In Akelius Canada Inc. v. 2436196 Ontario Inc.,
2020 ONSC 6182 (CanLII), the Ontario Superior Court of
Justice rejected a real estate investor’s claim for lost
opportunity damages resulting from the failed purchase of an
apartment complex in Toronto.
In 2015, the Plaintiff entered into an Agreement of Purchase and
Sale (APS) to buy seven residential apartment buildings from the
Defendants for $228,958,320. The Plaintiff paid deposits as
required but the transaction failed to close as scheduled in
January 2016, as there were several encumbrances registered on
title as of the completion date which the Plaintiff buyer did not
wish to assume. The Defendants subsequently sold the properties to
another buyer in 2018 for a substantially higher price.
There was little dispute that the Defendants had breached the
APS by failing to remove the encumbrances as required by the time
of closing, thereby entitling the Plaintiff to reimbursement for
sunk costs incurred towards the prospective purchase. These amounts
totalled $775,855.46. At issue, however, was the Plaintiff’s
claim for “lost opportunity” damages of more than $56
million.
The parties agreed that the sale price under the APS reflected
the fair market value of the properties at the time of the aborted
closing in January 2016. They disagreed as to whether damages
should be calculated as of that date or as of the time of the
subsequent sale of the properties by the Defendants in 2018, by
which point there was a significant increase in value of
$56,544,318.00, based on the figures in the Land Transfer Tax
affidavits (which the Court accepted as reflecting the market value
of the properties for the purposes of the argument). The Plaintiff
sought the latter amount as “lost opportunity” damages.
The Plaintiff’s theory was that the Defendants had
intentionally failed to take steps to clear title to the properties
prior to closing as they realized they could achieve a greater
profit by breaching the APS and reselling the apartments to another
buyer in the rising real estate market.
The Defendants countered that the operative date should be the
breach of the APS, and that the Plaintiff had therefore suffered no
damages in addition to the sunk expenses.
The Court described the essence of the dispute as follows:
In argument at the hearing, counsel for the Plaintiff contended
that the Defendants only seem to have realized when they were
half-way to closing that discharging the mortgages would result in
a significant loss of profits. At that point, they determined that
they would benefit by waiting for a more profitable future sale. In
a nicely executed Canadianism, Plaintiff’s counsel submitted
that the Defendants then “ragged the puck” until the
closing buzzer sounded. I feel compelled to add that what followed
is the current donnybrook.
In assessing the issues, the court noted that in the ordinary
case of an aborted purchase and sale of real estate, damages are
usually assessed as of the scheduled closing date: 100 Main
Street Ltd. v. W.B. Sullivan Construction Ltd.,
1978 CanLII 1630 (ON CA). There is however some flexibility
to this approach based upon “what is fair on the facts of
each case”: 642947 Ontario Ltd. v. Fleischer,
2001 CanLII 8623 (ON CA).
The date at which damages for breach of the APS is assessed was
also crucial because the basic principle for breach of contract is
that damages should put the injured party as nearly as possible in
the position it would have been in had the contract not been
breached. Typically this is determined by “the difference
between the contract price and the market price”:
100 Main Street. The price achieved on a
subsequent mitigating sale may be good evidence of the market value
on the intended closing date, but it is not determinative in all
cases where the re-sale price differed from the relevant market
price: Marshall v. Meirik,
2019 ONSC 6215 (CanLII).
As well, the Court explained that it could take into account the
nature of the property and the nature of the market: Greenberg
& Greenberg v. Shanghai Real Estate Limited,
2010 BCSC 1837 (CanLII).
Ultimately, the Court ruled against the Plaintiff’s claim
for lost opportunity damages and drew a distinction between claims
where the seller has breached the APS rather than the buyer.
In cases where a seller is seeking damages from a buyer for
failing to complete a real estate purchase, the damages are often
assessed as of the date of subsequent sale, as the loss represented
by the decline in the market (if any) is to be borne by the
breaching party. The seller is generally entitled in those
circumstances for damages equal to the difference between the
contract price and the highest price obtainable within a reasonable
time after the contractual date for completion following the making
of reasonable efforts to sell the property commencing on that
date.
Conversely, in the case at hand, the Plaintiff sought damages
based upon what a disappointed investor would seek, namely the
dollar differential between the APS price and the price achieved
had the Plaintiff been able to purchase and resell the properties
at later date. The Plaintiff argued that its damages should be
measured by putting it in the same position it would have been in
but for the Defendants’ breach. Essentially, the Plaintiff
sought to step into the shoes of the Defendants who speculated on
the increasing value of the properties.
Unfortunately for the Plaintiff, the Court determined that this
very approach had been rejected years earlier by the Ontario Court
of Appeal in
642947 Ontario Ltd. v. Fleischer, which held that
were a seller retains a property in order to speculate on the
market, damages will be assessed at the date of
closing.
Instead, the measure of damages for failure to complete a
purchase of land is the difference between the contract price in
the APS and the market value of the land at closing, which is
intended to represent the lost benefit of the bargain: see
Marshall v. Meirik.
Essentially, the Defendants’ motive (for profit or
otherwise) was irrelevant as the Plaintiff was not entitled to
speculative profit as a measure of damages just because the
Defendant made such a profit. The damages must make up what the
buyer lost in value on the closing date, not a speculative future
date.
While the Plaintiff argued that there were no comparable
investment opportunities available, the Court noted that in the
commercial real estate business, where investment units are
entirely fungible, the Plaintiff could have made investments that
replaced the properties in the failed transaction at issue. It is
noteworthy, that no such evidence was before the Court because the
Plaintiff (and its multinational parent company) refused to provide
it on the grounds that to do so was burdensome. In the
Court’s view, this evidentiary burden was not
disproportionate to the approximately $50,000,000 being claimed for
lost opportunity.
In short, as at the aborted closing date, the Plaintiff was
simply not ‘out money’ on top of the expenses which it
was entitled to recover. The Plaintiff retained the millions of
dollars not invested in the apartment complex and could have
invested the funds elsewhere during the intervening years.
This case demonstrates once again that in failed commercial real
estate transactions, lost opportunity damages are not necessarily
easy to obtain, especially for a jilted buyer. Rather than sinking
costs into a court case for more than the recovery of sunk costs,
the better course of action for a jilted investor is likely to
recover the sunk costs as quickly as possible and seek out other
investments opportunities.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
