It has been common knowledge in the South African property industry the past number of years that the Competition Commission has been investigating the issues surrounding exclusive longterm leases concluded between landlords of shopping centres and the grocery retailers. The Commission’s terms of reference were gazetted in October 2015, and its preliminary report was published recently. At this stage, there seems to be uncertainty amongst landlords and tenants alike regarding, specifically, exclusivity clauses contained in lease agreements, and their enforceability.
At the outset, it is important to note that the enquiry by the Commission was only focused on the Grocery Retail Sector. Therefore, it did not consider other retail spheres. Secondly, the Commission’s report contains recommendations only – no new legislation has been promulgated. It is, of course, so that if the Commission’s recommendations are ignored, it may commence enforcement steps. The importance of the report, however, lies in the fact that various principles regarding exclusivity are stated in the report. The principles can be applied to the relationship between landlords and other retail tenants.
Firstly, it is important to note that exclusivity provided to tenants may be either complete or partial. Complete exclusivity means that no other retailer offering competing merchandise may be allowed to take up space in the centre, during the existence of the protected tenant’s lease agreement. Partial exclusivity allows one or more specified exceptions to the blanket exclusivity, such as when Woolworths would allow a Checkers in the same centre. Partial exclusivity may also consist of limiting the store size, product lines or location of competitors.
The Commission found that longterm exclusive leases are anti-competitive, and that it has a detrimental effect on the ability of smaller retailers to challenge the existing large retailers. Accordingly, the Commission has recommended remedial action, which includes the following:
- Supermarkets must, with immediate effect, stop enforcing their exclusivity provisions in their lease agreements against speciality stores, such as butcheries or bakeries;
- No new leases for these supermarkets may include exclusivity clauses;
- Supermarkets must, within the next three years, phase out the enforcement of their exclusivity provisions against competing smaller retailers;
- The Commission will investigate the issue of different rental rates for different tenant types and premises sizes.
In light of the what has been stated, it is clear that exclusivity clauses should no longer be included in lease agreements. Even though these recommendations only pertain to supermarkets, it is quite clear that similar findings will be made in other retail sectors. Therefore, the best route would be to remove these clauses from all new leases being concluded.
Also, landlords should now safely be able to let premises to competing tenants of tenants who benefit from exclusivity clauses. It is suggested, however, that this still be done with circumspection, and that, if possible, a formal waiver of exclusivity be obtained from the tenant concerned.
It is important to note that these recommendations have no impact on usage clauses, where the landlord regulates the products or services which a tenant may offer. In our view, usage clauses play an extremely important role in managing tenants’ conduct, and ensuring that the centre has a good quality offering to its patrons.
Therefore, the whole issue of exclusivity seems to be on the way out of lease agreements, and landlords will now be free to lease premises to whomever they deem fit. 2