Economic Development Minister, Ebrahim Patel recently announced that the Competition Commission would commence a market inquiry into aspects of the South African retail sector. Particularly, it was indicated that the inquiry would amongst other things, focus on tenancy arrangements in shopping malls. This may have important implications for supermarket chains and property owners because parties to exclusive long-term leases for anchor tenants could potentially have to amend or terminate their agreements if they are found to have anti-competitive effects.
The Minister’s concern presumably stems from the fact that long-term leases, which contain exclusivity provisions, prevent landlords from offering space to rival retailers. These may amount to a contravention of the Competition Act, especially in circumstances where the leaseholder retailer has market power within the relevant local market. Property owners commonly enter into these long-term exclusive leases with large anchor tenants, usually being supermarket chains. These arrangements may increase barriers to entry and can lead to smaller retailers including specialist stores such as bakeries, liquor and fruit & vegetable stores being excluded from operating within those shopping centres. This in turn might hamper retail competition.
The Competition Act applies to all economic activity within, or having an effect in the country. It prohibits agreements which prevent or substantially lessen competition in any market for goods or services, unless the agreement can be justified based on technological, efficiency or other pro-competitive gains. Where the Commission has reasonable grounds to suspect that a restriction or distortion of competition may be occurring within a particular sector of the economy, the Commission can initiate a market inquiry. During the course of the inquiry, the Commission has the power to request and, if necessary, to subpoena information from market participants. The Commission is also empowered to search for and seize documents from a company’s premises.
If at the conclusion of the market inquiry, the Commission determines that there is a restriction or distortion of competition caused by a type of agreement it may initiate an investigation and refer it to the Competition Tribunal for determination. Alternatively, the Commission can make recommendations to the Minister for wider market reforms through means such as amended policy, legislation or regulations.
If an investigation is referred by the Commission to the Tribunal and it proves the existence of a prohibited vertical agreement (other than resale price maintenance) or an abuse of dominance, then the Tribunal has the power to hand down a number of directives to the parties, which could include a requirement to terminate or amend an agreement, to cease or alter the conduct, to observe specified conditions in relation to the continuation of an agreement, or to grant access to facilities generally or to named parties.
Although different to a formal market inquiry, the Commission has already conducted an investigation concerning long-term exclusive leases in the retail sector, but announced in January 2014 that it would not take the investigation any further. It stated at the time that long-term exclusive leases could give rise to considerable competition concerns and could amount to a vertical restrictive practice or an abuse of dominance involving exclusionary conduct by supermarket chains but ultimately concluded that the anti-competitive effects of the conduct could not be demonstrated conclusively. However, it said that it remained concerned about the potential dampening effects of these exclusive leases on competition and it indicated that it would engage in advocacy campaigns to convince landlords and retailers to limit exclusive lease periods. Property developers should be able to recover the investments they have made in developing shopping centres by securing anchor tenants for extended periods of time. But retailers should not be able to demand exclusive rights in shopping centres for excessive time periods, beyond what is fair and reasonable in relation to how long it takes a landlord or financier to recover their investment.
The Commission has also objected to such leases in the course of investigating several mergers and imposed conditions to deal with these concerns, including requiring landlords, retailers and even financial institutions who wish to implement a merger to approach their anchor tenants and negotiate the removal of exclusivity clauses.
A market inquiry will be far reaching and more formal so retailers and property owners whose leases may potentially be scrutinised during the course of the inquiry should assess each lease in the context of the relevant geographic and retail market it impacts on, in order to assess their potential risks. This is also an opportunity for smaller retailers concerned about competition in the retail markets to engage proactively with the Commission during the course of the inquiry.
Anthony has a BCom and LLB and was admitted as an attorney in 2004 after having completed his articles at Ramsay Webber. He rose to the level of director in its commercial department by 2007, where he practiced until 2010. In 2010, he took up a position as an associate and then director in the competition law department at Norton Rose Fulbright, and in July 2014 he joined Caveat Legal.