ARE RESTRICTIVE COVENANTS (NON-COMPETITION CLAUSES) BETWEEN NEIGHBOURING PROPERTIES LEGALLY ENFORCEABLE?

Two neighbouring property owners  (Provigo & El-Ad) are bound by a contract which provides that El-Ad will not allow the sale of food on its shopping center premises for as long as Provigo operates a food supermarket on its neighbouring property.

The Quebec Superior Court decided that the contract was not legally enforceable for the following reasons (Complexe Commercial De L'Île Inc. v. Provigo Distribution Inc. et al., 2018 QCCS 5284).

The validity of such restrictive covenants is determined by well settled principles established over time by case law:

1.     Undertakings in restraint of trade are generally against public order;

2.     There may, within reasonable limits, be contractual restrictions on freedom to conduct a specified commercial activity;

3.     The validity of such restrictions is dependent on their being reasonable, particularly with respect to the activity that is sought to restrict, the duration of the restriction, and the applicable territory;

4.     The restrictions must be necessary for the reasonable protection of the legitimate interests of the party in whose favour they are granted.

Relevant Facts:

For many years, Provigo was a tenant in the shopping center owned by El-Ad's predecessor. A clause in the lease granted Provigo exclusivity in the shopping center  for the operation of a food supermarket.

In 1993, Provigo purchased a vacant property across the road from the shopping center from El-Ad's predecessor. 

In 2004, Provigo sold part of the vacant property to El Ad and kept the remainder for itself in order to build a food supermarket. 

El Ad agreed not to operate a food supermarket in the shopping center or on the purchased land.

El-Ad and Provigo agreed to require from any future purchaser of their properties a written undertaking to respect the restrictive covenant.

The parties agreed to register real and personal servitudes  (easements) on their properties to reflect their undertakings.

Provigo built a supermarket on the retained land. 

El-Ad sold the shopping center to CCI who expressly agreed to be bound by the restrictive covenant. Nevertheless, CCI argues that the restrictive covenant is null and is not legally enforceable.

The Court recognized that the public interest lies in freedom of commerce and not in the restriction of commercial activities. Consequently, the legal burden will rest with the party seeking to enforce a restrictive covenant to show that the restriction is limited to what is necessary to protect its legitimate commercial interest.

In the present case, the restrictive covenant had no fixed term and continued at Provigo's sole discretion. The Court concluded therefore that the restrictive covenant was subject to an indeterminate term which could be perpetual, thereby offending public order.

A contractual undertaking that offends public order is not legally enforceable, notwithstanding that CCI expressly undertook to be bound by it. There are legal limits to what one may freely consent to in a contract.

Although the parties registered real and personal servitudes on the property, this had no legal effect since it is recognized that non-competition clauses cannot be registered as servitudes. A prohibition to carry on a certain type of activity does not benefit the dominant property, which is a fundamental precept of a servitude. Rather than benefitting the dominant property, the prohibition confers an advantage on the owner of the dominant property for as long as he operates the activity that benefits from restricted competition. Should the activity change, such as by the owner moving the activity to a different property, the prohibition would be without purpose or meaning.

Finally, the Court distinguished the restrictive covenant in an agreement between two property owners from an exclusivity clause often found in commercial leases. The primordial difference is that a commercial lease has a fixed term or if the term is indeterminate, either party could cancel upon giving reasonable notice. An exclusivity clause in a lease cannot be for a perpetual duration and consequently, will not offend the basic principles referred to above.