HG Competition & Trade Practices Alert: Restrictive covenants in commercial leases – could they breach competition laws? - 10 February 2015

Previous HopgoodGanim alerts have considered the enforceability of “permitted use” clauses and other restrictive covenants in commercial leases from the perspective of landlords responsible for imposing these restrictions on their tenants.

These types of clauses potentially raise issues under the general anti-competition provisions and “exclusive dealing” provisions of the Competition & Consumer Act 2010 (CCA).  However, it is sometimes overlooked that these provisions can apply equally to clauses inserted into commercial leases at the request of the tenant. 

Special Counsel Brett Bolton discusses further. 

Restrictive covenants in commercial leases under the Competition and Consumer Act

The section of the CCA which applies specifically to covenants in leases and other real estate transactions (Section 45B) makes it unlawful for a landlord and tenant to agree to a provision which is likely to have an anti-competitive effect or purpose.  In relation to leases, a covenant which restricts the right to use the premises for certain purposes will be unlawful if it has the effect of substantially lessening competition in any market in which either party operates. This issue gets interesting because while the CCA states that “exclusive dealing” includes restrictions or obligations imposed by a landlord on a tenant (Section 47(8)); what is the situation where the tenant is able, for whatever reason, to negotiate for the imposition of restrictions or obligations on the landlord? 

For example, a shopping centre lease may contain a condition requiring the landlord not to grant another lease in the shopping centre for the purposes of any sports, amusement or recreation usage.  Not only would such a provision be caught by section 45B, it could also constitute a form of “exclusive dealing” under section 47(4).  Section 47(4) states that exclusive dealing can include the situation where a tenant acquires services (i.e. the lease) on the condition that the person from whom the tenant acquires the services (i.e. the landlord) will not supply services (i.e. another lease) of a particular kind or description to another party (i.e. the potential lessee of other premises in the centre).

However, the inclusion of such a restrictive covenant in a commercial lease will not, of itself, expose the tenant to liability under section 45B or section 47.  Before there can be liability under either section, it must be demonstrated by the party asserting a breach that the restrictive covenant has, or is likely to have, the effect of substantially lessening competition in the relevant market.

Market definition

The issue of market definition is rarely easy and is a matter on which reasonable economists can and do differ.  However, the identification and definition of the relevant market is crucial. As a general rule, the smaller or narrower the market (in product or geographic terms), the higher the risk of a restrictive covenant in a lease being held to have a substantial anti-competitive effect in that market.

In relation to shopping centre leases (especially large regional shopping centres), a question arises as to whether they are capable of constituting a separate geographic market.

For example, in one case, the Judge was prepared to treat the Queen Victoria Building in Sydney as its own geographic market for the purposes of an interlocutory hearing.  In another case ( ACCC -v- Liquor Land (Australia) Pty Ltd), Allsop J (as his Honour then was) concluded that the market was to be identified by reference to an area of approximately two kilometres around the relevant supermarket in each locality.

In a recent English decision, the Court took a very narrow view of the geographic scope of the market for “convenience goods” and judged it to be a “relatively short walking distance” from the small strip of retail shops in question.  It is easy to see an Australian Court adopting a similarly narrow definition if the evidence indicates that consumers don’t usually travel further than a couple of kilometres to acquire products and services such as food and groceries, petrol, alcohol or medical services.

As a result, provisions in commercial leases and shopping centre leases stating that the landlord will not allow other tenants to lease premises in the shopping complex without the approval of existing tenants, could be unenforceable under the CCA if challenged.  Indeed, the Australian Competition and Consumer Commission’s (ACCC) view is that such arrangements substantially affect competition (particularly in regional and more remote areas) because they allow present tenants to exclude potential competitors to their business.

Authorisation of restrictive covenants

Landlords and tenants however can seek authorisation from the ACCC for restrictive covenants that substantially lessen competition. The ACCC will grant authorisation if it is satisfied that the proposed restriction has some significant public benefit that outweighs the anti-competitive detriment.  However, the authorisation process is time-consuming, cumbersome and expensive, and the ACCC must be satisfied that the benefits from the proposed restriction are “public” (and not, in reality, a private benefit to the party seeking authorisation). 

For more information or discussion, contact the HopgoodGanim Competition & Trade Practices team. 

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