Restrictive land covenants are a key focus for the New Zealand Commerce Commission (NZCC) after all three market studies to date into the fuel, grocery and building supply industries identified them as an issue.

This focus was again highlighted recently when the NZCC released a fact sheet on its approach to assessing whether land covenants may be in breach of the Commerce Act.

In this FYI we break down the recent NZCC activity regarding restrictive land covenants and offer key guidance for businesses.

Key takeaways:

• Recent legislative and enforcement activity shows that the NZCC is focusing on enforcing the prohibition in the Act on restrictive land covenants.
• This focus has again been highlighted by the publication of a fact sheet warning businesses of the risks of restrictive covenants.
• Before agreeing to or registering restrictive covenants against land, businesses need to be sure that the covenant is not going to impede competition, for example by raising barriers to entry for competitors.

Recent NZCC activity regarding restrictive land covenants

Restrictive land covenants are prohibited in s 28 of the Act, which prohibits the requiring, giving, carrying out, or enforcing of a covenant that has the purpose, effect, or likely effect of substantially lessening competition in a market. Despite this prohibition, the NZCC’s recent market studies have revealed that restrictive covenants remain a feature of the fuel, grocery and building supplies industries.

The response to these findings has been swift. Last year the Government, through the Commerce (Grocery Sector Covenants) Amendment Act 2022, introduced a strict liability test for restrictive covenants with effects on retail grocery competition.  This test, contained in new sections 28A and 28B of the Act, deems any land covenant or exclusivity lease covenant to breach s 27 or s 28 of the Act where:

• a “designated grocery retailer” has an interest in it; and
• it is likely to impede the development or use of the land as a retail grocery store (or any other retail store that is likely to compete with a retail grocery store).

Currently, the definition of “designated grocery retailer” in the Act only includes Woolworths New Zealand and Foodstuffs North and South Island. If a designated grocery retailer has a covenant that is prohibited and unenforceable under these provisions as at 30 June 2022, then the retailer has two years (i.e. until 30 June 2024) to revoke, or modify the covenant.

In addition the NZCC has taken enforcement action in relation to restrictive land covenants:

• Following the grocery retail market study, the NZCC opened investigations into whether grocery retailers Woolworths New Zealand’s and Foodstuffs North and South Island’s land and lease covenants may have had the purpose or effect of impeding competitive entry or expansion in the retail grocery sector.
• The NZCC has also brought proceedings in the High Court in Wellington against NGB Properties Limited for allegedly contravening s 28 of the Act.

NZCC fact sheet

The NZCC’s guidance concerns every industry in New Zealand, although some industries are likely to be more susceptible to use of restrictive land covenants than others (for example, industries with a focus on bricks & mortar retailing, or industries in which land with specific requirements is needed in order to compete efficiently).

The NZCC’s guidance highlights the importance of considering the potential impact of a land covenant on competition before it is agreed to or registered.

The NZCC says that a land covenant is more likely to have a substantial effect on competition when:

• The land covenant has a broad scope and/or long duration;
• The land covenant restricts the use of land for specified purpose(s) (for example, to prevent a competitor of the original covenantor from operating on a site).
• The effect of the land covenant is to strengthen or reinforce barriers to entry or expansion by competitors (for example, where zoning or regulatory restrictions mean there is limited availability of suitable land);
• The land covenant limits land owners’ freedom to choose what they buy or sell, or who they do business with; and
• Existing competition in the relevant market is already limited.

Furthermore, where there are multiple land covenants that benefit the same person or associated person, the NZCC says it will assess their combined effect. As such, while an individual land covenant may not substantially lessen competition, multiple land covenants may breach s 28.

Conclusion

While the fact sheet provides a general guide on anti-competitive land covenants, we recommend that businesses get in touch with one of the contacts listed on this page if they are unsure of whether their restrictive covenants are at risk of breaching the Act.

Special thanks to Achi Simhony for her assistance with writing this article.