Covenants in the crosshairs of the Commerce Commission

  • Legal update

    15 September 2022

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From supermarkets to building supplies merchants and the wider economy, restrictive covenants on land and exclusivity lease covenants are well and truly in the crosshairs of the Commerce Commission.

Restrictive covenants and exclusivity clauses in leases are coming under increased scrutiny because the Commerce Commission is concerned about how they are used to control freedom of competition in various markets.

If you benefit from a restrictive land covenant or an exclusivity clause in a lease, or are contemplating including one in new documentation, our experts would be happy to advise on how the changing competition landscape may impact you. Please get in touch.

New legislation restricting anti-competitive covenants in the grocery sector

Landowner and tenant retailers in the grocery sector need to be aware of recent changes to the Commerce Act 1986. Somewhat ironically, the changes restrict those retailers’ ability to restrict the actions of others. Other sectors should also be aware that the Commerce Commission has indicated the grocery sector will not be the only sector that will be subject to greater scrutiny.

On 29 June 2022 the Commerce (Grocery Sector Covenants) Amendment Act 2022 added new sections 28A-28D into the Commerce Act 1986 (Act). The new sections (Additions) expand the existing provisions of sections 27 and 28 of the Act by prohibiting restrictive covenants on land and exclusivity lease covenants in favour of designated grocery retailers that are deemed to substantially lessen competition.

“Designated grocery retailer” is defined in the Act. Currently, it only includes companies in the Foodstuffs and Woolworths groups, but the Governor General has powers to include others.
In the context of the Act, a restrictive covenant is an instrument registered on the title to a property that restricts what current and future owners of the land can do on and with their land. Similarly, an exclusivity covenant in a lease is a clause (usually for the benefit of an anchor tenant) restricting the landlord’s ability to lease other premises to competing retailers.

The Additions highlight a closer interaction between two areas of law, competition and property. While the changes have an impact on how property is dealt with, their primary purpose is to control anti-competitive behaviour in a specific sector of the retail market.

From the grocery sector to building supplies and beyond

The Additions result from recommendations made by the Commerce Commission following its market study into the retail grocery sector.

The Commission has also completed a similar market study of the retail fuel market and is currently running another in relation to the residential building supplies market.  In each of these studies, the Commission has raised concerns about the adverse effect that restrictive covenants and exclusivity clauses in leases have on competition. The Commission’s willingness to take action in relation to grocery retail suggests we can expect similar recommendations in relation to these other sectors in the future.

We also understand that the Ministry of Housing and Urban Development (HUD) is considering how restrictive covenants on land act as a barrier to residential development and affect housing affordability.  These covenants are often used by developers to control the look and feel of residential developments and also maintain value for the developer. However, they are not always consistent with the principles of affordable housing.  HUD may well follow the Commerce Commission by making recommendations to control the use of restrictive covenants on land in relation to residential developments.

More regulatory scrutiny on the terms of property documents

Restrictive covenants and exclusivity clauses in leases are already prohibited under sections 27 and 28 of the Act if they have the purpose of, or are likely to, substantially lessen competition in the market. Given the growing concerns around the impact of these provisions, we expect the relevant terms of existing documentation to be subject to more scrutiny than ever before.

A range of factors are relevant when determining whether a restrictive land covenant or an exclusivity clause in a lease will substantially lessen competition in the market (and therefore be prohibited under the Act). These include:

  • the locality in which the retailer benefiting from the covenant is operating;
  • accessibility to other retailers and the availability and practicality of ordering the same product online; and
  • how the benefiting party seeks to apply the terms of the covenant or exclusivity clause.
Accordingly, each set of circumstances and the underlying documentation need to be considered on an individual basis.
The industry standard lease may be unaffected

The Auckland District Law Society’s form of lease remains the most widely used form of commercial lease across the country. The current edition contains clauses that restrict the uses to which tenants can put the premises. In particular, the tenant must obtain the landlord’s consent to use the premises for anything other than the specified business use. The landlord is allowed to withhold consent where the proposed new use is in substantial competition with the business of other occupiers of the same property.

Few leases adopt the ADLS standard terms without amendments so, again, each lease and its effect on competition in the relevant market would need to be considered individually.

This article was co-authored by Erin Wylde, a Solicitor in our Property team