Following recent amendments to the Competition Act (the "Act"),1 the Competition Bureau (the "Bureau") released preliminary property control guidelines ("PPCGs") describing its planned enforcement approach for "property controls" in commercial leases.2 The PPCGs signal that the Bureau is taking an aggressive approach for challenging property controls, which may not be supported by the requirements of the Act.
According to the Bureau, restrictive covenants are not justified "outside of exceptional circumstances" and tenant exclusivity protections are justified only in "limited circumstances", with both types of clauses being subject to potential challenge, as discussed below.
However, the PPCGs underplay the challenges the Bureau may have in proving the elements needed for either of the two relevant sections of the Act to apply to these types of provisions in commercial leases:
- For abuse of dominance claims, the Bureau minimizes the challenge of proving dominance (and in particular proving joint dominance absent any agreements between the alleged jointly dominant players) as well as the difficulty it may have in proving that "non-justified" property controls represent a practice of anti-competitive acts;
- For anticompetitive collaborations between non-competitors, the Bureau minimizes the challenge of proving that a significant purpose of all or part of a commercial lease agreement containing a property control is to prevent or lessen competition and that the property control has or will lead to substantial competitive harm.
The Bureau is requesting feedback on the PPCGs by October 7, 2024.3 The Bureau recognizes that the law will continue to evolve as cases involving the amended Act and property controls get litigated, so the PPCGs may change over time.
What are "Property Controls"?
The PPCGs define "property controls" as "restrictions on the use of commercial real estate" focusing on (but not limited to) (1) tenant exclusivity clauses4 and (2) restrictive covenants.5
An Important Qualifier on What Needs to be Proven
The first sections of the PPCGs describe how businesses should review their property controls to see if they may raise issues under the Act, and the Bureau discusses circumstances where property controls can be "justified". We describe these sections in the latter portion of this bulletin. The PPCGs imply that if a property control cannot be "justified" because it is anticompetitive in nature, it is at risk of being challenged under the Act, and businesses should modify their commercial leases to remove or amend such provisions.
To support the Bureau's new enforcement approach, the PPCGs explain that property controls have been subject to international enforcement activity in the competition law regimes of both New Zealand and the United Kingdom. However, those countries have different legal frameworks than Canada's Competition Act that appear to have lower thresholds and/or reduced requirements for challenging property controls (or certain types of property controls).
While the Bureau sets out all the elements that need to be proven to challenge property controls under the relevant provisions of the Act, namely the abuse of dominance provisions (sections 78-79) and the anticompetitive collaborations provision (section 90.1), those elements are given little airtime in the PPCGs. The main portions of the PPCGs may lead businesses to mistakenly believe that their leases could be challenged solely based on whether a property control can be "justified".
For abuse of dominance claims, the Bureau must challenge the conduct of a party who is dominant or multiple parties who are jointly dominant in a market. The potential concerns about property controls in commercial leases will typically apply to tenants who are allegedly benefiting from reduced competition. However, it can be quite difficult to prove dominance. Proving joint dominance is even more challenging and could require showing at least some level of tacit agreement or coordination between the alleged jointly-dominant parties. Moreover, to make out an abuse case, the Bureau will need to prove that the property control(s) represent(s) a practice of "anti-competitive acts" and/or that the property control(s) has (have) led to substantial competition harm. The PPCGs imply that if a property control does not meet the Bureau's "justification" threshold, it will necessarily represent a practice of anti-competitive acts, but that conclusion is by no means certain under the Act.
For claims under the anticompetitive collaboration provision that will allow the Bureau to challenge anticompetitive agreements made between non-competitors (which takes effect in its amended form in December 2024), the Bureau will not have to prove dominance. However, the Bureau will have to prove that a significant purpose of the agreement or part of the agreement is to prevent or lessen competition, and it will have to prove that the property control has harmed or is likely to harm competition substantially. Proving both these elements may be difficult.
We recommend that tenants and landlords consider a full analysis of all the elements of the abuse of dominance and anticompetitive collaboration provisions before relying on the PPCGs' justification test alone as the basis for amending their commercial leases.
What are the Bureau's Criteria for Analyzing Property Controls?
With the caveats above, we briefly touch on how the Bureau advises tenants and landlords to review their property controls. The PPCGs advise businesses to consider the following questions to reduce the risk that their property controls may be offside the Act:
- Is the property control necessary to allow a new business to enter the market or to encourage a new investment?
- Could the property control last for a shorter period of time? Does the property control restrict a future owner of the land or benefit a previous tenant?
- Could the property control cover fewer products or services?
- Could the property control cover less geographic area?
- Is there another suitable tenant who would require a less restrictive exclusivity clause or no exclusivity clause at all (having regard to the nature of the other tenant's business, their effectiveness at drawing customers to the development and the development's tenant mix)?
These questions suggest that the Bureau only wants to view property controls as "justified" when they are as limited in scope as possible and offer a clear pro-competitive benefit. In our view, the Act allows for more flexibility, and there could be many types of property controls that are neither anticompetitive nor pro-competitive which would not raise any concerns under the Act.
When Does The Bureau Think Exclusivity Clauses and Restrictive Covenants Can Be Justified?
Keeping in mind that exclusivity clauses are common, especially in retail settings, the PPCGs indicate that such controls are only justifiable if they lead to increased competition and/or to the extent they are required to encourage new entry and investments (e.g., where there would otherwise be no entrants). For example, a pro-competitive property control could be one where a tenant only agrees to enter a property due to an assurance from the landlord that no similar retailers will be leasing space within that plaza, for a reasonable period of time.
The PPCGs assert that restrictive covenants are almost always not justified, and it would take an exceptional circumstance for such a property control to be appropriate.
Next Steps for Businesses
Businesses are advised to review their commercial leases to identify any competitor property controls that may go beyond what would be needed to serve a pro‑competitive purpose. If such property controls are identified, businesses should consider whether those provisions are at risk of being challenged under the Act.
It should be noted that private party litigants can apply to the Competition Tribunal for leave to challenge alleged abuses of dominance and, as of June 2025, anticompetitive collaborations. Beginning in June 2025, the additional potential remedy of disgorgement of the benefits realized by firms that breach these provisions will provide a further incentive for private applicants. Therefore, landlords and tenants should also consider whether there is risk that a person who believes they have been harmed by a property control may launch their own challenge.
Footnotes
1. See McMillan's previous bulletins, in particular our bulletin from March 2024 on how leasing arrangements may be impacted by the recent Competition Act amendments. Also see our June 2024 overview of the recent changes to the Competition Act, our deep dive into the new greenwashing provisions, and our deep dive into the amendments to the merger regime.
2. Competition Bureau, "Competitor property controls and the Competition Act" (2024-08-07).
3. For assistance with submitting feedback on the PPCGs on behalf of your business, please reach out to McMillan's Competition & Antitrust Group and/or McMillan's Commercial Real Estate Group.
4. Tenant exclusivity clauses are provisions in leases limiting whether or how property can be used by competitors to a tenant. These include clauses prohibiting a lessor from leasing a unit or property to a competitor of a tenant, clauses limiting the types of products that other tenants can sell, and clauses providing incentives to lessors not to lease to a tenant's competitors.
5. Restrictive covenants are restrictions on land preventing a purchaser or owner of a commercial property from using the location to operate or leasing it to a third party to operate certain types of businesses that compete with a previous owner. Because this type of control is tied to land, it can create long-lasting areas where certain businesses are not permitted to operate.
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2024