Established hardware chains have set in place about 60 restrictive legal covenants on desirable land blocks, preventing new stores from opening in competition
Enforcement action against a building supplier's land-blocking covenant is to be filed in the next month or so, says Commerce Commission chair Anna Rawlings.
The Commerce Act bars the use of exclusivity clauses in leases and restrictive covenants that substantially lessen competition in a market – a problem the commission has now identified in petrol stations, supermarkets and building supplies merchants.
The problem is so big the commission is recommending an economy-wide review, Rawlings says. "Tackling them one at a time is a difficult proposition from a resourcing perspective," she tells Newsroom.
It comes after ugly turf wars between incumbents such as the Mitre 10 co-ops, and more recent arrivals including Bunnings. In Queenstown, the Environment Court found the Mitre 10 Mega owner had abused court process in its attempts to stop a new 8100 square metre Bunnings store opening 500 metres away. Mitre 10 owner H&J Smith was ordered to pay the maximum $60,000 in legal costs.
And in 2011, the Commerce Commission issued warnings to Mitre 10 and Bunnings over misleading advertising in which both claimed to have the lowest prices.
In response to direct questions about the Commerce Commission's enforcement action, Mitre 10's head of external communications Lisa Wilson did not return calls yesterday. But she did issue a perfunctory statement saying the company was reviewing the draft report.
"The Commission has signalled further work is required to establish the impact of restrictive covenants across the wider economy," she said. "We will continue constructively engaging with that cross-industry work."
“Merchants told us the primary purpose of store covenants is to stop a competitor from establishing itself near a merchant’s planned or existing store. They consider this is justified, as it provides them with the necessary confidence that they will make a return on the investment.” – Commerce Commission
The restrictive land covenants appear to be used more often in regions such as Auckland and the lower North Island.
In addition to the 60 restrictive covenants identified by the Commerce Commission, in its draft report published this week, it also found 80 exclusive leases benefiting the major building merchants, that potentially limit competition.
Most of the covenants block competition for years to come – and the remaining ones don't have a fixed expiry date. The covenants are over land adjoining, or near, land leased by a merchant, where the landlord has agreed to lodge a covenant for the merchant’s benefit.
"Merchants told us the primary purpose of store covenants is to stop a competitor from establishing itself near a merchant’s planned or existing store," the report says. "They consider this is justified, as it provides them with the necessary confidence that they will make a return on the investment associated with developing a new store."
Because of the prevalence of restrictive covenants and exclusive leases, the commission says it will launch a compliance programme later this year. "We encourage any merchant or supplier benefiting from restrictive covenants and exclusive leases which prevent competitors from accessing certain sites to review them for compliance with the Commerce Act."
After the Commerce Commission raised similar concerns in the groceries sector, the two big supermarket chains acknowledged such covenants were wrong. Foodstuffs North Island – a co-operative similar to Mitre 10 – agreed to unilaterally remove the 135 covenants it had placed over land.
But Woolworths NZ said although it supported the move in principle, acting unilaterally was legally challenging. This prompted the Government to urgently introduce a law removing and banning such covenants.
The commission has also discovered a new type of covenant, over land developments. Developers and homebuyers are forced to agree to only buy from the one hardware chain, as part of their purchase agreement. "These covenants appear to make it more difficult for other merchants to supply building materials for new houses to be built on the land," the report says.
"We are aware of land development covenants in the Hawke’s Bay region. These covenants apply to residential land developments and appear to influence or dictate the merchant through which building products are purchased by trade customers wanting to build on the land. The effect of any covenants is to reduce the contestable market for new entrants (or merchants that expand), which could impact on entry or expansion."
However, these land development covenants are less widespread than the store covenants.
Fletcher Building, which owns the Placemakers chain, has just been approved to take over six Tumu ITM stores in Hawke's Bay and Wairarapa. But it said it was not the subject of the Commerce Commission enforcement action, nor aware of the case involved.
Grant Swanepoel, advisory firm Jarden NZ's equity research director, noted the company facing enforcement was not named. "From what we can deduce, it does not appear to be related to Fletcher Building," he said. "The commission also refers to the potential negative use of restrictive land covenants, also likely limited if any Fletcher Building impact."
New residential homes consented, 12-month rolling totals to April 2022
The Commerce Commission is preparing to take more enforcement actions, as its powers are widened next year. At present, it must prove a business is acting with the purpose of lessening competition, but a change to the Commerce Act means it will be enough that the company's action had the effect of substantially lessening competition.
It's somewhat like the difference between murder and homicide: the commission will no longer have to prove murderous intent.
"So we've always said that there may be types of conduct that would enable us to take enforcement action under a revised section 36 of the Commerce Act," Rawlings says. "And what we are really encouraging is the parties who are using quantity-forcing rebates, in particular, have a good look at their place in the markets, their market power, and assess the use of those rebates for compliance with that amended Commerce Act provision next year."
The Government also kicked off a review of the building consents regime last month. The commission says the code and associated systems are complex to navigate and competition is not an express objective of the Building Act.
But amid the moves to open up the market to more products, competing on price and speed, the commission’s draft report does recognise a countervailing challenge: meeting the core objectives of the building regulatory system to deliver safe, healthy, durable homes.
