By Geraldine Southern, Director of Hadar Incorporated, Specialist Property Law Firm
This article first appeared in Asset Magazine’s December 2022 edition

In South Africa, it has long been common practice for certain dominant retail tenants to insist on an exclusivity clause when entering into a lease agreement for premises at malls or shopping centres. Although this has virtually become accepted practice, it has not been without its share of controversy.

Major grocery retailers who have benefitted from exclusivity clauses have been criticised for the practice, which is viewed by some as anti-competitive. As a result, the Grocery Retail Market Inquiry, or GRMI, was launched in October 2015 to investigate the impact of exclusivity agreements on fair trade and market accessibility.

What is a lease agreement exclusivity clause?

In essence, an exclusivity clause is most commonly found in a long-term lease agreement between a retail tenant and a landlord, which grants the tenant sole rights to conduct a certain type of business within a particular mall or shopping centre.

Most commonly, an exclusivity clause has been invoked by South Africa’s four large supermarket chains to ensure exclusive representation of their scope of business within a shopping centre – and by implication, the surrounding urban area. Depending on the type of business, an exclusivity clause may stipulate that no other grocery retailer, butchery, bakery, or pharmacy may conduct business on the premises.

Of course, there is also a trade-off: major grocery retailers have often pointed to their presence as an anchor tenant as an important drawcard for a centre. The arrangement has also frequently led to co-operative marketing campaigns or promotions that benefit the centre as much as the tenant. Such a retail tenant is also more inclined to protect their investment by regularly upgrading their facilities or even bearing part of the centre maintenance cost.

Findings by the GRMI

One of the key findings of the GRMI was that the prevalence of exclusivity clauses is not in fact beneficial to the larger consumer market. Notably:

• Such clauses limit consumer choice, which by implication causes consumer harm;
• They reduce competition within shopping centres, which impacts pricing and accessibility, and
• They prevent the participation of SMMEs and historically disadvantaged persons from participating in the grocery retail sector.

Subsequently, the GRMI recommended that the Competition Commission work toward securing a voluntary commitment from the major retailers in question, with a view to phasing out exclusivity clauses entirely. This recommendation was the result of several years of careful observation and analysis, with the final report published in December 2019.

The Competition Commission then introduced recommendations that all major national supermarket chains cease enforcing exclusivity clauses with immediate effect, that new lease agreements may not contain these clauses, and that exclusivity clauses contained within existing lease agreements be phased out. This phasing out must take place by the next due extension of the lease, or within five years from the date of the publication of the Commission’s Final Report on 25 November 2019, whichever occurs first. In October 2020, the Shoprite Checkers group and Pick ‘n Pay group became the first grocery retailers to voluntarily adopt these recommendations.

Is this the end of exclusivity clauses in retail lease agreements?

It’s important to note that these undertakings are limited only to grocery retail leases and formal shopping centres. In other words, these provisions do not include a restriction of enforcement against retailers other than supermarkets. They will also not apply if a lease is entered into for a premises which is not in a shopping centre.

On one hand, these changes should allow smaller businesses to compete more fairly. However, the opposite also applies, in that the viability of smaller businesses could be jeopardised by landlords injudiciously allowing direct competitors into the same centre. A landlord might feel this is justified because the competitor is willing to pay a premium rental, or the landlord may be under pressure to just fill vacant spaces regardless of tenant mix.

Striking a balance: a common-sense approach

Virtually any tenant operating a smaller business would like to enjoy exclusivity within a shopping centre. Equally obviously, most landlords will not agree to this, as their function is to build the space and optimise profits for the shopping centre.

However, there are an increasing number of landlords who take a pragmatic and holistic approach to their tenant mix, and who exercise a measure of discretion by not placing direct competitors in the same centre as far as possible. This unspoken exclusivity is then upheld by the landlord, despite there being no contractual obligation to do so.

In one notable local example from my personal experience the landlord of a prestigious shopping centre in Johannesburg, which features a well-known and long-standing Greek restaurant, will not accept tenancy applications from any similarly themed restaurant. This not only rewards the loyalty of the existing tenant, who has been operating a successful business for years, but prevents the dilution of offerings within the centre and the potential fallout and risk of losing a well-established tenant.

This approach is an important consideration for any landlord. If the only goal is to fill space regardless of tenant preservation, the landlord could potentially end up losing a failed tenant, with no guarantee the other would succeed. Filling space is not the only consideration for landlords. Location within the centre is important, as is a good tenant mix, in order to maximise traffic flow and time and money spent by consumers within the centre.

This also means formulating or adjusting a tenant mix to cater to the urban demographic – for example parents with children seeking entertainment, the necessity of school supplies, family-friendly eateries, and so on. Put simply, this means that the most successful landlords are those who cultivate relationships of trust and open communication with their tenants – and who seek solutions that are mutually beneficial.

We encourage landlords to ensure that they are fully apprised of the exclusivity recommendations of the GRMI and to carefully consider the impact of placing (or not placing) certain tenants in the centre, particularly on the loyal long-standing tenants who should be prioritised. If you are unsure of the recommendations or would like additional input on the issue, contact us for an opinion or advice.