Breaking Up an Exclusive Relationship: The Impact of Bill C-56 on Commercial Leases

By: Arturo Pugliese & Jenna Morley

Many commercial tenants seek to include an exclusive covenant in their lease, which grants the tenant the exclusive right to operate a specific business or sell certain products within a specified area. An exclusive covenant is designed to protect the tenant’s market share and investment in the location by restricting the landlord from leasing to the tenant’s competitors.

Often, a commercial lease will state that the landlord is not required to enforce the exclusive covenant if, by doing so, the landlord would be in breach of any laws, or if the covenant would give rise to an offence under the Competition Act [1]. While the Competition Act is often cited in commercial leases, its application to exclusive covenants has received limited consideration by the courts to date.

The recent enactment of the federal Affordable Housing and Groceries Act [2] (formerly known as Bill C-56) brings the intersection of competition laws and exclusive covenants squarely into focus. With the relevant changes set to target anti-competitive agreements in the retail sector, landlords and tenants alike will need to evaluate the potential implications of the Affordable Housing and Groceries Act on their leases.

The Affordable Housing and Groceries Act, which received Royal Assent on December 15, 2023, amends the Competition Act to enhance competition and help stabilize prices for Canadians, particularly in the grocery sector. Of particular interest, the Affordable Housing and Groceries Act amends Section 90.1 of the Competition Act, which pertains to anti-competitive agreements or arrangements. Previously, Section 90.1 provided that if the Competition Tribunal finds that an agreement or arrangement between two or more competitors is likely to prevent or lessen competition substantially in a market, the Tribunal can make an order to prohibit the person(s) from doing something under the arrangement or agreement or to require the person(s) to do something.

Through the changes introduced in the Affordable Housing and Groceries Act, the Competition Bureau will now be authorized to challenge an agreement or arrangement that has the significant purpose of preventing or lessening competition in any market, even if the agreement is not between two competitors. The stated intent of this amendment is to zero in on restrictive covenants and exclusive covenants in commercial leases that give grocers the ability to exclude actual or potential competitors from selling food products within a specified area.

On March 1, 2024, the Competition Bureau launched an investigation into the parent companies of Loblaw and Sobeys, the two largest full-service grocery chains in Canada, claiming that the grocery chains had negotiated “property controls” into their lease agreements, which were specifically designed to restrict competitor tenants and hamper competition in the grocery market. In June of this year, the Bureau was successful in obtaining two federal court orders, which require the companies to produce records and information relevant to the Bureau's investigations, including information about real estate holdings, lease agreements, and customer data. Empire Cos. Limited, the parent company of Sobeys, has indicated that the federal court’s ruling is under appeal.

While no conclusions have been made yet with respect to wrongdoing among Canada’s grocer giants, the Competition Bureau is paving the way for future investigations into potential anti-competitive leasing practices. Currently, it is unknown whether the Bureau intends to use its enhanced powers to challenge “property controls” in commercial leases more broadly across various retail sectors. It is also unclear what types of orders the Competition Tribunal intends to make in respect of commercial lease covenants that are deemed to have the “significant purpose” of preventing or lessening competition. However, the potential remains for widespread impacts on the negotiation of commercial leases across Canada.

Loopstra Nixon LLP will continue to monitor the effects of the Affordable Housing and Groceries Act on the commercial leasing industry and will provide further updates as more information becomes available. In the meantime, both landlords and tenants need to start considering alternative leasing strategies to work within these new rules.

[1] R.S.C., 1985, c. C-34.

[2] S.C. 2023, c. 31.