$500k Penalty In Land Covenant Case For Trying To “stop Bunnings Building”

NGB Properties Limited (NGB) has been penalised $500,000 after the Commerce Commission took court action over an anti-competitive covenant that it placed on a site close to Mitre 10 MEGA Tauranga, for the purpose of preventing competitor Bunnings from opening a Bunnings Warehouse in the area. NGB is the sister company of Juted Holdings Limited, which operates the Mitre 10 MEGA in Tauranga.

Commerce Commission Chair, John Small, says the penalty handed down in the Wellington High Court serves as a strong warning and deterrent to other companies who may engage in this conduct.

Dr Small says the Commerce Act prohibits the use of land covenants that either are intended to substantially lessen competition in a market or are likely to have that effect.

“Land covenants can harm competition by raising barriers to entry or expansion in a particular market, making it harder for competitors to compete effectively and gain scale.”

“In this case, the covenant was intended to stop Bunnings, a competitor to Mitre 10, from building close by which would deprive Kiwis in Tauranga of the benefits that might have come from a more competitive local market for DIY and building supplies.”

Land covenants have been identified in all three market studies completed to date (fuel, groceries and residential building supplies) and the Commission considers they may be limiting competition across many sectors of the New Zealand economy.

In March, the Commission issued guidance around anti-competitive land covenants, outlining the Commission’s approach to assessing whether land covenants may breach the Commerce Act.

Dr Small says: “This case illustrates that even a single covenant of short duration has the potential to have a substantial impact on competition. That’s why the Commission will continue to pursue companies who seek to benefit from anti-competitive land covenants.”

In imposing a penalty of $500,000, Justice Cooke agreed that the issue of restrictive land covenants is a serious one and made several further comments:

“In the three market studies undertaken by the Commission it has identified land covenants as a factor affecting competition for all three market areas.”

“The lodging of the encumbrance in the present case illustrates the types of concerns it has identified. It was lodged as part of a deliberate strategy to prevent access to land by Bunnings and any other potential rivals to stop them competing with Mitre 10 MEGA Tauranga.”

“For these reasons it is important for the Court to impose a penalty that is significant, and which operates as an effective deterrent against this kind of conduct.”

Justice Cooke’s judgment goes on to say that:

“… it is a striking feature of the present case that the present contravention was made in apparent ignorance that conduct of this kind is unlawful. The conduct was no doubt engaged in to restrict competition from Bunnings, but it was not appreciated that it could be unlawful. The Commission’s market studies suggest that such misunderstandings might exist more widely. The illegitimacy of such conduct needs to be better appreciated.”

This is the first time a penalty has been imposed under section 28 of the Commerce Act, which prohibits the requiring, giving or enforcement of land covenants that have the purpose, effect or likely effect of substantially lessening competition.
What happened?

In December 2019, Juted (via NGB as its nominated purchaser) acquired land on Cameron Road in Tauranga, 500 metres from its Mitre 10 MEGA Tauranga store. This followed a competitive tender process that also involved Bunnings, which owned the site next door on Cameron Road. Having decided to publicly list the property for sale in June 2020, NGB placed a covenant on it. The covenant prevented the land from being used as a hardware store (although it was later removed by NGB in March 2021 in response to the concerns expressed by the Commission).

The minutes of an April 2020 meeting involving directors of NGB and Juted show that the decision to lodge a covenant on the Cameron Road site was influenced by a desire to “stop Bunnings building” on this site.

At the conclusion of its investigation, the Commission filed proceedings in the Wellington High Court against NGB for lodging a covenant with the purpose of substantially lessening competition. The Commission and NGB agreed a settlement to resolve the proceedings.

Background

Section 28 of the Commerce Act prohibits certain land covenants that harm competition.

More specifically, it prohibits the requiring, giving, carrying out, or enforcing of a covenant that has the purpose, effect, or likely effect of substantially lessening competition in a market. Covenants that breach section 28 are also unenforceable. A land covenant is an agreement or promise to do, or not do, something in relation to a piece of land.

The Commission has previously identified restrictive land covenants as impacting competition in the markets for residential building supplies, groceries and retail fuels, via its market studies into these sectors of the New Zealand economy. A law change prompted by the groceries study means that, as of 20 April 2023, section 28A applies to make certain grocery-related covenants unenforceable.

Having observed the possible effects of covenants in two previous market studies, the Commission’s final report in its market study into residential building supplies, recommended an economy-wide review of their use and impact. The Government accepted that recommendation. MBIE is leading that review and released a Discussion Paper earlier this month.

© Scoop Media