SAPOA urge Competition Commission to rule on exclusive leases

Posted On Wednesday, 08 October 2014 09:12 Published by
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South Africa's large grocery retailers stand accused of anti-competitive behaviour.

Neil Gopal latest

The South African Property Owners Association (SAPOA) has officially asked the Competition Commission to investigate the broader prohibitive practice of long-term exclusive leases in shopping malls.

SAPOA has levelled a formal complaint that names Pick n Pay Group, Shoprite Group and Spar Group, but notes these are only some of a wider number of retailers that are parties to the conduct, which SAPOA asserts is anti-competitive.

Exclusivity clauses are usually requested by larger tenants as a condition for entering into long-term lease agreements, specifically in large retail centres.

Supermarket chains and property developers enter into and enforce long-term exclusive leases through so-called 'anchor tenancy'. Typically, these leases are of a minimum period of ten years with renewal options up to 40 years. This means competing retail chains are excluded from particular shopping centres by 'Use and Exclusiveness' clauses in lease agreements.

But it isn't only competing chains that are excluded. Specialist stores like fruit and vegetable sellers, liquor stores, as well as full-line grocery stores are excluded in shopping malls where any one of the main supermarket chains is the anchor tenant.

The retailers named in the complaint are among those that have concluded and continue to seek to enforce the exclusivity clauses and thus exclude competitors.

Neil Gopal, CEO of SAPOA, comments: "Exclusivity clauses harm competition to the clear detriment of consumers. They restrict entry into the market by competing retailers, especially when a retailer's entry strategy requires scale of activity and buying, distribution and selling networks."

He adds: "Besides excluding potential new market entrants, including independent and small retailers, long-term exclusive leases also reduce competition between supermarkets and broader competitors. The anti-competitive effects and outcomes, including higher prices, are to the detriment of consumers."

This will not be the first time the Competition Commission has turned its attention to long-term exclusive leases in shopping malls.

SAPOA's complaint notes that in January 2011, the Competition Commission concluded part of its investigation against the four major supermarkets and found exclusive lease arrangements are of great concern and could result in anti-competitive effects in circumstances where supermarket chains have market power within the relevant local markets, and its analysis to date indicates that they may amount to a contravention of the Competition Act, particularly where supermarkets have market power.

Gopal notes: "In several recent merger applications before the Competition Tribunal involving commercial or retail property, the Tribunal has imposed a condition to the merger approval that the parties to exclusivity clauses in leases negotiate in good faith to seek an end to the relevant exclusivity clauses."

But, the pervasive nature of the practice in the retail sector shows that asking parties to negotiate to drop exclusivity clauses is insufficient. "Instead it is perpetuating anti-competitive behaviour," says Gopal.

And, SAPOA contests the issue cannot be resolved on a case-by-case basis. "It is impractical, expensive and wasteful of resources to have to bring complaint proceedings in respect of each lease agreement," stresses Gopal.

Gopal explains the anti-competitive effects may be much broader than immediately evident. "A shopping centre where an anchor retailer has an exclusivity clause in its lease will prevent new market entrants, on a regional and national level. It will stifle competition and prejudice the consumer."

In addition, should a supermarket seek a ruling from the Competition Commission regarding the anti-competitive nature of an exclusivity clause in a lease, resources required for references to the Tribunal are extensive.

eProp Commercial Property News is asking property professionals to give their opinions on exclusivity clauses in shopping centre leases:

  • what are the benefits (if any) of exclusivity clauses for the consumer, for the shopping centre, retailer and developer?
  • do exclusivity clauses stifle or control growth?
  • how will the ban on exclusivity clauses affect shopping centre development finance?
  • could they really disappear?
Last modified on Thursday, 09 October 2014 08:15

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