Following an investigation into Loblaws' and Sobeys' parent companies, Canada's Competition Bureau says businesses taking advantage of property controls in commercial real estate could be hit with monetary penalties.

On Thursday, the independent law enforcement agency in charge of regulating competition in Canada unveiled its preliminary enforcement approach to competitor property controls.

The agency explained that property controls are restrictions placed on commercial real estate and can compromise competition by making it extremely difficult or "even impossible" for other businesses to open new stores.

Changes to the Competition Act impact how we approach anti-competitive controls on the use of commercial retail real estate.🏬

Today, we’re launching a public consultation that will help inform our guidance.

To provide feedback: https://t.co/QoNKnm1bAJ pic.twitter.com/zAYbmHdOuG

— Competition Bureau Canada (@CompBureau) August 7, 2024

Parliament recently made changes to the Competition Act and the bureau has outlined how the amendments could impact the way it enforces property controls.

"Our approach continues to develop. We may revise our approach as we gain more experience, as circumstances change, or as the law evolves," noted the Competition Bureau.

What do the changes to property controls focus on?

The new guidance addresses exclusivity clauses and restrictive covenants, the two main property control types.

The bureau said that these controls "insulate firms from competition" and therefore raise "serious competition concerns."

In a commercial lease, an exclusivity clause limits how land can be used by a tenant's competitor.

"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," stated the Competition Bureau.

Restrictive covenants are clauses that prevent or prohibit a commercial property purchaser or owner from using that location to lease to business operators that compete with that owner.

In June, the Competition Bureau advanced its investigations into Loblaws' parent company, George Weston Limited, and Sobeys' parent company, Empire Company Limited.

The court orders, which were granted by the federal court, require George Weston and Empire to surrender records about real estate holdings, lease agreements, customer data, and other related records.

"This information will help determine whether Sobeys and Loblaw are imposing anticompetitive restrictions on the use of real estate, known as property controls, that impact competition in the retail sale of food products," said the Competition Bureau in a previous statement.

"This includes examining whether they are restricting or excluding their competitors through exclusivity clauses and restrictive covenants."

When are competitor property laws justified?

The bureau says there are limited instances where competitor property controls can be justified because they may increase overall competition.

One example is when property controls “protect incentives for a retailer to make investments in order to enter a market,” the agency stated.

Exclusivity clauses are justified only when they "go no further than necessary" to support new entry or allow a tenant to invest in developing their storefront.

When a key tenant makes investments to open their store and customers to a plaza, that could also encourage competitors to open up shop in that plaza.

With more competitors, the key tenant may see the benefits of the investments they made in opening their store impacted, and their incentive to make further investments may decrease unless an exclusivity clause is in place.

The bureau added that restrictive clauses are "exclusionary" because they apply to the land. Due to their long-lasting nature, they often create environments that don’t allow a competitor to cooperate. These clauses are not considered to be justified "outside of exceptional circumstances."

Enforcement

The Competition Tribunal can issue an order to end anticompetitive behaviour if a dominant group participates in anticompetitive business practices or has the effect of harming competition.

The tribunal may also use other measures to restore competition or could issue an "administrative monetary penalty if the behaviours are both a practice of anticompetitive acts and have the effect of harming competition," said the Competition Bureau.

Enforcement measures can also be applied under the provision of anticompetitive collaboration. This is highlighted under Section 90.1 of the Competition Act and applies to agreements that could harm competition in the past, present, or "likely" in the future.

The tribunal has the power to take several enforcement measures, such as ordering monetary fines or prohibiting a person from carrying out activities related to the agreement if it finds that it involves at least two competitors and could harm the competition.

Currently, Section 90.1 doesn't apply to agreements that don’t involve competitors but the Competition Bureau says that could change as of December 15, 2024, "if the Tribunal finds that a significant purpose of any part of the agreement is to prevent or lessen competition in a market."

The bureau is currently seeking feedback on its preliminary guidance, and Canadians can submit their responses through this online feedback form by October 7.