Chapter 2: What purposes do land agreements serve and are there alternatives?
Businesses use land agreements for a multitude of reasons – many unrelated to competition.
We want to understand whether there are circumstances where parties may use land agreements for beneficial aims, but where those agreements may have the effect of restricting competition, and whether, and how, we should allow types of agreements to continue.
Land agreements can provide businesses with a degree of certainty and can incentivise investment
While we have concerns about the potential for land agreements to limit competition, we also appreciate that they can create incentives for development and investment and allow businesses to use land in the way they consider most appropriate. For example, where land agreements encourage new businesses to enter a market with a complementary product or service to what already exists, it can have benefits to competition and consumers. However, it could be that some land agreements which exist for long durations have potential for the opposite to result.
Land agreements put in place by businesses may have other wider benefits, particularly where they encourage development in sectors that support us as we decarbonise and increase productivity. Separately, land agreements can be put in place to protect features of the natural environment, such as biodiversity and open space, which we would not want this work to impact. This is discussed in more detail in Chapter 5.
We are seeking information on the reasons land Agreements are put in place
It is often difficult to understand what the original rationale for a land agreement was – particularly when they have been in place for many years, and land has since been sold numerous times – so we would like to hear from businesses that benefit from land agreements to understand the purposes they serve. We are interested in the differences between land agreements which directly impact competitors, for example those put in place with the intention of protecting a business’ place in the market, and those which impact competitors as a secondary effect.
Understanding the purposes of land agreements will help us build a picture of their benefits for businesses and the wider economy and allow us to balance this against any potential harm.
We understand that common reasons for using land agreements include:
Recoup an initial investment:
The Commerce Commission’s investigation into the residential building supplies market found the primary purpose reported by businesses for using store covenants was to stop a competitor from establishing itself near a merchant’s planned or existing store, and this was justified by giving businesses confidence that they will make a return on the investment associated with developing a new store.
Protect ongoing operations:
A hypothetical example provided in a submission on the Commerce Amendment Bill in 2021 described a horticultural grower (Grower A) which has spare adjoining land and wishes to sell that land to another horticultural grower (Grower B), but wishes to place a covenant on the land to restrict Grower B from using that land in ways that would be detrimental to Grower A’s use of his/her retained land (for example, restricting activities that would shade the retained land, cause run-off on to the retained land, or even conservation or waterway protection covenants that place limits on the capacity of Grower B’s use of the purchased land).
We also understand that reverse sensitivity covenants (“no complaints”) are used in a range of sectors. For example, they can be used in a primary sector context, where existing operations have the potential to be affected by increasing rural subdivision nearby. In this situation, a covenant could state that the occupier of a new dwelling has no right-of-complaint about certain adverse effects from an existing adjacent activity, for example, a farm or orchard. These types of covenants support continued land use by existing landowners, especially where they cannot materially reduce their noise, dust or odours.
Another example identified by the Commission was a fuel retailer moving to a new site and specifying that the previous site must not be used as a retail fuel site. One rationale retailers provided to the Commission for this type of covenant was that it can prevent potential disputes over who is liable for any subsequent clean-up of site contamination.
We have identified three broad rationales for businesses using land agreements: to recoup an initial investment, to protect ongoing operations, or to protect them from future dispute.
Do you agree with these categories?
Are there any other rationales for using land agreements that we have not covered here?
Are you party to an agreement that benefits your business, either by requiring another party to do something, or by requiring them not to do something?
If so, please provide details of the agreement (the type of agreement, the purpose of the agreement and its duration). If you have multiple land agreements, please provide the most recent example
Did the agreement achieve this aim?
Have you ever used a land agreement to protect your place in the market? If so, how?
Are there circumstances where alternatives could achieve the same purpose?
We want to better understand the reasons for land agreements as this will help us discern whether the benefits sought can be achieved by another way, with less impact on competition. We want to know:
- Are there other, less restrictive, means for the business to achieve its aim?
- Are there ways to lessen the impact of the restriction?
- Where an agreement is used to recoup an initial investment, would a time-limited agreement (for example, 5-year duration) be sufficient to protect an initial investment?
- Could resource consent conditions be used to manage negative effects from neighbouring land use?
Returning to the examples above:
Recoup an initial investment:
In this case, a long duration covenant seems inconsistent with the justification: a store covenant that endures after a business stops operating on the land or after it has had a reasonable period to recoup its investment seems unnecessary. One alternative would be for the covenant to be limited to a defined period of time. This would be similar to a patent, where a time-defined restriction which is related to the time it would take to recoup the cost would be better than a blanket restriction.
Protect ongoing operations:
In this case, an alternative could have been to restrict the adverse effects only (for example, run-off in waterways) and not specify any particular use of the land. This would create incentives on Grower B to manage their effects without necessarily restricting their production of crops. There may also be other levers such as testing, monitoring and land remediation.
It may be possible for the landowner to achieve the same objective by having the land independently assessed following remediation and including an indemnity provision in the sale contract with the purchaser of the land. Doing this would not preclude any future use of that land for a similar use by a competitor.
If you benefit from a land agreement, did you consider any alternative options to the land agreement? If so, what were these and why did you choose the land agreement?
Are you aware of any competition impacts from the alternatives we suggest? If so, what are these?