Supermarket giants Coles and Woolworths have voluntarily entered into court enforceable undertakings to stop demanding restrictive covenants in supermarket leases. Restrictive covenants may include requirements that if a rival supermarket moves into a shopping centre the rental rates of the incumbent will be cut, which has the potential of acting as a significant barrier for new entrants.

The agreement means that 602 out of 750 active restrictive leases involving Coles and Woolworths will cease immediately, with the remaining 20 per cent to be phased out within five years.

Graeme Samuel, Chairman of the ACCC, considers it ‘a major breakthrough for grocery competition in Australia’. The ACCC’s 2008 grocery industry report has fuelled a series of microeconomic and legislative reforms which aim to increase competition in the grocery retail sector, as well as empowering consumers through unit pricing laws which will become mandatory in the large supermarkets by December this year. (See our July edition of the Competition and Market Regulation Update2 for further information on unit pricing).

To reduce barriers to entry in the grocery retail sector, the government has planned additional reforms which include:

  • relaxing foreign investment rules so that foreign owned supermarkets such as Aldi and Costco have an extended period of time to commence construction after receiving purchase approval, and
  • reviewing state and territory government planning laws which currently hinder the ability of supermarkets to establish themselves in areas outside of the major shopping centres.

The ACCC has indicated that it will engage with other supermarket chains in a bid to remove restrictive covenants from their leases.

The ACCC’s investigation into restrictive covenants follows an April 2008 report from the United Kingdom competition regulator, the Competition Commission, which announced measures to prevent land agreements which restrict entry into grocery retailer markets. The agreements addressed by the Competition Commission were restrictive covenants and ‘exclusivity arrangements’, which provide that a landowner grants exclusivity to a grocery retailer and agrees not to allow another grocery retailer to operate from site(s) owned by the landowner. Measures implemented by the Competition Commission included:

  • requiring certain large grocery retailers to release restrictive covenants
  • prohibiting certain large grocery retailers from entering into new restrictive covenants, and
  • requiring certain large grocery retailers not to enforce or seek the enforcement of other exclusivity arrangements after five years from the date of the report (30 April 2008) or five years from the opening of the store benefitting from the exclusivity arrangement.