Canada’s Competition Bureau Issues Updated Guidance on Property Controls
Canada’s Competition Bureau (the “Bureau”) has issued updated guidance on how it will apply recent amendments to the Competition Act (the “Act”) to its property controls guidelines, with a focus on exclusivity clauses and restrictive covenants in commercial real estate.
The guidance builds on the Bureau’s earlier Preliminary Property Controls Guidelines and related public consultations and clarifies how the new law applies to commercial tenants and property owners. The guidelines also reflect amendments to the Act that expand its civil competitor provision to include, not only agreements between competitors, but also those between landlords and tenants if they are intended to reduce or prevent competition in whole or in part.
Focus on Property Controls
Property controls can restrict the use of commercial real estate. The guidelines aim to challenge unjustified stifling of competition through the use of two specific property controls:
- exclusivity clauses, which are clauses generally found in commercial leases that prevent landlords from leasing to competing businesses or restrict how certain products can be sold; and
- restrictive covenants, which prevent purchasers or owners of commercial property from certain uses.
Key considerations for permitting these property controls are whether the control has an anti-competitive purpose and if it is likely to prevent or significantly reduce competition.
Justification Analysis
The justification of property controls is a central factor in the updated guidelines. The Bureau evaluates whether a property control is justified by assessing whether it has a narrow scope and is reasonably necessary to support a pro-competitive objective. If a control is deemed pro-competitive, it will not be challenged. The Bureau assesses three key elements to determine whether a property control is justified:
- Timeframe: Is the duration of the control no longer than necessary to support entry or investment?
- Geographic Scope: Does the property control cover the smallest geographical area possible?
- Product and Service Scope: Could this property control achieve its objective with fewer restricted products or services?
The Bureau also considers whether the property control is necessary to support market entry or new investment, and if less restrictive alternatives exist. The Bureau will evaluate whether a restriction is harming competition by focusing on barriers to entry or expansion.
A stricter criterion governs the acceptability of restrictive covenants. The Bureau indicates that exclusivity clauses will only be justified in “limited circumstances,” while restrictive covenants are justifiable exclusively in “exceptional circumstances.”
Enforcement Framework
The Bureau may challenge unjustified competitor property controls primarily through the use of sections 79 and 90.1 of the Competition Act. Section 79, the abuse of dominance provision, typically focuses on the party that benefits from the restriction, which is often the tenant in a lease or the vendor in a restrictive covenant. A property control may be challenged under this section if it has an anti-competitive purpose. Section 90.1 focuses on agreements that have harmed or are likely to harm competition. This extends to agreements beyond non-competitors if they substantially lessen competition or have anti-competitive purposes. All parties to an agreement, including tenants, landlords, sellers, and buyers, may be subject to investigation if a challenge is initiated.
While the updated guidelines reflect a more tempered approach than the Preliminary Property Controls Guidelines, they confirm that the safest option to avoid enforcement risks is to ensure any property controls align with the elements of the Bureau’s justification assessment. Although the Bureau acknowledges that property controls can be pro-competitive, parties should clearly indicate any such rationales.
Notably, the Bureau has not suggested exemptions for property controls established before the legislative amendments. Both the preliminary and updated guidelines advise that businesses review any property controls in their agreements to ensure compliance with the Competition Act.
The Future of Property Controls?
Private individuals can also apply to bring applications under sections 79 and 90.1 of the Act to challenge certain agreements with permission from the Competition Tribunal (the “Tribunal”) where they can show that either (i) they are directly and significantly impacted by actions that could be subject to an order under the applicable provision, or (ii) the application is in the public interest. Private parties who seek to challenge property controls before the Tribunal will not be bound by the Bureau’s enforcement approach, although it may be considered.
Alongside releasing its guidance, the Bureau continues to investigate existing property controls, particularly in the grocery industry. In a move the Bureau calls a “milestone for competition in the grocery industry,” Loblaws has committed to ending the use of property controls across Canada. Although the broader implications of this change for landlords and businesses are not yet clear, the Bureau will closely monitor this process.
The above provides only an overview and does not constitute legal advice. If you have questions or require assistance ensuring compliance with the Competition Act with respect to exclusivity clauses or restrictive covenants, a member of our Commercial Real Estate team would be happy to assist you.
