What Is an Exclusive Use Clause in a Commercial Lease?
An exclusive use clause in a commercial lease restricts a landlord’s ability to lease out their property to another tenant for a specified use. Some examples include exclusivity clauses in favour of pharmacies, dentists and grocery stores. These clauses appeal to benefitting tenant(s) who view them as protecting their market share and justifying the capital investment required to establish their business at the premises. For landlords, an exclusive use clause may serve as a tool to attract specific tenants and to provide an appropriate mix of businesses.
The 2024 Amendments to the Competition Act: What Landlords and Tenants Need to Know
The 2024 amendments to the Competition Act, RSC 1985, c C-34 (the “Act”) and the Competition Bureau’s June 2025 guidance mean that exclusive use clauses may now be seen as anti-competitive and subject to the Act’s remedies. A companion article to this one examines the specific statutory amendments and the procedure before the Competition Tribunal in greater technical detail.
What are the legal consequences of an offending exclusive use clause? The clause is not automatically rendered void under the Act. Rather, the Competition Tribunal may issue orders and impose administrative monetary penalties against the parties in accordance with, and subject to, enforcement proceedings under the Act. The lease itself, including the exclusive use clause, remains in force unless and until a court or the Tribunal orders otherwise. This stands in contrast to the common law position on restraint of trade.
Under the common law, a covenant that constitutes an unreasonable restraint of trade may be struck down and rendered void by a court. In such cases, the offending provision could be severed from the agreement and treated as if it never existed. By contrast, the Act does not operate to void the clause or the agreement; rather, it subjects the parties to enforcement proceedings before the Tribunal, which may result in prohibitory orders, mandatory compliance measures, and financial penalties, while the underlying contractual provision remains extant.
A related question is whether an exclusive use clause found to offend the Act could be severed from the remainder of the lease. At common law, the doctrine of severability permits a court to excise an unenforceable provision while preserving the balance of the agreement, provided the offending clause is not so integral to the bargain that its removal would fundamentally alter the nature of the contract. Many commercial leases contain express severability clauses, which provide that if any provision is found to be invalid or unenforceable, the remaining provisions shall continue in full force and effect. An entire-agreement clause, while serving a different purpose, may also be relevant to the analysis insofar as it defines the scope of the parties’ bargain. Where a lease contains a severability clause, a court is more likely to sever an offending exclusive use provision rather than set aside the lease as a whole. However, if the exclusive use clause was fundamental to the tenant’s decision to enter the lease — for example, where the tenant made significant capital expenditures in reliance on the promise of exclusivity — a court may find that severance is not appropriate and that the entire lease has been frustrated or repudiated.
Risks and Remedies for Landlords and Tenants
Landlords face the prospect of reviewing existing leases for offending clauses and the risk of being subject to challenge, even as the non-dominant contracting party, as well as the need to address drafting considerations for new leases. Tenants face the risk of relying on exclusivity clauses that are rendered unenforceable, thereby losing the commercial certainty that justified their investment.
The enforcement remedies available to a tenant against a landlord in breach of an exclusivity covenant may remain unchanged by the amendments to the Act, which remedies include:
- Damages — compensating the tenant for proven loss of profits or diminution in the value of the leasehold interest: the most likely remedy available to the tenant.
- Injunctive relief — available from the court on the RJR-MacDonald principles where there is a serious question to be tried, irreparable harm, and the balance of convenience favours granting relief.
- Termination — the tenant could claim that a breach of the exclusivity covenant constitutes a breach of the covenant of quiet enjoyment or a repudiation of the lease, entitling the tenant to treat the lease as at an end. However, this remedy would only be available where the exclusivity provision is found to be a fundamental term of the lease. The test for repudiation requires the innocent party to demonstrate that the breach deprived it of substantially the whole benefit of the contract. In the context of an exclusive use clause, a tenant would need to establish that the exclusivity was a condition precedent to entering the lease or that the landlord’s breach rendered the premises substantially unsuitable for the tenant’s intended use. Relevant factors include: whether the exclusive use clause was a negotiated term or a standard provision; the extent to which the tenant’s business model depends on the absence of direct competition within the property; the magnitude of the tenant’s capital expenditures made in reliance on the promise of exclusivity; and whether the landlord’s breach was deliberate or inadvertent. A tenant who has invested heavily in leasehold improvements on the strength of an exclusivity promise, and whose business becomes unviable (and not merely marginally less profitable) following the introduction of a directly competing tenant, will have a stronger claim that the breach is repudiatory. Conversely, where the competing use is peripheral or the tenant’s business remains substantially viable notwithstanding the breach, a court is unlikely to find that the breach rises to the level of repudiation. It should also be noted that a tenant who elects to terminate on the basis of repudiation assumes the risk that a court may subsequently find the breach to be non-repudiatory, in which case the tenant’s purported termination would itself constitute a wrongful repudiation of the lease.
Exclusivity provisions and restrictions are presumptively contrary to public policy as a restraint of trade. However, the courts also recognize that there are proprietary reasons for such provisions. The courts will balance the public policy and proprietary nature of a provision to determine whether the provision can withstand scrutiny. Generally, exclusivity provisions in commercial leases have been upheld by Ontario courts. Situations in which tenants have not been successful were not as a result of the exclusivity provision being found to be void but rather based on the interpretation of the provision.
Can a Prospective Tenant Challenge an Exclusive Use Clause?
A further issue is whether a prospective tenant who was deterred from entering the market by an exclusive use clause has any claim or standing. Under the Act, any person may apply to the Tribunal for leave to bring proceedings in respect of a reviewable practice, provided the person is directly and substantially affected. A prospective tenant who can demonstrate that an exclusive use clause prevented it from obtaining a lease and entering the relevant market may therefore have standing before the Tribunal. In a civil action, however, a prospective tenant who never entered into a lease would face significant challenges in establishing a cause of action, as there is no privity of contract with the landlord and the prospective tenant’s losses may be characterized as speculative.
Despite being able to order significant monetary penalties (potentially in the millions of dollars), the stated purpose for any order is to promote competition in the market rather than to punish.
Competition Bureau Guidance for Drafting Exclusive Use Clauses
The Competition Bureau issued guidance in 2025 on the application of the changes to the Act in relation to property controls. In the guidance, the Competition Bureau acknowledged that exclusivity clauses may actually be pro-competitive rather than anti-competitive. For example, an exclusivity provision could encourage a new business to enter an underserved market or to encourage a business to make a new investment. However, even if an exclusivity clause could encourage competition, it must still be done in a manner that is otherwise justifiable. In this regard, one should consider factors such as:
- Necessity – Is the exclusivity clause really necessary? What is its justification?
- Time – Can it apply to a shorter period of time? Is the term limited to a reasonable investment recovery period? Does it apply after the expiry or termination of the lease?
- Area – Can it apply to cover less of an area? Does it apply to the whole development, a specific area within the development, or areas that go beyond the development?
- Products and Services – Can it be narrowed down to specific products or services?
Providing narrower exclusivity provisions may assist in justifying an exclusivity provision and assist a tenant who is investing heavily in a new lease. This could demonstrate sufficient proportionality to cause the exclusivity provision to be pro- rather than anti-competitive.
Conclusion: How Properly Drafted Exclusivity Clauses Can Spur Competition
Exclusivity can spur competition, instead of hampering it, in certain circumstances: it can provide a landlord and a tenant with commercial certainty to invest in the development of a property, assist that business in succeeding, and in effect, foster competition.
Ontario courts have recognized that there is a legitimate proprietary interest worthy of protection created when a commercial tenant enters a lease based on the expectation of exclusivity.
As of early 2026, no Tribunal or court decisions have applied the amended Act to exclusive use clauses in commercial leases; parties must currently therefore rely on the Bureau’s guidance rather than adjudicated outcomes. This uncertainty creates an opportunity for counsel to shape the emerging framework through careful drafting and proactive portfolio review.