Canada's Competition Bureau has launched investigations into the parent companies of grocery chains Loblaws and Sobeys for alleged anticompetitive conduct, court documents reveal, with Sobeys' owner calling the inquiry "unlawful."

The Federal Court documents show the Commissioner of Competition launched the probes on March 1, saying there's reason to believe the firms' use of so-called property controls limits retail grocery competition.

The commissioner claims the controls that the grocery giants have baked into lease agreements are designed to restrict other potential tenants and their activities and are hampering competition in the grocery market.

The Competition Bureau revealed its investigation into the use of property controls in the grocery sector in February.

At the time, deputy commissioner Anthony Durocher told a House of Commons committee that property controls can be a barrier both for independent grocery stores and chains looking to expand, as well as for foreign players looking to enter Canada.

That’s why in a report last June, the bureau recommended the government limit their use in the grocery sector in order to help boost competition and make it easier for new supermarkets to open.

Industry minister François-Philippe Champagne has said he’s seeking a foreign grocer to strengthen competition in the Canadian market.

Loblaw Cos. Ltd. and Sobeys parent Empire Co. Ltd. are two of the three major Canadian grocery companies and each owns a number of grocery chains across the country.

Details of the investigations are contained in a pair of court applications lodged by the commissioner on May 6.

Sobeys owner Empire has pushed back against the investigation, saying in a separate court application that the probe gave the commissioner "the appearance of a lack of independence" amid public criticism from federal politicians over grocery pricing and retailers' conduct.

Loblaws' parent company is co-operating with the bureau's review, said spokeswoman Catherine Thomas on behalf of George Weston Ltd.

"Restrictive covenants are very common in many industries, including retail. They help support property development investments, encouraging opening of new stores and capital risk-taking," she said.

The commissioner applied in the Federal Court to order Empire and George Weston to hand over records about real estate holdings, lease agreements, customer data and other records.

In the court documents, the commissioner describes Empire and George Weston’s holdings in real estate investment trusts, or REITs. In both cases, the companies’ own grocery banners are significant tenants for the real estate companies.

Through a subsidiary, Empire holds a 41.5 per cent interest in Crombie Real Estate Investment Trust, and Empire is an anchor tenant in the majority of Crombie’s properties, the documents say, adding that Empire’s ownership interest in Crombie puts it in a position to exercise influence over the REIT.

George Weston has a controlling ownership interest of 61.7 per cent in Choice Properties Real Estate Investment Trust, and Loblaw accounted for more than half of Choice Properties’ rental revenue in 2023, the documents say — and Choice Properties and Loblaw have a strategic alliance under which the REIT has agreed to “significant restrictions” limiting “its ability to enter into leases with supermarket tenants other than Loblaw.”

The commissioner's probe is focused on the companies' operations in Halifax, but also more broadly across the country.

The documents show the inquiries are zeroing in on two types of property controls in contracts and commercial leases used by the grocery retailers "in many markets in Canada."

Restrictive covenants in private contracts, the commissioner says, "limit or restrict" how a piece of land can be used and can apply even after changing ownership.

The covenants can "leave restrictions or exclusions on competitors that extend beyond ownership of the land, sometimes for decades," the applications say.

The probes are also looking into "exclusivity clauses" in commercial lease agreements that "limit or restrict" who a landowner can lease to and which products can be sold by other parties close to another leaseholders' business.

"According to market participants, property controls are widespread in the retail grocery sector, impacting where and how businesses can compete in the retail sale of food products," the commissioner claims.

The property controls, the commissioner says, may give the companies "the ability to exclude actual or potential competitors from selling food products within certain geographic areas or to dictate the terms upon which they carry on business."

“This is a novel case,” said Michael Osborne, chair of the Canadian competition practice at law firm Cozen O’Connor.

Previous cases alleging abuse of dominance involved companies with significantly more market power than George Weston or Empire have individually, said Osborne.

Therefore, the Bureau will have to argue that the companies are jointly dominant because they're using the same tools and together represent a large portion of the market, he said.

“The Bureau has never brought a joint dominance case before.”

Sobeys parent Empire claims the commissioner was wrong to start the inquiry because it doesn't have a "dominant" market position.

In a separate application in Federal Court that has yet to be decided by a judge, the company denies that property controls are anti-competitive and says they "are not unique to the grocery sector, but have been widely used for decades in a range of retail and other sectors across the country."

Empire also claims the inquiry was launched for an "improper purpose," claiming the grocery sector has been the subject of an "inordinate" amount of attention from politicians.

The company says the Competition Commissioner must make decisions independently and "free from political interference and direction."

Empire says the decision to launch an inquiry, amid a wave of criticism over rising grocery prices, raises "at least the appearance of a lack of independence of the Commissioner."

The company's lawyer declined to comment since the matter is still before the courts.

Competition Bureau spokeswoman Sarah Brown confirmed the formal investigations launched March 1 and said the Bureau had filed a motion to strike Empire’s application for judicial review.

She declined to comment further, citing ongoing court proceedings.

The bureau is using new tools it gained from recent amendments to the Competition Act that broaden the scope of the kinds of agreements it can look into.

Canada’s major grocers have recently been under public and political pressure as food prices have risen by double digits over just a handful of years.

The grocers have denied allegations of so-called greedflation, but the government has called on them to take action to stabilize food prices. All three major Canadian grocers have also agreed to participate in an industry-led code of conduct meant to help level the playing field for suppliers and smaller grocery retailers.

This report by The Canadian Press was first published May 24, 2024.