Booming real estate markets often raise the prospect of broken agreements of purchase and sale. For example, what happens when a seller enters into an agreement to sell their property and then obtains a better offer in a hot market, or thinks the grass is greener elsewhere and refuses to close? Or, what if the buyer chooses not to close due to the seller’s breach, and the seller is then rewarded with a higher price for their land from another buyer? Ontario courts have recently grappled with these issues, and specifically, the measure of damages that should be awarded to non-breaching parties in aborted real estate transactions.
Starting point: Akelius, damages from date of breach
In March 2022, the Ontario Court of Appeal released its decision in Akelius Canada Inc. v. 2436196 Ontario Inc. et al. 2022 ONCA 259, affirming Justice Edward Morgan’s October 2020 decision.
Akelius — an experienced international real estate investor — contracted to purchase seven residential apartment buildings in Toronto’s Parkdale neighbourhood. A few months before the closing date, Akelius reported issues with charges that it found on title for the properties which the defendant vendors wouldn’t remove from title. The deal fell through, and two years later, the defendants sold the properties to another purchaser for 25 per cent more than Akelius would have paid under the agreement. Akelius sued for lost profits, being the 25 per cent increase in the price for the properties.
Notwithstanding that Akelius was a long-term investor and not a speculator in the business of flipping real estate, it did not pursue its claim for lost rental income at the hearing. It only pursued a claim for the lost capital appreciation of the properties, and its expenses.
Justice Morgan held that the defendants breached the agreement. Justice Morgan awarded damages only for breach of contract in the amount of Akelius’ sunk costs of just under $776,000. He held that damages for lost capital appreciation were not appropriate because at the time of their agreement, the parties contemplated that Akelius intended to operate the properties for a long-term income stream.
The Court of Appeal upheld Justice Morgan’s decision, solidifying that damages for breach of an agreement of purchase and sale should be assessed as of the date of breach. The court agreed that this general principle should only be modified where the innocent party satisfies the court that a later date is appropriate because it is the first date upon which the party could reasonably have been expected to re-enter the market and mitigate its damages.
Rosseau: Using expert evidence to bolster claim for damages
Following the lower court decision in Akelius, Justice Kendra Coats’ January 2022 decision in The Rosseau Group Inc. v. 2528061 Ontario Inc. 2022 ONSC 486 is a cautionary tale for breaching vendors. The plaintiff purchaser, Rosseau Group Inc., intended to build houses for resale, and the defendant vendor was aware of this when it entered into the original and amended agreements of purchase and sale. For various disputed reasons, the transaction failed to close, and the court held that the defendant was responsible for the breaches. Rosseau sought general damages for all expenses, economic losses and lost profits arising from the defendant’s failure to close the transaction.
Rosseau, relying on expert witness testimony, submitted that it had lost profits of between $10.1 million and $12.1 million. Although the defendant, who put forward no expert evidence, tried to rely on Akelius to dismiss Rosseau’s claim for lost profits, the court distinguished the cases and held that there were “special circumstances” that entitled Rosseau to the compensatory damages claimed. Specifically, and unlike in Akelius, the parties had contemplated that the property would be developed by Rosseau and resold. Justice Coats awarded $11.1 million to Rosseau for lost profits, despite the purchase price of $6.6 million stipulated in the amended agreement of purchase and sale.
Tega: Another example of ‘exceptional circumstances’
Finally, Tega Homes (Attika) Inc. v. Spencedale Properties Limited et al. 2022 ONSC 75, is another example of the principle that the court will look to the surrounding circumstances of the deal as contemplated by the parties at the time of the agreement of purchase and sale to determine damages in the event of a breach.
In Tega, the parties entered into a joint venture agreement in 2011 to develop a block of commercial properties, during which time the plaintiff, Tega Homes (Attika) Inc., paid for and obtained the necessary development approvals to advance the project. The parties later entered into an agreement of purchase and sale. The defendant vendors ultimately failed to close the sale and Tega sued for damages.
Regional Senior Justice Calum MacLeod found that there was no legal basis for the defendants’ refusal to close. Justice MacLeod noted that in order to make a plaintiff whole in these circumstances, it may be necessary to award compensation for expenses reasonably incurred in preparation for closing and for other foreseeable damages naturally flowing from the vendor’s refusal to perform the contract. In this case, Justice MacLeod found that to make Tega whole, Tega should receive compensation for the value of the land and reimbursement of the expenses incurred in pursuing the land’s redevelopment.
Otherwise, the breaching defendants’ failure to close would have required Tega to “eat those losses.” The defendants were aware at the time of the agreement that Tega had incurred out-of-pocket expenses with respect to the development approvals. As with the “special circumstances” in Rosseau, Tega’s contributions constituted “exceptional circumstances” which the court considered in awarding damages (Tega predates both Rosseau by about three weeks and the Court of Appeal’s decision in Akelius).
Takeaways for lawyers, real estate professionals
1. Know the business of your client. This will inform the “exceptional” or “special” circumstances that could have been in the parties’ reasonable contemplation at the time of the contract. If the parties contemplated that the buyer would treat the property as a long-term investment, the case is best framed as a lost profits case. If the buyer intended to speculate on the market, framing the case as one of lost capital gains may be more appropriate.
2. Expert evidence on the rising (or falling) markets may be required if you intend to make an argument on appreciation or depreciation of property values. The court confirmed in Akelius that the court cannot simply take judicial notice of the rising or falling market.
3. Be prepared to present evidence of mitigation. In all three cases, the court highlighted the need for evidence of mitigation. Courts continue to emphasize the importance of mitigation when pursuing a claim for damages in an aborted real estate transaction.
This article was originally published by The Lawyer’s Daily (www.thelawyersdaily.ca), part of LexisNexis Canada Inc.