The Wellington High Court has penalised Foodstuffs North Island $3.25 million for lodging anti-competitive land covenants with the purpose of blocking competitors.
In handing down his judgment today, Justice Radich described the conduct as "deliberate" and "serious". He said it reflected a deliberate effort to hinder rivals from opening new supermarkets or developing existing ones at three locations in the Lower North Island - Newtown and Petone in Wellington and Tamatea in South Napier.
The court action by the Commerce Commission followed an investigation into the historical conduct which came to light during the market study into the grocery sector completed in 2022. The study identified that the use of covenants on land had limited the number of sites available to competitors.
Justice Radich said the conduct gives rise to serious competition issues and reflected a deliberate effort to hinder competitors at that time.
Commission Chair, John Small, says the $3.25m penalty imposed by the Wellington High Court – the largest to date under section 28 of the Commerce Act - reflects the seriousness of the conduct and the reason the Commission pursued the court action even though land covenants are now illegal.
"The covenants were of very long duration – up to 99 years - and lodged with the purpose of hindering competitors in local towns and suburbs where Kiwi consumers buy their groceries. By blocking other supermarkets from opening new stores or expanding existing ones, the covenants hindered competition for Kiwi shoppers. A penalty of this magnitude sends a clear message that this kind of anti-competitive conduct will not be tolerated."
Dr Small says this case against Foodstuffs North Island should act as a deterrent to businesses and a reminder that the Commission will continue to pursue companies in any industry who use land covenants to stop rivals entering local markets.
"Land covenants can harm competition by raising barriers to entry or expansion in a market, making it harder for rival businesses to compete effectively and gain scale. They deprive Kiwi consumers 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 carefully consider whether they comply with the Commerce Act."
Dr Small recognised that in August 2021, Foodstuffs North Island committed to stop using restrictive land covenants and exclusivity provisions in leases and in June 2021 had started a significant and public process to identify and remove any such clauses in existing tenancy contracts.
In his judgment, Justice Radich said the penalty imposed recognised the fact that the conduct was historic, the defendants had sought legal advice, admitted the conduct at the earliest possible stage and publicly acknowledged it. He also noted that Foodstuffs North Island had not intended to breach the law and that the covenants weren't enforced.
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 – 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 of the Commerce Act renders 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.
