms in existing agreements to reduce legal risks. Landlords and tenants should carefully review their leases to ensure compliance with the updated law.
Conclusion
The landscape of retail leasing is shifting. Restrictive covenants, once a standard tool in lease negotiations, are now under the microscope. To stay ahead, landlords and tenants need to adapt to these changes and prioritize transparency and competition-friendly practices.
Source: Lawson Lundell LLP
