Countdown threatens to halve rent: How anti-competitive covenants worked

National supermarket chain Countdown threatened to halve the rent it paid to landlords who allowed in competing food or drink sellers, according to lease documents.

Caveats in leases made clear that if landlords in a development wanted the supermarket as a tenant, then other competing businesses would be excluded.

The anti-competitive practise is now outlawed and Countdown and Foodstuffs are being forced to unwind all their land war caveats.

Rival fish, liquor, meat, vegetable and grocery sellers were specifically named in Countdown leases, drawn up to control trade so the subsidiary of the ASX-listed Australian business had sole prerogative to sell its goods from properties it leased - often larger centres with many other stores surrounding the supermarket.

There could be clothing shops, banks, pharmacies, gyms and other retailers in such larger centres, but no one else selling food or drink like Countdown does.

Anti-competitive lease caveats threatened financial penalties for landlords allowing others in.

Documents say Countdown will only be liable to pay 50 per cent of the base rent and that would continue until the rival leaves if the landlords disobeyed and breached the lease terms.

The choke caveat is in the lease in some detail so if the matter went to court, the property owner could potentially lose because they'd already agreed in writing to those terms and conditions.

"If during the terms any premises ... are used without the grantee's prior written consent ... for ... a supermarket, butcher, a fruit and vegetable store, fishmonger or a liquor store, if there is already a liquor store in the centre, the grantor acknowledges that under the terms of the supermarket lease, the lessee shall only be liable to pay to the grantee ... 50 per cent of the base rent," a lease document said.

Commerce and Consumer Affairs Minister David Clark. Photo / Mark Mitchell

Asked which properties the caveats were on, how many there were throughout New Zealand and how many were now removed, Countdown spokesperson Ally Orr said: "We won't be providing the details you've requested, but as per the law change any restrictive covenants are being removed. We support the law change that the Government has made regarding these."

For years, Countdown has been able to reduce rivalry at properties it leases because to score the popular grocer as a tenant, investors must sign those leases. The chain hardly owns any stores but instead leases most from investors.

Supermarkets like Countdown are highly desirable tenants and many landlords seek to secure them for stable long-term rent flows, the trade it brings to bigger centres and suburban areas, foot traffic, flow-on benefits to other retailers, the necessity that food is to all of us and its big-brand, highly trusted name.

Score one of the approximately 185 Countdowns and as a landlord, you're likely to secure a lucrative 10 to 12-year lease, significantly increasing the value of your building and land, and generating millions in rent.

Around 21,000 people are employed by the business which sells around 20,000 different products in its larger-format stores, committed to providing customers with choice, value and convenience.

But landlords were asked to pay a price to get those stores.

The Government announced on Budget night in May it would outlaw supermarket covenants. It passed an urgent law review to eliminate the practice, identified by the Commerce Commission reason for our supermarket duopoly because the covenants are barriers to new entrants.

Now, supermarkets have to unwind all their covenants which industry experts said could cost them dearly. Some landlords might well say "pay us" and Countdown might have no option but to fork out, one industry expert said.

Landlords won't agree to the terms and conditions of the leases being changed willingly because they know Countdown has no choice but to comply with the new law, that person said.

So while they mightn't have liked the caveats, nor might they like being asked by Countdown to eliminate them from their leases.

Foodstuffs has said far more than Countdown. New Zealand's biggest supermarket chain is responding to the crackdown by removing restrictive covenants on 78 of 135 affected titles or properties where it had tried to ban competitors from building new stores.

Foodstuffs North Island chief executive Chris Quin gave those figures on July 12, telling how the co-operative which has Pak'nSave and New World was responding to the new law.

The sector had been outed in engaging in those anti-competitive land wars, buying up properties or dictating the terms of leases to try to stop any competitors from getting a foothold in dozens of areas throughout New Zealand.

Commerce and Consumer Affairs Minister David Clark said of why the Government had acted on the covenants: "The Commerce Commission's market study found competition is not working well for consumers in its current state. In fact, it found major grocery retailers are earning excess profits of around $1 million a day. Something needs to change."

The Commerce Commission has been given new powers to help it assess compliance with the amendments to the Commerce Act that were made through the Commerce (Grocery Sector Covenants) Amendment Act 2022, and which make existing covenants unenforceable.

"These powers allow us to require supermarkets to hand over information relating to contracts, arrangements and covenants and will be used to actively assess compliance within the sector. The commission can take enforcement action in appropriate cases, including through the courts, if covenants are anticompetitive," a spokesman said.

It now has three sets of investigations open into land and lease covenants, relating to each of Foodstuffs South Island, Foodstuffs North Island and Woolworths NZ - that is, an investigation for each supermarket retailer relating to a set of covenants for each retailer.

"Before the new law was introduced, we considered the covenants identified in our market study and prioritised specific geographic areas for in-depth investigation, including a range of urban and rural areas. We are also continuing to receive new information regarding the scale and scope of covenants and will continue to consider our prioritisation of covenants we know about in relation to this new information," the spokesman said.

It expects to be able to announce more details on these investigations later in the year.