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17 Mar

Property developer awarded $11 million in lost profits against seller who refused to complete transaction

Thursday, March 17, 2022James R.G. CookLitigationAgreement of Purchase and Sale, Real Estate

When a seller breaches an Agreement of Purchase and Sale (APS) by refusing to complete the sale of a property to a buyer, the buyer is generally entitled to the return of the deposit and damages representing the difference between the contract price and the market value of the land. This measure of damages is intended to represent the lost benefit of the bargain that had been made between the parties.

In some circumstances, a buyer may also be entitled to seek damages for lost profits for a commercial venture which may substantially exceed the market value of the land.

The case of The Rosseau Group Inc. v. 2528061 Ontario Inc., 2022 ONSC 486 (CanLII) arose out of the failed purchase and sale of property in Caledon. The property was 45.71 acres and contained a substantial amount of natural heritage features, including a wetland and valley system. The original purchase price for the property was to be $10,500,000.

The APS had a lengthy conditional period for the buyer to satisfy itself as to the economic feasibility of the development of the site, including reviewing all of the seller’s documents relating to development, zoning, and restrictions. The buyer had free reign to conduct its own due diligence and inspect the property as it saw fit.

The buyer paid an initial $50,000 deposit at the time the APS was signed and agreed to pay a further $400,000 upon waiving all the conditions.

The purchase price was based on “net developable acreage” given that the value of the land was based upon its potential for development. It was originally estimated that 30 acres could be developed. However, during the conditional period, the APS was amended and the purchase price was reduced to $6,615,000 because the net developable acreage was found to be less than originally estimated. As part of the amendment to the APS, the buyer agreed to assume the seller’s existing mortgage to the Bank of Montreal in the amount of $1,660,000.

The buyer subsequently waived the conditions in the APS.

A dispute then arose as to whether the parties had also agreed that the buyer no longer had to pay the additional $400,000 deposit upon waiving the conditions. The buyer’s position was that it had only agreed to assume the BMO mortgage if the requirement for the further $400,000 deposit on the waiver of conditions had been waived. The seller took the position that the buyer’s failure to pay the $400,000 deposit was a repudiation of the amended APS. The seller returned the $50,000 deposit and refused to close on the scheduled completion date.

Litigation ensued. The buyer originally sought an order requiring the seller to complete the transaction. By the time of trial in 2021, the buyer abandoned its claim for title to the property and sought damages for all expenses and losses, including lost profits.

In the Reasons for Judgment, the court determined that the parties had agreed that the further $400,000 deposit was not payable by the buyer at the time the conditions were waived. The seller had therefore repudiated the APS before the scheduled completion date when it said in writing, through its counsel, multiple times, that it considered the transaction to be at an end and returned the $50,000 deposit. The seller clearly expressed an intention not to be bound by the APS before performance was due and had no intention of completing the transaction. Conversely, the buyer was ready, willing and able to close the transaction.

The buyer was therefore entitled to damages as a result of the seller’s breach of the APS.

The normal measure of damages for failure to complete a purchase of land is the difference between the contract price and the market value of the land which is intended to represent the lost benefit of the bargain: e.g. Marshall v. Meirik, 2019 ONSC 6215, at para. 12.

In this case, however, the buyer was not seeking the normal measure of damages but the lost profits that it would have earned in the range of $10.1 million to $12.1 million had it acquired and developed the property. The buyer relied on a Supreme Court of Canada decision, Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC 19, [2002] 1 S.C.R. 678, for the proposition that lost profits were an appropriate measure of damages in such cases.

The court accepted the buyer’s arguments. The court found that the parties knew and specifically contemplated that the property would be acquired by the plaintiff to be developed into serviced lots. Indeed, the wording of the conditions in the APS made clear that the parties specifically contemplated that the buyer was acquiring the property to develop it. The buyer was to satisfy itself by reviewing all of the seller’s documents related to the development of the property. The buyer was to satisfy itself regarding zoning and restrictions, and the economic feasibility of the development of the site. These were special circumstances known to the parties at the time they made the APS and amended it.

As well, the court found that the plaintiff intended to acquire the property and develop it into serviced lots, and that it had shown that it had commenced operations to do so.

In such circumstances, lost profits can be awarded, based on Performance Industries and other decisions such as WED Investments Limited v. Showcase Woodycrest Inc., 2021 ONSC 237, at paras. 94–97. 

For the calculation of lost profits, the buyer relied upon expert evidence from a development consultant who was found by the court to be qualified to give opinion evidence on land planning, land use planning and development including planning approval and planning costs. The expert estimated the costs that would have incurred to buy, develop, construct, and rezone the land, and the associated tax and legal costs of this venture. He testified that he had reviewed typical plans of subdivision revenue generated from a planned subdivision and concluded that the costs for development would be in the range of $11 million.

The expert’s opinion was that once these costs were incurred, the project could have yielded an estimated $21.5 million to $23.5 million in revenue. Based on this analysis, the buyers’ range of estimated profits was therefore between $10 million and just over $12.1 million.

The seller took little issue with the expert’s calculation of estimated expenses but challenged the calculation of revenue and some of the methodology used. However, the seller did not adduce any alternative evidence by calling its own expert witness to respond to the buyer’s development consultant regarding damages. In the circumstances, the court accepted the buyer’s expert on damages as being uncontradicted.

In the result, the court found that the seller was liable for damages to the buyer of over $11.1 million, which was the midpoint between the estimated range provided by the buyer’s expert. In the court’s view, that amount was a reasonable estimate of the lost expected profits.

The decision shows that in appropriate cases, a buyer claiming damages from a seller in an aborted transaction may forego a claim to title to a property and seek damages for lost profits instead. Sellers of commercial properties would do well to consider a potential claim for lost profits by a buyer when deciding whether or not to complete a sale in circumstances where it is unclear who is responsible for a failure to complete the transaction.

James Cook

For more information please contact: James Cook at 416.865.6628 or jcook@grllp.com

(This blog is provided for educational purposes only, and does not necessarily reflect the views of Gardiner Roberts LLP)

 

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