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Pros and cons of long mall leases
August 11, 2009
By Roy Cokayne
Legal experts have cast doubt on whether exclusivity clauses in long-term property lease agreements are anti-competitive and contravene the Competition Act.
The legality of exclusivity clauses in property lease deals is in the Competition Commission's spotlight as part of its probe into possible anti-competitive behaviour by retailers.
If exclusivity clauses in long-term leases are found to contravene the act, they could be declared unlawful.
The clauses involve landlords agreeing not to rent space in the same shopping centre to a major tenant's competitor.
Lee Mendelsohn, the head of the competition department at Edward Nathan Sonnenbergs, believed it would be difficult to show that long-term leases were anti-competitive, and even where they were, the efficiencies and pro-competitive gains arising from them were likely to offset these effects.
Although there might be instances when a long-term lease violated the act, these would be few and far between.
This was based on the fact that for a lease agreement to violate the provisions of the act it must significantly lessen or prevent competition.
But it was unlikely, particularly with the proliferation of retail properties, specifically in urban areas, and because any retailer that was not accommodated in a particular retail development could simply look for space in another mall.
Mendelsohn said if it was shown in a particular case that there was a significant lessening or prevention of competition, the parties to a long-term lease would still be entitled to demonstrate efficiencies or pro-competitive gains arising from the deal that were greater than and offset the anti-competitive effect.
He believed a number of defences existed in such cases.
Without a long-term anchor tenant, for example, the development might never have been embarked upon, thereby lessening competition, while the benefits to other tenants in the development arising from the anchor tenant's tenancy through an increased foot count might enhance competition and increase efficiencies.
Lesley Morphet, the head of the competition law team at Deneys Reitz, said exclusivity clauses in lease agreements were not in themselves a problem in terms of competition law and it depended on the length of the lease and their ambit.
Morphet stressed it would be a "weighing-up exercise" to determine if a lease agreement was anti-competitive or not.
An exclusivity clause could be a problem from a competition law perspective if it lessened competition and rivals were unable to compete.
However, Morphet said many factors would have to be considered, including the relevant market and whether there was any dominance in the market.
There were arguments as to why an exclusivity clause was needed and commercial realities played a big role in this.
"I can see why a landlord would want a key tenant and once they have secured that, commercial considerations definitely come into play, particularly now" in the current economic recession, she said.
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