Negotiating Exclusive Use Clauses Following Amendments to the Competition Act (Canada)

In the wake of a series of amendments to the Competition Act (Canada) (the “Act”), landlords and tenants in the Canadian commercial leasing world are anxiously awaiting further clarity on how the Competition Bureau (the “Bureau”) will exercise new authority to enforce limitations on anti-competitive activities, such as exclusive use covenants affecting real property. Landlords and tenants should be aware that the prohibition against anti-competitive exclusive use clauses applies to all existing leases, not just leases entered into after the amendments to the Act. While the extent to which the Bureau will prosecute anti-competitive exclusive use clauses is currently unclear, landlords and tenants can utilize certain strategies to avoid running afoul of the Act and in drafting exclusive use clauses in commercial leases.

Limitations to Exclusive Use Clauses

The best approach to ensure that an exclusive use provision is compliant with the Act is to take steps to limit its impact on competitors. The Bureau has provided certain preliminary guidelines to reduce the risk that an exclusive use will be found to be anti-competitive. To increase the likelihood of an exclusive use provision being enforceable and binding on the parties, tenants should consider the following:

(1)       Limiting the duration of the exclusive use to a portion of the lease term. As an example, tenants may elect to limit the exclusive use to the first several years of their lease term when it is most critical to establishing their business at the project.

(2)       Limiting the scope of the exclusive use to only those products/services most essential to the tenant’s business as opposed to restricting use categories. For example, an Italian restaurant may wish to limit its exclusive rights to the sale of pizzas rather than restricting other Italian restaurants generally.

(3)       Limiting the scope of the exclusive use to target businesses that would be most likely to harm the tenant by opening in the same plaza. For example, a fast food/takeout restaurant primarily selling hamburgers may wish to have an exclusive use preventing other fast food/takeout restaurants from selling hamburgers, but which otherwise permits dine-in restaurants to sell, among other things, hamburgers.

(4)       Limiting the geographical scope of the exclusive use so that it applies only to one building among various components of a shopping centre. For example, a store may wish to limit their exclusive use to one of several buildings in a development or, in the case of a single building development, limit the exclusive use to a part of the building in question.

Contingencies for Non-Compliant Exclusive Use Clauses

While the above considerations will increase the likelihood that an exclusive covenant will not be found anti-competitive under the Act, tenants understandably will not want to dilute their exclusive use rights. Leases are negotiated holistically and the benefit derived from an exclusive use clause is taken into account when settling the rent payable under a lease. For this reason, tenants who depend upon stronger exclusive use clauses may prefer to keep aggressive language at first instance but, in so doing, also add contingencies to protect against the possibility that the exclusive use may not be compliant with the Act.

Given that rent is often negotiated having regard to the revenue that a tenant expects to receive from being the exclusive supplier of goods or services in a particular project, landlords and tenants may consider including some form of agreement to reduce base/minimum rent payable by the tenant in the event that the exclusive is deemed anti-competitive and unenforceable. However, landlords will want to ensure that any potential rent reduction or abatement is proportionate to the loss in value caused by, and is a direct result of, the tenant losing its exclusive rights. To ensure that the contingencies are equitable from a landlord perspective, the rent reduction/abatement should only be available where there is an actual breach of the agreed-upon exclusive use covenant and only for so long as a competitive business is actively conducting business at the project. Furthermore, the landlord may want to limit any rent abatement/reduction such that the reduced rent is evidentially tied to the loss of revenue caused by a competing business entering the development.

Finally, tenants may wish to request a termination right in the event that an exclusive use is no longer applicable as a result of it not being compliant with the Act. Understandably, a strong exclusive use likely plays a major role in a tenant’s decision to enter the lease to begin with. That being said, given the major expenditures incurred in entering into a new lease, it’s unlikely that tenants would be satisfied with this as the only contingency available in the event that they lose their exclusive use.

The takeaway, during these uncertain times, is to devote more time to wordsmithing a proper exclusive use clause that meets the objectives of those who seek to rely upon it.

If you require legal counsel on exclusive use clauses, please contact the author or a member of our Commercial Leasing Group.