The use of long-term exclusive lease agreements by supermarkets in South Africa has been quite controversial over the last few years. Unsurprisingly, the impact of long-term exclusive lease agreements on local competition was one of the six objectives to be investigated by the Grocery Retail Market Inquiry (“GRMI”) which was established on 30 October 2015.
In the final report of the GRMI, which was published on 17 December 2019, it was recommended that the Competition Commission (“Commission”) must seek to secure voluntary compliance by the national supermarket chains of the recommendations made. These recommendations included undertakings by supermarkets not to enforce exclusive provisions in certain instances, that new lease agreements may not contain exclusive provisions and that exclusive lease agreements must be phased out over a period of time.
On 9 October 2020, the Competition Tribunal confirmed the first consent agreement between the Commission and Shoprite Checkers Proprietary Limited, one of the major grocery retailers in South Africa, which essentially implemented the recommendations by the GRMI (“Shoprite Consent Agreement”). The Shoprite Consent Agreement was soon followed by a Media Statement issued by the Commission on 20 October 2020, in terms whereof the Commission announced that it has concluded a consent agreement with another major supermarket retailer, Pick n Pay Retailers Proprietary Limited. At the time of writing this note, this consent agreement has not yet been confirmed by the Competition Tribunal.
This article will discuss (i) the background to the GRMI’s findings and recommendations on exclusive lease agreements, (ii) some key aspects of the Shoprite Consent Agreement, and (iii) whether the Shoprite Consent Agreement will lead to the end of all exclusive lease provisions in lease agreements.
I. Background and introduction
An exclusive lease agreement is generally a long term lease agreement between a landlord and a tenant, which grants the tenant exclusive rights to operate in a specific shopping centre. The tenant is usually one of the big four national retail supermarket chains and obtains “exclusivity” in a particular shopping centre. The exclusive provision could include, for example, that no other supermarket, bakery, chemist or butchery, may do business in the same shopping centre in which the particular supermarket operates.
While excluding any direct competition for the retailer within the shopping centre, an exclusive lease agreement ensures the shopping centre’s financial viability and sustainability. This aspect was also acknowledged by the GRMI as a positive benefit, namely that this may lead to protection of an investment and a potentially optimal tenant mix in the shopping centre that may also benefit the consumer and the small businesses in the shopping centre.
The Commission’s first investigation into the four major supermarkets was concluded in 2011, when no evidence of anti-competitive behaviour and price fixing was found. At the time, the Commission had concerns about long-term exclusive leases and indicated that these may possibly contravene the Competition Act, particularly where supermarkets have market power.
After the Commission’s first investigation, a number of landlords thought there was an understanding that long-term exclusive lease agreements would not be enforced as they may not be legal. This led some retailers to turn to the courts to enforce their contractual rights.
In addition thereto, these concerns were being addressed in that the Competition Tribunal had imposed conditions in property related mergers where exclusivity clauses in leases existed, that they must negotiate in good faith to seek an end to the relevant exclusivity clauses upon termination of the lease agreement.
In most of these cases the retailer did not agree to the cancellation of the clause, or the lease agreement would only terminate after a long period, which led to the perpetuation of this practice.
One of the key findings of the GRMI was that long-term lease agreements are widely prevalent in the grocery retail sector and give rise to customer harm as they limit consumer choice and reduced competition within shopping centres. It further found that such agreements prevent the participation of SMME’s and historically disadvantaged persons in the grocery retail sector.
II. Key aspects of the Shoprite Consent Agreement
In line with the recommendations of the GRMI, Shoprite Checkers undertook and agreed with the Commission on the following key undertakings, namely that it shall –
- With immediate effect cease enforcing exclusivity provisions, or provisions that have a substantially similar effect in its long-term exclusive lease agreements against 1) SMME’s; 2) Specialty and limited line stores; and 3) any other Supermarket in Shopping Centres located in Non-Urban Areas (which areas have been listed in an annexure). The effect hereof is that exclusive provisions may still be enforced against Supermarkets in Urban Areas (subject to the undertaking in the third bullet point below);
- Not incorporate exclusivity provisions, or provisions that have substantially the same effect into any new Supermarket leases in Shopping Centres; and
- Not, subject to the provisions discussed in the first bullet point above, enforce exclusivity provisions, or provisions which have the same effect, as against Supermarkets in any extended (or renewed) long term exclusive lease agreement for a five year period after 17 December 2019.
A further noteworthy undertaking is that Shoprite will ensure that its franchisees will comply with these undertakings where it holds the lease or head lease to the franchise business, where new franchise agreements are concluded and that it will negotiate and agree with franchisees within a 12 month period to remove any exclusive provisions.
The immediate effect of these undertakings appears to put an end, within five years, to the use of exclusive lease provisions in agreements where Shoprite Checkers is a party. However, it is obvious that the undertakings are limited to only Supermarket leases and Shopping Centres. This will for example, not include a restriction of enforcement against retailers other than Supermarkets, or if the lease is not in a Shopping Centre. If Shoprite Checkers for example concludes a lease in a building which is not a Shopping Centre, arguable the undertaking will not apply.
III. Is this the end of the road for the use of all exclusive lease provisions?
For all supermarkets who have concluded consent agreements along the lines of the Shoprite Checkers Agreement, it is unlikely that the use of exclusive lease provisions will continue. Apart from breaching an undertaking, the Shoprite Checkers Agreement contains a provision in terms whereof Shoprite Checkers will have to annually supply a written report of its compliance with the undertakings. To the extent that the Commission believes that there is non-compliance, an independent auditor could be appointed and if the audit finding is that there is non-compliance, Shoprite Checkers will be allowed a reasonable period within which to remedy any such finding.
It is fairly common to find exclusive lease provisions in other commercial lease agreements, but there will generally be no competition issues or effects. Two examples of such leases are as follows:
- Renewable energy projects
The common structure used is that a project company leases portions of farmland on which the wind farm or solar project will be constructed and operated. The lifetime of such a project is usually up to 30 years or longer and a long term lease agreement is concluded, which is registered against the title deed of the farm. It is fairly common to insert a provision in such agreement that the farm portion may only be used for its purpose and that no other similar project is allowed on the remainder of the farm land.
The main reason for this exclusivity is usually not to restrict competition, but to enable the project company to comply with other regulatory obligations, even though it is not stated as such. The energy sector in South Africa is highly regulated and each project must comply with onerous environmental obligations. A particular issue in South Africa is the scarcity of water – any similar project on the same farm will have an affect on its current water licence. This on its own will be a good example of using exclusivity for reasons that are unrelated to competition issues.
However, if a farmer owns a few adjacent farms in the same area and an exclusive provision is inserted which prevents the farmer to allow any other similar projects on adjacent land, or within a certain radius of the project, it will preclude other competitors and could well be seen as anti-competitive.
- Petroleum filling stations
The petroleum industry is also highly regulated in South Africa. If for example, a petrol filling station is built on a portion of farmland next to a freeway, the long term lease will also include provisions that the land may only be used by the particular oil company and only as a petrol filling station branded by the oil company. This exclusivity is usually secured by registering a personal servitude over the property in favour of the oil company (a so called “pump servitude”).
On its own, any such exclusive provision will not be problematic from a competition perspective. However, should the same farmer own land adjacent to the farm, or even a few kilometers away, an exclusive arrangement which excludes any competitors could well be seen as anti-competitive.
In conclusion it seems that it will be the end of the road for the use of exclusive provisions in lease agreements by supermarkets in shopping centres.
The use of exclusive provisions in other types of lease agreements as discussed, will generally not be seen as anti-competitive, depending on the factual position as discussed.
 Defined as a small, medium or micro enterprise as defined in section 1(k) of the Competition Act.
 Defined as retail stores within the grocery retail sector that focus on a specific product category, such as butcheries, bakeries, delicatessens, liquor stores and greengrocers, or 15 and fewer categories.
 Defined as a store devoted to the retail sale of groceries and household goods and which stocks a range of goods from more than 15 product categories.
 Defined as a group of retail and other commercial establishments that are developed, owned and managed as a single property, typically with on-site parking.