Thinking of going exclusive? Competition Act amendments target property controls

On December 15, amendments to the Competition Act (Canada) (the Act) that were intended at least in part to target competitor property controls that restrict the use of commercial real estate – specifically exclusivity clauses and restrictive covenants – came into effect. The Competition Bureau (the Bureau) generally views these property controls as anti- competitive, but admits they can “in limited cases” be justified if they enhance competition (e.g., by encouraging investment) and are limited in duration and scope.

In light of these amendments, Loblaws has called for an industry-wide end to restrictive property controls, stating it will eliminate them if competitors do the same, while Walmart Canada is unilaterally removing the covenants nationwide.

While large grocery businesses have come under the most scrutiny to date, businesses in all sectors should approach competitor property controls in commercial real estate agreements with caution.

What are competitor property controls?

The Bureau is concerned with two main types of property controls:

• Exclusivity Clauses, typically found in commercial leases, limit the use of a property by a tenant’s competitors, either by preventing the landlord from leasing nearby space to a tenant’s competitor (or incentivizing them not to) or otherwise restricting the sale of products. An exclusivity clause may prevent a landlord from leasing any space within a certain proximity of an existing tenant’s retail space to a competitor of that tenant.
• Restrictive Covenants limit how owners may use property. For example, a land purchase agreement may provide that the purchaser/owner cannot use the location to operate a certain type of business that competes with the seller/previous owner’s business. According to the Bureau, restrictive covenants in particular will almost never be justified.

How was the Act amended to address property controls?

The Act contains two main provisions that can be used to regulate competitor property controls (among other things):¹

• Competitor Collaborations: Section 90.1 applies to all types of agreements or arrangements that could prevent or lessen competition substantially in a given market. It previously only applied to agreements between competitors. Since exclusivity clauses and restrictive covenants are generally entered into by non-competitors (e.g., landlords and tenants), the Bureau has not historically used section 90.1 to target competitor property controls. However, on December 15, 2024, section 90.1 was expanded to capture all types of agreements that do not involve competitors if a significant purpose of the agreement or any part of it is to prevent or lessen competition in a market. The Bureau has signaled it will evaluate competitor property controls under section 90.1 where there is proof that the agreement has the effect of harming competition.²
• Abuse of dominance: Other recent changes to the Act expanded the abuse of dominance provisions to make it easier to challenge conduct, including where only anti-competitive intent or effect can be made out (though the Bureau would still have to make out the other elements of abuse of dominance, namely that the business in question is dominant in a market).

Penalties for anti-competitive behaviour under the Act have increased significantly recently to include substantial administrative monetary penalties,³ as well as the possibility of private applications for damages,⁴ making compliance all the more important.

Does the Bureau view all property controls as anti-competitive?

According to the Bureau’s guidelines on competitor property controls, if it can be shown the property control enhances competition and is limited in duration and scope, then it may be justified. As an example, an exclusivity clause may encourage investment or entry into a market if no retailer would otherwise make the necessary investments to become a key tenant in a new shopping plaza without the comfort a property control provides. On the other hand, the Bureau considers that restrictive covenants will not be justified outside of “exceptional circumstances”.⁵ These statements arguably downplay that the Bureau would have to make out the other elements of the provision in question, including, in respect of section 90.1, that the agreement prevents or lessens competition substantially in a market.

Both the duration of a competitor property control and the scope of the restriction it imposes are key considerations. According to the Bureau, property controls that last for a shorter time and cover a smaller geographic area are more likely to be justified.

Has the Bureau investigated use of competitor property controls before?

Earlier this year, the Bureau announced it had obtained court orders against the parent companies of two grocery chains requiring them to produce records and information that the Bureau says it will use to determine whether the companies are “imposing anti-competitive restrictions” on the use of real estate that impact competition in the retail sale of food. The Bureau, which has not yet made any conclusions of wrongdoing, says it plans to determine the “nature and extent of property controls in Canada.”

How have retailers responded?

Loblaws has stated it is in favour of eliminating commercial property controls in the grocery industry and is willing to stop using the covenants, but only if other grocery businesses do the same. The company has indicated that although the property controls were originally intended to incentivize development, they may in some circumstances reduce options for customers. Others have called on the government to eliminate exclusivity clauses, rather than leaving the decision to individual businesses. Walmart Canada also announced last month that it will remove restrictive property controls nationwide, stating its decision was influenced by "recent changes in Canada," likely referencing the amended Act and/or Bureau investigation.

How will these changes impact existing leases?

The amendments will permit the Bureau to take enforcement action on competitor property controls in existing agreements – though no action can be taken on agreements that have been terminated for more than three years.

Both tenants and landlords should carefully review existing leases for any property controls that may raise compliance concerns, using the questions set out below. Problematic clauses may need to be removed or walked back. Some businesses in high-risk sectors may also choose to adopt Walmart’s approach of notifying contracting parties it is unilaterally waiving the restrictions.

What should businesses consider in leases and agreements going forward?

Going forward, tenants, landlords, and those buying or selling commercial real estate should carefully review any property control clauses to ensure they comply with the new provisions of the Act. In particular, businesses should consider the following questions with their legal counsel:

• Is the property control reasonably necessary to serve a pro-competitive purpose (e.g. allowing a new business to enter the market or incentivizing new developments or investments) or is its purpose really to restrict competition?
• Is the business dominant in the market?
• Has the property control harmed or is it likely to harm competition in a particular market or area?
• Could the property control last for a shorter time and still be effective in its pro-competitive purpose?
• Could the property control cover fewer products or services or a small geographic area and still be effective in its pro-competitive purpose?

Businesses that frequently enter into leases or property purchase/sale agreements should also review their standard form contracts to identify potentially problematic clauses.