ComCom files proceedings against Foodstuffs North Island for blocking rivals

The Commerce Commission has filed proceedings in the Wellington High Court against Foodstuffs North Island, alleging that anti-competitive land covenants were lodged by the supermarket operator with the purpose of blocking competitors from opening rival supermarkets at particular sites and developing existing ones at several locations across the lower North Island.

The Commission and the defendants have entered into a settlement to resolve the proceedings on terms acceptable to both parties. The High Court will determine any orders to be made in relation to Foodstuffs North Island in due course.

Commission Chair, John Small, says that while historical, the Commission considers the conduct to be serious enough to warrant proceedings under the Commerce Act.

“This is a vital $25 billion sector, which impacts every Kiwi consumer. The covenants were of long duration, and we allege were lodged with the purpose of hindering competitors in local towns and suburbs where Kiwi consumers buy their groceries.”

The proceedings follow an investigation into the conduct which came to light during the Commission’s market study into the grocery sector, completed in March 2022. The study identified that the use of covenants on land, or in leases by the major retailers was limiting the number of sites available to competitors.

Dr Small acknowledged that in August 2021, Foodstuffs North Island committed to stop using restrictive land covenants and exclusivity provisions in leases and in June 2021 had already started a process to identify and remove any such clauses in existing tenancy contracts. The Commerce (Grocery Sector Covenants) Amendment Act 2022 has also made certain grocery-related covenants prohibited and unenforceable. This legislation was a recommendation from the Commission’s market study into the grocery sector.

Dr Small says this case against Foodstuffs North Island is important in demonstrating that the Commission will continue to pursue companies in any industry who use land covenants to stop rivals entering local markets.

“Land covenants have the potential to harm competition by raising barriers to entry or expansion in a market, making it harder for rival businesses to compete effectively and gain scale. Ultimately, the loser here is the Kiwi consumer who is deprived of the benefits that come from a more competitive market.”

“I encourage all companies who have previously lodged land covenants that restrict the use of sites by their competitors to consider whether they comply with the Commerce Act.”

As the proceedings are before the Court, the Commission cannot comment further at this time.

Background

Section 28 of the Commerce Act prohibits certain land covenants that harm competition.

More specifically, it 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. Covenants that breach section 28 are also unenforceable. A land covenant is an agreement or promise to do, or not do, something in relation to a piece of land.

Penalties for breaching the Commerce Act can be significant – fines can reach up to $10 million or three times the commercial gain derived from the breach, or 10% of annual turnover, whichever is greater.

In 2023, NGB Properties Limited (NGB) was penalised $500,000 after the Commerce Commission took court action over an anti-competitive covenant that NGB placed on a site close to Mitre 10 MEGA Tauranga, for the purpose of preventing competitor Bunnings from opening a Bunnings Warehouse in the area. NGB is the sister company of Juted Holdings Limited, which operates the Mitre 10 MEGA in Tauranga.

The Commission has previously identified restrictive land covenants as impacting competition in the markets for residential building supplies, groceries and retail fuels, via its market studies into these sectors of the New Zealand economy. A law change prompted by the groceries study means that, as of 20 April 2023, section 28A applies to make certain grocery-related covenants prohibited and unenforceable.

Having observed the possible effects of covenants in two previous market studies, the Commission’s final report in its market study into residential building supplies, recommended an economy-wide review of their use and impact. The Government accepted that recommendation.

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