Federal Watchdog Challenges Grocers' Use of Restrictive Land Covenants in Landmark Case

The Competition Bureau of Canada has launched a significant legal challenge against two of the country's largest grocery chains, Loblaw Companies Limited and Sobeys Inc., aiming to dismantle what it describes as anti-competitive control over commercial real estate. The Bureau filed an application with the Competition Tribunal seeking to end the use of so-called "property controls" or restrictive covenants in lease agreements, which it argues stifle competition and harm consumers by limiting choice and keeping food prices artificially high.

This action follows a comprehensive market study into the Canadian grocery industry, which concluded in June 2023. The study identified a severe lack of competition as a key factor behind soaring food prices. One of the most significant barriers to entry for new and independent players, the report found, was the widespread use of restrictive covenants by incumbent grocers. These clauses, often embedded in lease agreements for shopping centres or in deeds of sale for land, effectively prevent rival supermarkets from opening in proximity to an existing store or in a location formerly occupied by one of the major chains. The Bureau contends that this practice creates "food deserts" in some areas and insulates the dominant players from competitive pressure.

Matthew Boswell, the Commissioner of Competition, stated that these controls are hampering the ability of new grocers to establish themselves and for existing independent retailers to expand. "We are taking action to stop the use of these anti-competitive restrictions," Boswell said in a statement. "This will promote more competition and choice for Canadians, and in turn, should lead to lower prices."

The Mechanics of Property Controls

Restrictive covenants in the grocery sector can take several forms. A common example is an "exclusivity clause" in a shopping mall lease, where a major grocer, as an anchor tenant, negotiates a term that prohibits the landlord from leasing space to any other business that sells a significant amount of food items. Another form involves placing a restriction on a piece of land when it is sold, preventing the new owner or any subsequent owner from ever using it for a grocery business. The Bureau argues that the cumulative effect of these agreements across the country has created a formidable barrier that protects the market share of the established giants.

The legal application targets specific locations where Loblaw's and Sobeys' banners operate, but the Bureau's goal is broader: to secure a prohibition order that would apply nationwide. If successful, the Competition Tribunal could order the companies to cease enforcing existing restrictive covenants and to stop including them in future agreements. This would be a landmark decision, as detailed in the ongoing coverage of how the Competition Bureau targets grocers' land controls in a landmark case to boost competition.

Industry Response and Broader Economic Context

The grocery chains have defended their use of property controls as a standard and necessary business practice common in many retail sectors. They argue that such clauses are required to protect their significant capital investments in establishing a store and to ensure the long-term viability of their operations. In statements, representatives for both Loblaw and Sobeys have indicated they are reviewing the Bureau's application and believe their real estate practices are compliant with existing laws and are pro-competitive by allowing them to offer services to communities.

This legal battle unfolds against a backdrop of intense public and political pressure over food inflation. For years, Canadians have faced rapidly rising grocery bills, prompting parliamentary inquiries and widespread consumer frustration. The federal government has made affordability a central theme of its economic policy. This focus is evident in recent fiscal plans, where measures to increase competition are presented as a key tool for easing financial pressures on households, a strategy that aligns with the broader goals outlined in Canada's Economic Update: A High-Stakes Bet on Housing and Green Investment. The Bureau's action is therefore not just a regulatory matter but a high-profile component of the government's response to the cost-of-living crisis.

Potential Outcomes and Market Impact

The case before the Competition Tribunal could have far-reaching consequences. A victory for the Competition Bureau would likely be hailed as a major win for consumers. It could significantly lower the barriers to entry for international grocery chains like Aldi or Lidl, which have so far been hesitant to enter the Canadian market, as well as for smaller independent and discount grocers. By freeing up prime retail locations, it could foster a more dynamic and competitive marketplace, potentially leading to greater innovation, wider product selection, and, most importantly, lower prices.

Conversely, if the Tribunal sides with the grocery chains, it would reinforce the status quo and could be seen as a setback for the Bureau's enhanced enforcement mandate. It would affirm that such property controls are a legitimate business practice under current Canadian law, potentially leading to calls for legislative amendments to the Competition Act to explicitly prohibit them. Regardless of the outcome, the case will bring unprecedented scrutiny to the real estate strategies that have helped shape Canada's highly concentrated grocery sector for decades. The proceedings are expected to be lengthy and complex, but their conclusion will undoubtedly set a critical precedent for the future of retail competition in Canada.