Overview
On August 7, 2024, the Competition Bureau ("Bureau") issued draft guidance on the use of Property Controls (i.e., exclusivity clauses and restrictive covenants) in commercial real estate. The guidelines were developed in response to the significant Competition Act ("Act") amendments introduced by Bill C-56 (The Affordable Housing and Groceries Act ("Bill C-56")), which passed in December 2023, and Bill C-59 (the Fall Economic Statement Implementation Act ("Bill C-59")), which received royal assent in June 2024. Together, Bill C-56 and Bill C-59 have expanded the scope of the Act's abuse of dominance and anti-competitive collaborations provisions, with important consequences on property controls in the commercial real estate sector.
Competitor property controls are restrictions on the use of commercial real estate. The Bureau's draft guidelines address two common forms of property controls:
- Exclusivity clauses, which prohibit a landlord 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; and
- Restrictive covenants, which prevent 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 Bureau has provided a set of basic questions for businesses to consider when using property controls:
- 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?
Enforcement under the Abuse of Dominance Framework
The Bureau considers that there are limited circumstances where property controls may increase overall competition, and may therefore escape enforcement action under the abuse of dominance regime. In particular, the Bureau's guidelines provide that an exclusivity clause may be pro-competitive if, for instance, no retailer would otherwise make an investment to become a key tenant in a new shopping plaza. Provided that the scope of the exclusivity clause does not go further than necessary to encourage new entry or to allow a tenant to make investments to develop their storefront, the Bureau would consider such a restriction to be justified.
On the other hand, the Bureau considers the use of restrictive covenants by dominant firms to be an anti-competitive business practice in almost all cases.
Notably, the preliminary guidelines list factors that the Bureau will consider to determine whether a firm, or group of firms in a joint dominance scenario, is dominant, and indicate that the scope of the property control itself (in terms of covered products, competitors or geographic areas) may be taken into account when assessing dominance.
Absent any evidence of a pro-competitive justification, competitor property controls used by dominant firms will be deemed anti-competitive. The Bureau's proposed guidelines state that, in most cases, the party who proposed or benefits competitively from the property controls will be the target of an abuse of dominance investigation.
Enforcement under the New Anti-Competitive Collaboration Provision
As currently drafted, section 90.1 of the Act only applies to agreements that include actual or potential competitors (i.e., horizontal agreements). Pursuant to Bill C-56, effective December 15, 2024, both an agreement between competitors (without reference to its purpose) and any agreement, regardless of the competitive relationship between the parties (therefore including all vertical agreements), for which "a significant purpose" is to "prevent or lessen competition in any market" may be subject to enforcement action and remedies ordered by the Competition Tribunal (the "Tribunal").
The Bureau's proposed guidelines provide limited insight with respect to its enforcement approach under the new section 90.1 framework. The guidelines only confirm that section 90.1 could apply to competitor property controls where there is proof that the agreement has the effect of harming competition and that the Bureau will typically consider all parties to the agreements (i.e., the tenants and lessors) to be the targets of any section 90.1 investigation.
With the changes introduced by Bill C-59, parties that agree to competitor property controls may now face harsher penalties. In particular, where an agreement infringes section 90.1, the Tribunal can not only make a prohibition or behavioural order (as previously), but also make structural orders, such as the divestiture of assets or shares, or impose administrative monetary penalties, of up to $10 million (or $15 million for subsequent infringements), or up to "three times the value of the benefit derived from the agreement or arrangement" or, if that amount cannot be reasonably determined, up to 3% of the person's annual worldwide gross revenues.
Conclusion
The Bureau's preliminary guidelines is subject to public consultation until October 7, 2024. The current draft is rather general, and it remains to be seen whether the final guidelines, which will benefit from the consultation, will inform commercial real estate arrangements and provide much needed practical clarity on the new changes to the Act.
To view the original article click here
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.