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THE legal battle between Shoprite [JSE:SHP] and Massmart [JSE:MSM] (through its Game stores) regarding Shoprite’s exclusive rights to sell certain products in the Cape Gate Shopping Centre will place the spotlight on legal issues which are relevant to developers, landlords, retailers and consumers alike.
Whether Game’s intended introduction of liquor and food lines into its Cape Gate store will infringe Shoprite’s exclusivity rights and whether Game will ultimately be precluded by the landlord (Hyprop) from selling these lines, will, in part, depend on the unique facts of the case.
However, the issues relating to exclusivity provisions in favour of supermarket chains in shopping malls are more general, and the case is likely to be an important indicator of the way that such clauses will be approached in future.
The Competition Commission has for some time expressed its discomfort with exclusivity agreements entered into between landlords and supermarkets and has conveyed its desire to remove or exclude “exclusivity from long term lease agreements”.
To this end, the Commission and the Competition Tribunal have imposed conditions on property mergers which involved shopping malls where exclusivity agreements existed with “anchor tenants”.
The conditions imposed to date have been soft to the extent that the landlord was required to negotiate with the tenants in whose favour the exclusivity agreements operate, with a view to removing such clauses.
There were, however, no consequences or sanctions in the event that such negotiations failed.
Not surprisingly, such conditions have had limited success in removing exclusivity clauses from existing agreements.
Competition Commission
The Competition Commission’s cautious approach to date is (in our view correctly) borne out of an appreciation of the potential difficulties that will arise from adopting a blanket approach to exclusive lease agreements in the shopping mall context.
Exclusivity clauses stand to be considered under Section 5 of the Competition Act which, in essence, provides that an agreement will only be prohibited if its net effect is anti-competitive.
Exclusivity clauses will, therefore, only be problematic from a competition law perspective if any anti-competitive effects are not outweighed by pro-competitive gains.
The weighing up exercise takes place within the context of defined product and geographic markets and there are accordingly limits to the extent to which the outcome of such an exercise in respect of one shopping mall might be applied generally.
For example, an exclusive lease agreement in one shopping mall could place the lessee in a position to increase prices to the detriment of consumers.
However, the same exclusivity in another shopping mall, where the tenant’s ability to increase prices is inhibited by competition from outside the particular shopping mall, might minimise or remove the potential harm.
Further, the “anchor tenant” role played by supermarkets in shopping malls in South Africa will play an important role in the analysis of the effect that exclusivity clauses have on competition, particularly bearing in mind the apparent important role that the presence of supermarkets play in developing and sustaining shopping malls.
The outcome of such analysis will depend on various complex factors and cannot be prejudged.
It bears mentioning that the act provides that clauses which may be anti-competitive are not automatically void.
The raging debate over whether or not such clauses are desirable from a competition law perspective is therefore not a license for any party to breach an existing contract.
- Fin24
* Jac Marais is a partner at Adams & Adams. Views expressed are his own.
Whether Game’s intended introduction of liquor and food lines into its Cape Gate store will infringe Shoprite’s exclusivity rights and whether Game will ultimately be precluded by the landlord (Hyprop) from selling these lines, will, in part, depend on the unique facts of the case.
However, the issues relating to exclusivity provisions in favour of supermarket chains in shopping malls are more general, and the case is likely to be an important indicator of the way that such clauses will be approached in future.
The Competition Commission has for some time expressed its discomfort with exclusivity agreements entered into between landlords and supermarkets and has conveyed its desire to remove or exclude “exclusivity from long term lease agreements”.
To this end, the Commission and the Competition Tribunal have imposed conditions on property mergers which involved shopping malls where exclusivity agreements existed with “anchor tenants”.
The conditions imposed to date have been soft to the extent that the landlord was required to negotiate with the tenants in whose favour the exclusivity agreements operate, with a view to removing such clauses.
There were, however, no consequences or sanctions in the event that such negotiations failed.
Not surprisingly, such conditions have had limited success in removing exclusivity clauses from existing agreements.
Competition Commission
The Competition Commission’s cautious approach to date is (in our view correctly) borne out of an appreciation of the potential difficulties that will arise from adopting a blanket approach to exclusive lease agreements in the shopping mall context.
Exclusivity clauses stand to be considered under Section 5 of the Competition Act which, in essence, provides that an agreement will only be prohibited if its net effect is anti-competitive.
Exclusivity clauses will, therefore, only be problematic from a competition law perspective if any anti-competitive effects are not outweighed by pro-competitive gains.
The weighing up exercise takes place within the context of defined product and geographic markets and there are accordingly limits to the extent to which the outcome of such an exercise in respect of one shopping mall might be applied generally.
For example, an exclusive lease agreement in one shopping mall could place the lessee in a position to increase prices to the detriment of consumers.
However, the same exclusivity in another shopping mall, where the tenant’s ability to increase prices is inhibited by competition from outside the particular shopping mall, might minimise or remove the potential harm.
Further, the “anchor tenant” role played by supermarkets in shopping malls in South Africa will play an important role in the analysis of the effect that exclusivity clauses have on competition, particularly bearing in mind the apparent important role that the presence of supermarkets play in developing and sustaining shopping malls.
The outcome of such analysis will depend on various complex factors and cannot be prejudged.
It bears mentioning that the act provides that clauses which may be anti-competitive are not automatically void.
The raging debate over whether or not such clauses are desirable from a competition law perspective is therefore not a license for any party to breach an existing contract.
- Fin24
* Jac Marais is a partner at Adams & Adams. Views expressed are his own.
