The Commerce Commission (Commission) has already identified (in its market studies) that land agreements, such as land covenants and certain lease covenants, were being used in ways that can lessen competition in the retail fuel, retail groceries, and residential building supplies sectors.1
Covenants that specifically restrict the use or development of land as retail grocery stores were banned last year, following the Commission’s 2022 market study into the retail grocery sector.2
In its 2022 market study into the residential building supplies sector, the Commission recommended an economy-wide review into the use of such agreements, to assess whether interventions, in addition to the rules already in place under the Commerce Act 1986, are needed to address their impacts on competition.3
To initiate this review, the Ministry of Business, Innovation and Employment (MBIE) has released consultation documents seeking feedback from submitters on the effects of such agreements across the economy. Submissions will be used to determine whether there is an issue, and if so, what possible options are appropriate.
Broadly, the consultation documents seek feedback on three main aspects:
How land agreements can be used to lessen competition
Land agreements can impact competition if they are used by one party to make it harder for competitors, or potential competitors, to establish their business or attract customers.
For example, leases may contain exclusivity clauses that restrict businesses selling competing products or offering similar services from operating nearby.
This week, a significant $500,000 penalty was imposed on the sister company of a Mitre 10 MEGA operator, who registered an anti-competitive land covenant in order to prevent a major competitor from operating nearby.4
The Commission has also expressed concern about rights of first refusal in leases, which requires the landlord to offer the lease to the tenant first when the term of the lease expires – these clauses have been banned last year where they restrict land to be used as a retail grocery store.5
Covenants registered on land may also contain terms that restrict the property from being used to operate a particular type of business.
In addition to the above, the Commission also identified the following types of land agreements to be of concern:
- “land development covenants” – this term is used by the Commission to refer to covenants registered on land zoned for residential development intended to influence customers’ choice of supplier for building materials;
- “no complaints covenant” (also known as reverse sensitivity covenants) – they prevent landowners or occupiers from objecting to certain activities or effects occurring on nearby or adjoining land; and
- obligations in a lease that require either the landlord or the tenant to object to, for example, future nearby developments that may be in competition with the business of either the landlord or the tenant.
MBIE is interested in views from businesses and individuals whose choices have been affected by a land agreement. This can include situations where a business has been deterred or prevented from using a suitable site, or was impacted in other ways (such as being required to use a certain supplier), as a result of a land agreement.
How land agreements can be used to promote positive outcomes
The consultation also seeks to understand the reasons that land agreements are put in place, to assess any wider benefits they serve so that any proposed options can be balanced.
MBIE is interested in the differences between land agreements that directly impact competitors – i.e., those that are put in place to primarily protect a business’s place in the market – and those that impact competitors as a secondary effect.
Three broad rationales have been identified as reasons for using land agreements:
- by stopping a competitor from establishing itself nearby, it gives businesses confidence that they will make a return on the investment associated with developing a new store;
- to protect an existing landowner’s use of their land – for example, a vineyard owner wishing to sell spare adjoining land may register a land covenant on the spare land, to prohibit the purchaser from objecting to the owner’s ongoing use of their existing land as a vineyard; and
- avoid disputes – for example, a fuel retailer moving to a new site may register a land covenant prohibiting the old site from being used as a fuel site, to prevent potential disputes about who is liable for any decontamination of the site.
Feedback is sought from businesses that benefit from land agreements, including whether the benefits sought by those businesses could be achieved by alternative means (with less impact on market competition).
How well the current rules protect competition, and proposed options to improve this
There are already laws contained in the Commerce Act 1986 which were passed in order to deter anti-competitive behaviour and agreements. Despite this, the consultation document noted that current settings could be working better, given the findings in the Commerce Commission market studies.
The consultation document identified that there are three key areas where the system is not working effectively to prevent anti-competitive land agreements:
- there is minimal control or audit over the content of land agreements, even when they are registered under the land registration system and of course, many leases in New Zealand are not registered, so their content is not public;
- it is difficult and time-consuming for the Commission to monitor covenants and other agreements for compliance with the Commerce Act 1986. Outside of market studies, the Commission largely relies on the public coming forward with knowledge of any breaches; and
- enforcement under the Commerce Act 1986 is complex and costly.
A number of options are proposed to better protect competition in this regard. These include:
- Options to prevent and detect new anti-competitive land agreements, by (amongst other options) –
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- amending commonly used lease templates in the market to address potentially problematic clauses. For example, these templates may contain clauses that allow the landlord to withhold consent if any proposed new use of the premises by the tenant is in substantial competition with the business of other occupiers at the property;
- introducing checkpoints in the land registration process;
- require a description or “purpose” when land agreements are registered on a title;
- Options to identify and remedy existing anti-competitive land agreements, by (amongst other options) –
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- introducing a sunset clause whereby agreements become unenforceable after a certain time;
- making it easier to voluntarily remove a land or relevant lease covenant.
Next steps
Submissions on the consultation documents close on 25 August 2023, at 5pm.
Submissions will be used by MBIE to understand the nature and scale of any harm created by the use of land agreements, whether further action is required and if so, what type of action is most appropriate.
Comment
The use of land agreements that may lessen competition has received increased scrutiny after they were identified in all the Commerce Commission market studies conducted since 2018.
MBIE’s current review is focusing on whether additional interventions are needed to address any impact from such agreements across the economy.
If you have any questions on the New Zealand Government review of anti-competitive land agreements, or would like any assistance in making submissions, please get in touch with the contacts listed or your usual Bell Gully adviser.
[1] Commerce Commission retail fuel sector market study (2019) https://comcom.govt.nz/about-us/our-role/competition-studies/fuel-market-study
Commerce Commission retail grocery sector market study (2022) https://comcom.govt.nz/about-us/our-role/competition-studies/market-study-into-retail-grocery-sector
Commerce Commission residential building supplies sector market study (2022) https://comcom.govt.nz/about-us/our-role/competition-studies/market-study-into-residential-building-supplies
[2] Commerce (Grocery Sector Covenants) Amendment Act 2022
[3] Commerce Commission residential building supplies sector market study final report – Executive summary (2022), pages 21-22 – https://comcom.govt.nz/__data/assets/pdf_file/0013/300703/Residential-building-supplies-market-study-Executive-summary-6-December-2022.pdf
[4] Commerce Commission New Zealand “$500k penalty in land covenant case for trying to “stop Bunnings building” (31 July 2023) Commerce Commission - $500k penalty in land covenant case for trying to “stop Bunnings building” (comcom.govt.nz)
[5] Commerce (Grocery Sector Covenants) Amendment Act 2022, section 1: “Exclusivity covenant” is defined as including, without limitation, a right of first refusal.