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Background:

The defendants had owned a vacant commercial property since 1989. They obtained a mortgage for $250,000 with interest at 12% per annum. Payments on the mortgage ceased entirely around 2006. The mortgagee took no steps to enforce the mortgage.

In 2016 the defendants agreed to sell the property to the plaintiff for $500,000.00. The plaintiffs requested a discharge of the mortgage. The defendants then tried to negotiate with the mortgagee. They could not agree on the final payment due under the mortgage. The defendants proposed an amount of $250,000.00. The mortgagee refused the offer and countered with a proposal for $505,000.00 as it felt some interest was owing for the use of the money for so long.

The defendants responded that the proposal was for more than the sale price of the property. The mortgagee withdrew their offer. They did so because of their belief that the purchase price was too low and below fair market value. They felt the price had been set to convince them to accept less for their mortgage. At this point, the defendants could not discharge the mortgage and proposed that the sale be cancelled and mutual releases signed.

The Switch:

To convince the mortgagor of its sincerity, the defendants then swore statutory declarations stating that the purchase price agreed to was less than the mortgage owed. They offered $300,000.00 to pay off the mortgage. The mortgagee asked for and received, a copy of the Agreement of Purchase and Sale and the name of the purchasors lawyer.

The mortgagee’s lawyer then disclosed to the purchaser’s lawyer that he had statutory declarations from the vendor. Copies were provided without the vendors’ permission or knowledge. As a result, the purchasers now knew that the sale price would not satisfy the mortgage debt and that the vendors were trying to negotiate a discount before the closing of the sale. Any leverage they had was now gone. In their ignorance, however, the vendors continued to negotiate a discharge payment with the mortgagee.

The purchasers realized that a discharge of the mortgage would not likely be forthcoming. They began to discuss a sale of the property directly with the mortgagee through a power of sale proceeding. A notice of sale was prepared and delivered to a property owned by the vendors but not their residence or their solicitor. It did not come to their attention as a result. The purchaser’s solicitor was given a copy of the notice.

The mortgagee then delivered an offer to sell the property for $770,000.00. Eventually, the mortgagee and the purchasers agreed on a sale price of $687,500. The sale closed on the same day proposed for the closing of the original sale. The deal was conditional on the purchaser being unable to close with the vendor, so they refused based on their inability to discharge the mortgage. The purchaser tendered their performance. The purchaser then bought the property from the mortgagee.

The Action:

Not satisfied with the acquisition of the property, the purchaser commenced an action for loss of bargain. They made a claim for the increase in the purchase price by $187,500, the $25,000.00 deposit and legal costs. The vendors counterclaimed by asserting bad faith on the purchaser’s part for which they sought damages and a forfeiture of the deposit.

The action was resolved on a motion for summary judgment brought by the purchaser. The purchaser was successful. However, they obtained judgment only for their deposit and not for any loss of the bargain. The motions judge distinguished previous loss of bargain cases. She did so on the basis that the vendors had no equity in the property and were not in a position to bargain at all. The real bargaining took place between the purchasers and the mortgagee. Thus, the vendors could not reserve a benefit to themselves. The benefit the purchasers assumed they were denied was, in fact, an illusory bargain.

The vendors’ counterclaim was dismissed. Despite the deceptive use of the power of sale, this was not the cause of their inability to close. Costs were awarded to the vendors.

The Court of Appeal:

The purchasers appealed to the Ontario Court of Appeal (ONCA). They were successful. The ONCA found that there was a real, not an illusory, bargain as follows:

We do not agree with the motion judge that, as a condition of recovering damages for the difference in the price agreed upon with the respondents and the higher price eventually paid to the mortgagee, the appellant was required to show that the respondents “appropriated the benefit” otherwise available to the appellant. The damages for the loss of benefit are measured by the higher price paid by the appellant for the property and are not dependent on any benefit that may have flowed to, or been bestowed upon, the respondent Vendors.

The appellant was entitled to judgment for the difference between the purchase price agreed upon and the price eventually paid for the same property.

Real Estate litigation, particularly commercial real estate litigation, is complex, expensive, and often unpredictable. Litigation counsel must know how to gauge and manage risk, keep costs down with efficient and effective strategy, and guide clients through the choices they will face as litigation evolves.

At Milosevic Fiske LLP we provide thorough, multi-disciplinary legal advice and representation at mediations, hearings, and trials.  Over the years, our lawyers have seen it all and our impressive track record speaks for itself. Call us at 416-916-1387 or contact us online to learn how we can help.