Supermarket lease conditions on landlords revealed at Bill hearing

$40b grocery sector tells select committee supermarket leases need reining in. Photo / Getty Images

Supermarket anti-competitive behaviour runs to banning a "vast" range of non-grocery retail neighbours in leases, setting site conditions for years after a tenancy ends, and requiring landowners to object to new developments or district plans at their own cost, says the Food & Grocery Council.

In a submission to the parliamentary select committee hearing on an urgent Government bill to stop supermarkets blocking competitors from accessing land for stores, the council has used a current supermarket lease it's obtained to make a case for new legislation to broaden the prohibition of anti-competitive covenants imposed by supermarkets.

The council, which represents major manufacturers and suppliers in the $40 billion food, beverage and grocery products sector, told the Herald the generic lease is currently in use and indicative of clauses "in place up and down the country".

The economic development, science and innovation select committee is hearing the Commerce (Grocery Sector Covenants) Amendment Bill. The proposed legislation is one of the Government's actions in response to the Commerce Commission's market study into supermarkets. The report found the supermarket duopoly earned $1 million a day in excess profits, "straight from the pockets of Kiwi consumers", said Commerce and Consumer Affairs Minister David Clark.

The council's submission said restrictions in the example lease prohibited a range of retailing well beyond core retail grocery on the site of which a supermarket is part.

The lease defined "supermarket" as a store which:

(a) Stocks, sells and supplies such general merchandise and services as provided for in supermarkets anywhere in the world and includes, (but without limitation) general merchandise, products, goods and equipment and services under the following general headings: food and groceries such as meat, seafood, delicatessen, bakery, dairy, frozen, grocery, produce; alcoholic beverages; clothing, fashion, footwear and accessories for women, men, children and babies; bags and luggage; music, video, DVD and entertainment; toys and games; sports and fitness; electronics; computers and software;
telecommunications; electrical appliances; small and large appliances.

(b) kitchenware; homeware, furniture and furnishings; bedding and décor; lighting;
carpets and rugs; books, office supplies, stationery, greeting cards,
magazines and newspapers; confectionery; art and crafts; pet food and
products; tools, hardware and DIY; manchester and linens; toiletries, and
cosmetic; pharmaceuticals; optical ware; household cleaning and chemicals;
health and beauty care; giftware; gardening, plants and flowers; motoring
automotive; jewellery; banking, financial, insurance and lending; and such
other ancillary uses thereof and such new lines and products as may be
introduced from time to time; and

(c) Includes (but without limitation) a coffee shop, café, restaurant; takeaway/fast
food outlet; pharmacy; Lotto outlet; news agency; travel agency; optician;
jewellers; photographic shop; pet shop; hairdresser; child care facility; shoe
and key shop; post office; dry cleaners; car wash, automated teller machine;
bank; internet/games café; home shopping and online facilities."

The council said there was scope in the lease to add any other activity deemed by the
supermarket at any time, through the phrase "but without limitation".

The definition of supermarket carried through to another lease clause which required the retail centre/facility owner to obtain consent to permit any part of the facility to be used by other food, liquor or pharmacy outlets or the supermarket's rent shall be reduced by 50 per cent and the rent review date postponed by three years until the competing retailer had been closed, the submission said.

It recommended the bill should be more broadly framed to reflect and negate the full scope of these restrictions.

The submission said lease agreements may give a supermarket various types of rights of first refusal (ROFR), whether to buy centres, take leases or approve any other tenants in or around the property.

"This includes ROFRs applying after the tenancy ends (eg. up to three years later) which is unusual and extending the ROFR to bind mortgagees (banks). Again it is not clear the bill captures such provisions which create entry/switching barriers.

"A ROFR lasting many years after termination of a lease in effect makes it extremely difficult for a landlord to lease the site to another supermarket or food distributor without facing a significant financial penalty. We recommend this be addressed and/or clarified."

The council said lease agreements may require landlords to object to new developments or changes to the district plan at the landlord's cost. This, it said, may leverage supermarket market power and lead to behaviour by the supermarket which might be prohibited by Resource Management Act limits on trade objections.

The council recommended the bill specifically prohibit such terms.

It said lease agreements may, by linking rent to turnover, anti-competitively align the incentives of the landlord and the grocery retailer, and asked the select committee to consider this.

"Sharing revenues may incentivise the retail centre/facility owner to protect the grocery retailer's monopoly rent (sharing monopoly rents)."

The submission asked the select committee to review the individual and collective effect of the broader range of supermarket provisions, including these.

Countdown said it had no comment on the council's submission but supported the commission's recommendations and the bill in relation to property covenants and leases. "To demonstrate our commitment to change, we have been actively removing these types of covenants with our landlords, and not enforcing any such covenants."

Foodstuffs said Foodstuffs North Island and Foodstuffs South Island supported the Government's legislation banning the use of restrictive covenants on land and exclusivity provisions on leases.

"While Government progresses the legislative process, both cooperatives have made the commitment they won't be enforcing restrictive land covenants on land they've sold, or registering covenants when selling land in the future, and are taking steps to remove the restrictive land covenants that are in place. This work continues to be a priority."

The council recommended the committee seek details of lease template provisions and standard contracts used in New Zealand from the grocery retailers to help its work - "particularly given the terms may often be confidential".

The select committee is hearing submissions evidence from a wide range of parties, including the supermarket duopoly Foodstuffs and Woolworths NZ, the Commerce Commission, The Warehouse, the NZ Maori Authority and small retailers.