Competition law: ‘Exclusionary provisions’ in retail lease agreements – the warning!

The Commission initiated a market inquiry into the South African ”grocery retail sector” in November 2015, and part of which inquiry dealt with ‘exclusionary clauses’ in lease agreements.  An ‘exclusionary clause’ in a long-term lease generally reads that the tenant shall enjoy exclusivity in that no other competitor will be allowed to rent a retail space in the same property or building, save with the prior written consent of the tenant.

The Commission concluded that national supermarket chains resorted to ‘exclusionary clauses’ in long term leases, thereby allowing dominant retailers to retain market power, to the exclusion of smaller, independent stores. This was viewed as a distortion of competition between the national supermarket chains, wholesalers and independent retailers.

In the Commission’s final report, published in November 2019, the inquiry concluded and recommended the following remedial steps be taken:

1. The sustained use of exclusive long-term contracts restricts competition and goes against the objectives of the Competition Act;
2. National supermarket chains must, with immediate effect, cease from enforcing exclusivity provisions, or provisions that have a substantially similar effect, in their lease agreements against SMME’s; speciality stores; and other grocery retailers (including the emerging retailers) and especially in shopping centres located in non-urban areas;
3. No new leases or extensions to leases by grocery retailers may incorporate exclusivity clauses (or clauses that have the same effect) or clauses that may serve to restrict the product lines, store size and location of other stores selling grocery items within the shopping centre; and
4. the enforcement of exclusivity by the national supermarket chains as against other grocery retailers must be phased out by the next extension of the lease or within five years from the date of the publication of the Commission’s Final Report (i.e. five years from 25 November 2019) whichever is the earlier.

The enquiry by the Commission focused only on the ”Grocery Retail Sector” and other retail spheres were not considered.

By law, and in terms of a contractual agreement, exclusionary clauses can still be enforced, the Commission’s findings are not promulgated in law. However, the Inquiry recommended that its recommendations is achieved through voluntary undertakings by the national supermarket chains. The Commission will continue the Inquiry’s process and secure voluntary compliance with the recommendations, failing which legislation in the form of regulations or a code of practice will be introduced.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)