Chapter 4: How well is the current system working?

Although there are already laws which aim to ensure that land agreements do not substantially lessen competition, we have seen through the Commerce Commission’s reports that land agreements can risk having anti-competitive effects. This indicates that the laws could be working better, but we do not have a sense of how widespread the issue is, or the why the existing provisions are not providing sufficient deterrence. This section describes some of the challenges to the system working effectively to prevent anti-competitive land agreements.

We consider the challenges within the system fall into 3 main categories:

• there is minimal audit or control over the content of land agreements when they are created and recorded on the Land Titles Register
• information for monitoring purposes is difficult to obtain
• the Commerce Act provides enforcement powers, but compliance and enforcement is complex and costly.

There is minimal audit or control over the content of land agreements when they are created and recorded on the Land Titles Register.

Covenants and other agreements are private contracts

The creation of land agreements, such as covenants and leases, generally takes place between private parties, and the government does not normally have a role in checking or approving the terms.

There are limited levers with which to ensure the agreements entered into comply with the Commerce Act at the time they are made. We are relying on parties having the relevant knowledge of the importance of competition and how to comply. Often, a lawyer would be involved in drafting agreements, and may be aware of the relevant provisions in the Commerce Act, but there is no requirement to submit this to government to verify.

Furthermore, businesses and lawyers often use standard templates to create land agreements, restrict the uses to which tenants can put the premises, and/or allow the landlord to withhold consent where the proposed new use is in substantial competition with the business of other occupiers of the same property. The use of templates is not mandatory, but we consider these formats could encourage the drafting of agreements that could have the effect of lessening competition.

The land registration system is not designed to audit covenants or other agreements

Not all agreements can be recorded in the Land Titles Register, and not all agreements are required to be. However, we believe that the majority of covenants are.

Registration is the first point at which government (through the Registrar-General of Land) becomes involved in a covenant or other land agreement. However, the role of the Registrar-General of Land is to ensure that we have an accurate record of land agreements and has no powers to vet new agreements to ensure they comply with the law, other than ensuring they meet minimum content requirements. This is consistent with covenants or other land agreements (for example, leases) being private contracts, which parties have the freedom to enter into as they so choose. It also has a practical component – there are many laws and regulations applicable to the use and development of land, and to check each of these every time there was an application to make changes would be an undertaking of such a scale that it would be impracticable.

Information for monitoring and detection purposes is difficult to obtain.

Covenants and other agreements are difficult to monitor for compliance

The Commerce Commission is responsible for compliance with the Commerce Act, and therefore has a role in detecting land agreements which could lessen competition. However, the Commission is not party to the registration process and would be unlikely to have the capacity to review every new agreement being recorded on the Land Titles Register, even if it was.

The Land Titles Register is accessible online and searches can be carried out to review what affects the land, but only by individual titles. There are search limitations, which require searches to be carried out by title rather than geographically. In order to actively monitor land agreements and whether they contravene the Commerce Act, the Commission would have to research individual land agreements and attempt to map out which land and businesses are affected.

Market studies can help inform compliance work, but for the wider economy, this sort of monitoring is a time-consuming task, and it is difficult to target efforts where they are most needed. Outside of market studies, the Commission largely relies on the public coming forward and informing them of land agreements that may breach the Commerce Act.

The Commerce Act provides enforcement powers, but enforcement is complex and costly.

Covenants are difficult to remove, even if a party wishes to do so voluntarily

Where businesses become aware that a land agreement they are party to is, or could be, contravening prohibitions in the Commerce Act, they may wish to remove it voluntarily. For example, when the Commerce Commission published its market study report on the grocery sector, several major grocery retailers accepted the Commission’s concerns about the covenants they had in place and sought to surrender the benefit they enjoy from them.

There are 2 ways to remove covenants:

• A covenant can be removed if all affected landowners (and their mortgagees) agree to remove the covenant.
• A covenant can be removed by application to the High Court on one or more of the grounds outlined in section 317 of the Property Law Act 2007.

However, there are practical difficulties facing a party wishing to do this. Records of longstanding covenants may not have been kept, and even where known, consent is needed from all (sometimes numerous) parties to the covenant in order to remove it. For example, where the benefitting land has been subdivided and many owners now have the benefit of the covenant and are required to consent to the covenant being removed. Failing agreement between the parties, it is possible to apply to the court to have a covenant changed or removed, but court proceedings can be costly and time-consuming.

Sometimes the party benefitting from a land agreement may issue an undertaking not to enforce it. However, such an undertaking can be reversed over time, and so is likely to provide little assurance to competitors wishing to use the site or operate on multiple sites.  Further, unless the undertaking is registered on the title, a prospective purchaser would not know about the undertaking except by making further enquiries.

Under section 28A of the Commerce Act, certain grocery-related covenants are now treated as prohibited and unenforceable.  For a transitional period of two years, designated grocery retailers can voluntarily remove or modify covenants they believe would fall within the meaning of section 28A, without needing to secure approval of other parties.

We are interested to hear about your experiences or removing or varying covenants, and what might have made this easier.

The Commerce Act provisions can be complex and costly to enforce

Sections 27 and 28 of the Commerce Act prohibit a covenant, contract, arrangement or understanding containing a provision that has the purpose, effect, or likely effect of substantially lessening competition in a market.

However, to prove a contravention of existing prohibitions requires complex analysis of the purpose or effect of the covenant or agreement. Determining the actual or likely impact involves assessing the state of competition in the relevant market, the land agreement and how the situation may differ if the land agreement were not in place. It also often involves looking at more than one covenant that benefits the same person or associated people, as land covenants may, individually, not substantially lessen competition, but multiple land covenants, assessed together, may breach section 28.

As discussed above, identifying and gathering information on multiple covenants is not always a simple task. This makes prohibition difficult and expensive to enforce, whether for the Commission or for a competitor seeking to establish stores on multiple sites encumbered by these covenants. We understand that as a result of the time and complexity involved in analysis, it is not feasible for the Commission to carry out enforcement on a large scale.

Due to limitation periods, any enforcement action by the Commission is dependent on how long a land agreement has been in place. The Commission can take action against a party that enters into an agreement that contravenes sections 27 or 28, or that enforces (or attempts to enforce) the terms of that agreement. In either case, the Commission cannot take enforcement action if the event occurred more than 10 years ago.

Many agreements are likely to have been created more than a decade ago, and often the existence of a land agreement alone will deter potential competitors from attempting to secure a site. Therefore, there may be cases where enforcement action by the Commission against a land agreement causing competitive harm is either not an option due to the Commission being time-barred from taking action against the entering into of the agreement, or challenging in the absence of a complaint, due to there being no enforcement (attempted or actual) by the benefitting party. However, there will still be the ability to remove or modify the land agreement, by the consent of the parties or through the courts.

This is not to say that no compliance activity has taken or will take place. Covenants are a focus of the Commerce Commission compliance work in 2023, and as a result of its market studies, the Commission has opened three investigations into historical conduct relating to covenants in the retail grocery sector (each investigation relating to multiple covenants). Independent of the market studies, the Commission is taking enforcement action relating to a restrictive covenant in the building supplies industry.

The Commission’s decision to take enforcement action under the Commerce Act is made on a case-by-case basis with reference to its Enforcement Response Guidelines.

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