We previously wrote about the date at which losses are to be assessed for the purpose of determining damages in the context of failed real estate transactions. In The Rosseau Group Inc. v. 2528061 Ontario Inc., the Ontario Court of Appeal recently reviewed the normal measure of calculating damages in such a scenario. The case concerned an alleged breach of an agreement to sell lands intended to be developed by the purchaser.
The Parties Entered into an Agreement for the Sale of Certain Lands Intended to Be Developed by the Purchaser
In early 2017, The Rosseau Group agreed with the defendant-numbered company to purchase about 45.71 acres in Caledon, Ontario. The purchase price for the land in the agreement was initially set at $10.5 million. Still, it was subject to an adjustment if the “number of developable ac[r]es is changed … based on a price of $350,000.00 per developable acre.” The agreement provided an initial conditional deposit of $50,000, with a further deposit of $400,000 if certain conditions were not waived. After that, the defendant learned that the net developable area was over 10 acres less than originally believed. The parties discussed changes to the payment terms, including the assumption by The Rosseau Group of a BMO mortgage. According to the trial judge, a representative of The Rosseau Group told a representative of the defendant that the former would agree to assume the mortgage if the requirement for the further $400,000 deposit was removed.
The parties subsequently signed an amendment to the agreement. It reduced the purchase price and stipulated that The Rosseau Group would assume the BMO mortgage subject to approval. The amendment also addressed the initial $50,000 deposit but did not expressly refer to the additional $400,000.
A Dispute Arose Over the Payment of the Additional Deposit
In mid-2017, The Rosseau Group waived all conditions but did not provide a further $400,000 deposit. The defendant subsequently advised The Rosseau Group it was treating the failure to provide this deposit as a repudiation of the agreement and, later still, sent a certified cheque to The Rosseau Group purporting to return the initial deposit.
The Rosseau Group held that the agreement remained in effect and advised the defendant that it was “ready, willing, and able to complete the purchase.” The Rosseau Group set closing dates; however, no closing occurred. Neither party tendered. The Rosseau Group sued, claiming damages and other remedies.
Trial Judge Found that the Defendant Breached the Agreement for the Sale of Development Lands and Awarded Damages for “Lost Expected Profit”
The trial judge concluded that the $400,000 further deposit had not formed part of the amended agreement. As such, the defendant had breached the agreement by not completing the sale when The Rosseau Group did not pay this amount.
The trial judge determined that this was an appropriate case to depart from the normal measure of damages, “namely the difference between the market value of the property on the date of closing and the contractual purchase price.” The trial judge concluded that damages should be awarded to the plaintiff “based on the estimated profit it would have earned had the transaction closed.” These estimated profits related to the development of the property over six years following the closing date. Judgment was awarded in excess of $11.1 million. The defendant appealed on both liability and damages.
The Rosseau Group Had Been “Ready, Willing and Able to Close”
On appeal, the defendant argued that The Rosseau Group had failed to tender on closing and that this was fatal to its claim. The Court of Appeal noted that since The Rosseau Group had not accepted the defendant’s anticipatory repudiation of the agreement, both parties had been legally required to comply with their obligations on closing. The Rosseau Group had to be “ready, willing and able to close on that date.” The trial judge had concluded that a tender was not the only way for a party to establish it was ready, willing and able to close. The Court of Appeal agreed, citing the earlier case of Di Millo v. 2099232 Ontario Inc. to the effect that “while tender is the best evidence that a party is ready, willing and able to close, tender is not required from an innocent party enforcing his or her contractual rights when the other party has repudiated the agreement or has made it clear that they have no intention of closing the deal.” As the Court of Appeal noted, tendering in such circumstances would be a “meaningless or futile gesture” and was therefore not required by the law.
The Court of Appeal also agreed with the trial judge’s finding that The Rosseau Group had the funds available to it that were required to close. Further, The Rosseau Group could have performed the obligations it would have required had it assumed the BMO mortgage. As such, it had been ready, willing and able to close. The appeal on the issue of liability was dismissed.
Court Reviews the Normal Measure of Damages for a Failed Real Estate Purchase
The defendant argued that the trial judge’s damages assessment was incorrect for various reasons. The Court of Appeal, therefore, began its discussion by noting that the normal measure of damages for a failed real estate transaction is “the difference between the contract price and the market value of the land on the ‘assessment date,’” which is usually the closing date. This is the presumptive measure of damages for two specific reasons.
First, damages are intended to put the innocent party where it would have been if the agreement had been performed. Calculating damages using the difference between the purchase price of the land and its market value is consistent with this principle since the market value “represents the financial equivalent of the asset itself.”
Second, a “predictable damages methodology” is needed to ensure commercial certainty. A predictable date on which an innocent party’s damages are “crystallized” “promotes efficient behaviour and reduces uncertainty and speculation.”
The Court of Appeal noted that the trial judge had departed from this usual method of calculating damages because The Rosseau Group had been claiming for its “lost expected profit from the opportunity it would have had to develop the property.” However, the Court of Appeal concluded that this confused the type of loss in issue with the method of calculating it.
Court Finds Loss of Potential Value of Developing Land Is Recoverable Using the Normal Measure
The Court of Appeal referenced the earlier case of Saramia Crescent General Partner Inc. v. Delco Wire and Cable Limited, wherein it had found that damages were legally recoverable if (1) in the “usual course of things,” they arise “fairly, reasonably and naturally” from the breach or (2) they were within the “reasonable contemplation of the parties at the time of contract.” In this particular case, the agreement of sale contemplated the development of the subject land. Indeed, the price set in the agreement “was a direct function of the net developable acres for residential purposes.” As such, damages for loss of that potential value were recoverable under the usual test.
The normal measure of damages requires determination of the market value of the subject land. The Court noted that “the concept of market value of the land takes into account the value the land has because it can be developed.” Since a departure from the normal measure of damages is only appropriate if the normal measure does not address the loss suffered by the innocent party, such a departure was not appropriate in this case.
The Court of Appeal ultimately remitted the matter back for a hearing to determine damages based on the normal measure.
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