Exclusivity clauses and restrictive covenants have been common in commercial lease agreements, and for good reason. With many retail businesses running tight margins, it is often essential to a business’s bottom line to ensure that their competitors are not opening a storefront next door.
However, the federal government has made significant changes to the Competition Act, via two pieces of legislation in December 2023 (Bill C-56 (The Affordable Housing and Groceries Act)) and June 2024 (Bill C-59 (The Fall Economic Statement Implementation Act, 2023)). Section 90.1 of the Competition Act has now been amended so that as of December 15, 2024, the Competition Tribunal (the “Tribunal”) may prohibit any agreement with a significant purpose to “prevent or lessen competition in any market.” Previously, this section only applied to agreements between competitors. While the purpose of the changes was to reduce anti-competitive practices in sectors like grocery retail, the amendments apply broadly to all markets.
The legislation does not appear to go in depth as to what will be considered to “prevent or lessen competition in any market.” However, the Competition Bureau has released draft guidelines discussing the new amendments to the Competition Act (the “Guidelines”).1 The Guidelines address “competitor property controls,” which is defined as “restrictions on the use of commercial real estate.” The Guidelines focus on exclusivity clauses and restrictive covenants. However, the Guidelines note that other types of restrictions may also raise issues under the Competition Act.
The Guidelines define exclusivity clauses as:
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.
The Guidelines define restrictive covenants as:
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 Guidelines note that such property controls can be justified in limited circumstances “if they are necessary for a firm to make investments that increase competition, such as to enter a market.” However, in all cases, the property controls must be as limited as possible. The Guidelines encourage businesses to consider following certain criteria to determine whether property controls violate the Competition 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 indicate that some restrictions “can be justified because they increase competition overall, such as where they protect incentives for a retailer to make investments in order to enter a market.” They give the example of a limited exclusivity clause which is actually pro-competition because without the exclusivity clause, no retailer of that kind would want to make the necessary investments or become a tenant without it. However, the Guidelines warn lessors to consider if there may be other tenants who could have a less restrictive exclusivity clause, or no exclusivity clause at all.
Importantly, the Guidelines note that because of the long-lasting nature of restrictive covenants, and the fact that they apply to the land itself, they will generally not be justified outside of “exceptional circumstances.” The Guidelines do not expand on what “exceptional circumstances” would be.
Under section 90.1, the Tribunal is granted broad power to order actions which are reasonable and necessary to overcome the effects of the agreement. Additionally, the Tribunal may order significant administrative monetary penalties. For the first order under this section, the Tribunal may order a person to pay the greater of $10 million or three times the value of the benefit derived from the agreement. Further, with the new changes, the Competition Bureau may investigate tenants and lessors.
Remedies for anti-competitive property controls are even more severe if a firm is “dominant,” meaning it is able to exercise a substantial degree of market power. The Guidelines set out the following factors to consider if a firm is dominant:
- The ability to restrict competitors or competition;
- The presence of effective competitors, which we often consider based on market share;
- Barriers to entry in the market, including barriers to entry created by the competitor property control;
- The position of the firm in the broader industry; and
- Evidence of bargaining leverage, including the ability to seek the competitor property control.
The Guidelines note that restrictive covenants used by dominant firms will be considered “to be an anti-competitive business practice in almost all cases.”
Currently, only the Commissioner may bring applications to the Tribunal regarding anti-competitive agreements under s. 90.1 of the Competition Act. However, the amendments brought under the Fall Economic Statement Implementation Act, 2023 will allow any person (i.e. private litigants) to apply for leave to make an application before the Tribunal regarding anti-competitive agreements, beginning June 20, 2025 (see s. 272 of the Fall Economic Statement Implementation Act, 2023). The Tribunal may grant leave to private parties “if it has reason to believe that the applicant is directly and substantially affected in the whole or part of the applicant’s business by any conduct referred to in one of those sections that could be subject to an order under that section or if it is satisfied that it is in the public interest to do so” (see s. 254 of the Fall Economic Statement Implementation Act, 2023).
For more information on the recent amendments to the Competition Act and to discuss your specific circumstances, please contact Bradley Cronquist at [email protected], or Leah Sorge at [email protected].
1. See Government of Canada, “Competitor property controls and the Competition Act,” (August 7, 2024) online at: https://competition-bureau.canada.ca/how-we-foster-competition/education-and-outreach/competitor-property-controls-and-competition-act
