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An ongoing controversy

March 2017

South Africa

Without Prejudice
The contentious and long-running issues surrounding clauses in commercial leases that have the effect of granting a major tenant the exclusive right to carry on a particular type of business in a centre, and a corresponding clause in the lease of another tenant, prohibiting it from carrying on the same type of business, appears to have a taken another step towards a conclusion. 

On 25 November 2016, the Constitutional Court upheld an appeal by Masstores against a judgment that had been granted against it in favour of Pick 'n Pay. In terms of the judgment against which it appealed, Masstores had been interdicted from operating as a supermarket, selling fresh food produce, in a Western Cape shopping centre. 

The dispute arose as a result of an exclusive right granted to Pick 'n Pay to trade as a supermarket in the shopping centre in question. This right had been granted to Pick 'n Pay by Hyprop, the landlord of the premises, in the lease Pick 'n Pay had signed with Hyprop. 

At the time of conclusion of the Pick 'n Pay lease, Masstores was already trading in the centre but not as a general food supermarket. It had undertaken, in terms of its lease, not to trade as a general food supermarket unless no other general food supermarket had been trading in the centre for at least 90-days. In its lease with Pick 'n Pay, Hyprop had undertaken not to allow any supermarket not already trading in the centre to be opened. Masstores began to trade as a general supermarket some seven years after Pick 'n Pay's lease commenced. It was unaware at that time of Pick 'n Pay's contractual rights. 

Pick 'n Pay did not seek to enforce its right against Hyprop, but sought to interdict Masstores from breaching the undertaking in its own lease, not to trade as a food supermarket. Why Pick 'n Pay chose not to enforce its right in terms of the lease against Hyprop is not explained but the judgment establishes the principle that an exclusivity clause in a lease agreement will not necessarily safeguard the lessee against lawful competition from another tenant in the centre. 

The majority, nine out of 11 judges, of the Constitutional Court ruled that the appeal must be upheld. The court held that there is no legal duty on a party, such as Hyprop in the present case, not to infringe on exclusive rights of another party to carry on trade (Pick 'n Pay in the present case) arising from a contract. For a right to arise, Pick 'n Pay would have to show that Masstores had exercised its own rights in an unreasonable or malicious manner. The judges were of the view that Masstores' trading as a supermarket would not deprive Pick 'n Pay of its entitlement to enforce its exclusive right to operate as a supermarket in the shopping centre against Hyprop. The court found further that by simply trading as a supermarket, and notwithstanding that that might have amounted to a breach of its lease with Hyprop, Masstores had not unlawfully usurped Pick 'n Pay's right. 

Although this case has disposed of the question on a contractual level, it is not necessarily the last word on the topic. The Competition Commission has for some time expressed concerns that long-term exclusive lease agreements could amount to practices that restrict competition or exclude or impede competition, in contravention of the Competition Act. 

In June 2009, the Commission initiated an investigation against the major South African supermarket chains (Pick 'n Pay, Shoprite/Checkers, Woolworths and Spar), and two major wholesaler/retailers, Massmart (which is owned by Masstores) and Metcash. The concerns raised by the Commission included, among others, the effects on competition of the practice of granting major retail tenants exclusive trading rights and, in particular, raising barriers to entry and expansion of smaller and independent firms. The Commission maintained that exclusivity clauses in lease agreements with large retailers have the effect of preventing small businesses, such as butcheries, bakeries and delicatessen stores, from competing effectively in shopping centres, and from gaining access to rented space. When the investigation was completed in 2014, the Commission announced that it had found that exclusive lease agreements raised barriers to entry into grocery retailing but there was insufficient evidence to prosecute any of the firms concerned in terms of the Competition Act. 

While the investigation was underway, the Competition Act was amended, giving the Commission the authority to conduct inquiries into the general state of competition in a market. This was in addition to the authority it already had to investigate and prosecute contraventions of the Act. 

In November 2015, following requests by the South African Property Owners Association (SAPOA) and other interested parties, and as a result of the concerns it had itself previously expressed, the Commission launched an inquiry into the grocery sector retail market. The inquiry is still in progress. One of the issues the inquiry will investigate is the impact of long-term exclusive agreements between property developers and national supermarket chains on local competition in the sector and the barriers of entry and expansion in the market such clauses create. In the terms of reference of the inquiry, the Commission noted that exclusivity clauses may affect customers' choices in terms of product range and quality and, ultimately, may affect competition. The outcome of the inquiry, expected to be published in May 2017, may have a significant impact on the continued use of exclusivity clauses in retail leases and it is clear that, notwithstanding the disposal of the matter by the civil courts, the last word on the matter has yet to be spoken. Retailers, large and small, and commercial landlords would be advised to keep abreast of developments and structure their leasing arrangements accordingly. 

In the interim, Massmart had referred a complaint to the Competition Tribunal, relating to exclusivity clauses in lease agreements with landlords with regard to its Game stores. The respondents were Shoprite Checkers, Pick 'n Pay Retailers and Spar Group as well as SAPOA. Massmart had taken this step after the Commission had declined to refer the complaint on account of the market inquiry that it was conducting. Massmart then referred the complaint in its own right, arguing that the inquiry will focus more on small and independent retailers in townships, peri-urban areas, the rural areas and information economy, rather than larger formal retailers and urban shopping malls. On 21 February, the Tribunal granted an application by Massmart for condonation of the late filing of its amended referral affidavit, despite opposition from Shoprite Checkers. The Tribunal ruled that those respondents that wish to oppose the complaint referral must serve on the Commission and file copies of their answering affidavits and proof of service, in accordance with the Tribunal Rules, within 20 business days of receiving the complaint. 

This case, developing as it is on several fronts, has already yielded one landmark decision, and promises to yield more. As it plays out, it is likely to affect not only competition and contract law but will also have far-reaching effects for both existing and future commercial landlord and tenant agreements, and on the retail sector in South Africa. It is recommended that retail property owners and retailers, as well as the practitioners advising them, follow this case as it develops. 

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