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Real Estate Investor's Claim For Lost Opportunity Damages Rejected – Real Estate and Construction – Canada – Mondaq News Alerts

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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.

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Record month for South Georgian Bay real estate pushing pricing out of reach for many – CTV Toronto

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COLLINGWOOD —
October was another record-breaking month for real estate sales in the region.

Statistics from the South Georgian Bay association of realtors show the number of sales increased 47 percent over October last year. The benchmark price of a single-family home Climbed 21.8 percent to 513 thousand dollars, vacancies are down, while rents are also seeing an increase.

“Rents have been a surprise to me how quickly they have escalated and how out of context they are with the local market, wage rates and labour force,” says community activist Marg Scheben-Edey.

A flood of buyers from the GTA is fuelling the hot housing market. Still, there’s mounting evidence that rising prices make the communities around Southern Georgian Bay unaffordable, especially for service industry workers and single-income families who spend more than half their income on housing.

Pamela Hillier, the Executive Director of Community Connection, says that’s not sustainable and adds calls for help to 211 are up 153 per cent.

“At the end of the month, there’s no money left to buy food, or prescription medicine, or things like that, so people call to see if there are other income sources or help out there to pay for other services that they need.”

Advocates for purpose-built housing, including Gail Michalenko, say a bad situation just got worse in Collingwood.

“Our current council is certainly more supportive and recognizes that there’s a huge issue with this,” says Michalenko, “so now it’s time for some action.”

“There’s a sense of urgency to start addressing the situation,” says Scheben-Edey. It’s not something we can take likely sometimes it’s life and death.”

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Downtown TO office sublease space quadruples in 2020 | RENX – Real Estate News EXchange

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IMAGE: Bill Argeropoulos, Avison Young’s principal and practice leader for research. (Courtesy Avison Young)

Bill Argeropoulos, Avison Young principal and practice leader for research, Canada. (Courtesy Avison Young)

The amount of office sublease space on the market in downtown Toronto has quadrupled during 2020 to almost 2.5 million square feet, and there’s no short-term turnaround in sight.

Across the Greater Toronto Area (GTA), office sublease space on offer has more than doubled this year to over five million square feet.

Avison Young principal and Canadian research practice leader Bill Argeropoulos, who’s been closely monitoring sublease activity since COVID-19 started impacting the real estate market in March, doesn’t see available sublease space returning to previous lows until, perhaps, the end of 2023.

Argeropoulos wrote about the trend in a recent blog post and expanded on his analysis of the peaks and valleys from three past availability cycles in an interview with RENX.

“At the very beginning of the process, people were reluctant to put space on the sublease market because they didn’t know what the outlook was going to be like,” said Argeropoulos, who believes many companies were caught off guard by the length of the COVID-19 pandemic and the slow return of employees to offices.

Sublease space may appeal to some tenants because they can often get shorter and more flexible lease terms. Also, if they can take over space that’s already built out, they’ll save on related capital costs.

Companies have realized if some or all of their employees can work from home until the COVID-19 crisis clears up, they might as well try to relieve themselves of excess space and earn revenue through subleasing. However, lease-up of these spaces has been slow.

Rate of sublease space availability increases

Since last writing about the topic in August, Argeropoulos said available sublease space across the GTA office market increased from 3.7 million square feet to 5.1 million square feet. That’s up from 2.4 million square feet at the end of 2019.

Downtown Toronto sublease availability has risen from 1.7 million square feet to nearly 2.5 million square feet, which is about four times the 652,000 square feet available at the end of last year.

“Deals done with sublease spaces are usually at lower rates than direct landlord space, but we haven’t seen that sort of softening in the rents yet,” said Argeropoulos. “They’re basically on par with direct landlord space for now.

“However, I think the scales will likely tip in the tenants’ favour as more larger blocks hit the market, forcing some landlords to adjust their pricing.

“I think that will come, but given that the majority of the real estate in downtown Toronto is held by well-financed institutions, they’re willing to weather the storm a little bit and not necessarily give up on the rates yet.”

Where sublease space is coming from

Fifty-six per cent of the office sublease availability in downtown Toronto so far is for spaces of less than 5,000 square feet, according to Argeropoulos. Forty-six per cent is in class-A, 32 per cent is in class-B and 22 per cent is in class-C buildings.

“The piece of the pie that we’re closely watching right now is in that greater-than-20,000-square-feet range,” said Argeropoulos. “That number, which we’ve been following over several months, is in the five per cent category.

“Once we see that number rising, then I think there will be pressure on landlords to perhaps come off because they’re going to be competing with larger blocks of space, which can then be used as leverage to drive down rents.”

Argeropoulos said sublease space on the market now is coming from a range of business types, including technology, financial services, telecommunications and professional service firms.

“Even within the technology sector, it’s not just startups. It’s also established blue-chip technology companies that have decided to reduce their footprint — some on a temporary basis and some on a more permanent basis.”

Looking to the past for possible answers

Argeropoulos said there was no relationship between the rate of sublease availability take-up in the last three peak-to-valley cycles, spanning 20 years, in either downtown Toronto or the GTA as a whole.

For the current GTA office sublease market to return to its previous valley by the end of 2023, 256,000 square feet of take-up per quarter would be needed. That wouldn’t be far beyond the fastest take-up rate seen in the last 20 years.

Downtown, however, the necessary figure would be 159,000 square feet per quarter. That would be double the fastest rate recorded in any peak-to-valley period during the last 20 years.

Significant pent-up demand would be required, especially given the amount of new office space which will be delivered downtown between now and 2024.

In its just-released Canada 2021 Forecast report, Avison Young notes about seven million square feet of new office space is being delivered in 2020 and 2021 in the GTA. That report predicts a slightly higher 7.2 per cent overall vacancy rate for GTA office space in 2021 (it was 6.6 per cent at the end of Q3 2020).

Sources of future sublease space

Much of that new space is already pre-leased, but companies that have made those commitments may realize they don’t need all of it and look to the sublease market to take them off the hook.

Companies moving into new offices will also make significant backfill space available. Much of that could come from major banks, especially CIBC, and Infrastructure Ontario, as it moves back into its former buildings which have been under renovation.

“Rumours are that that Infrastructure Ontario space could be as much as an additional million square feet of availability perhaps coming on the market,” said Argeropoulos.

The City of Toronto has also announced it will implement a workplace modernization program, which includes both leased and owned facilities. That could reduce its office space footprint and introduce up to another million square feet to the sublease market.

“Heading into this crisis, Toronto and the downtown market in general was very, very tight and we couldn’t wait to get some availability to come online so we could transact,” said Argeropoulos. “But no one saw this amount of space coming back.”

Argeropoulos is concerned office demand has dried up and the newly available space isn’t moving.

It’s not yet panic time, he added, but smaller landlords or those with near-term risk due to lease rollovers are in an unenviable position.

“Once there’s greater clarity, the pent-up demand that’s waiting will definitely start to eat up the space,” said Argeropoulos. “How quickly is another question.”

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Record month for South Georgian Bay real estate pushing pricing out of reach for many – CTV Toronto

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COLLINGWOOD —
October was another record-breaking month for real estate sales in the region.

Statistics from the South Georgian Bay association of realtors show the number of sales increased 47 percent over October last year. The benchmark price of a single-family home Climbed 21.8 percent to 513 thousand dollars, vacancies are down, while rents are also seeing an increase.

“Rents have been a surprise to me how quickly they have escalated and how out of context they are with the local market, wage rates and labour force,” says community activist Marg Scheben-Edey.

A flood of buyers from the GTA is fuelling the hot housing market. Still, there’s mounting evidence that rising prices make the communities around Southern Georgian Bay unaffordable, especially for service industry workers and single-income families who spend more than half their income on housing.

Pamela Hillier, the Executive Director of Community Connection, says that’s not sustainable and adds calls for help to 211 are up 153 per cent.

“At the end of the month, there’s no money left to buy food, or prescription medicine, or things like that, so people call to see if there are other income sources or help out there to pay for other services that they need.”

Advocates for purpose-built housing, including Gail Michalenko, say a bad situation just got worse in Collingwood.

“Our current council is certainly more supportive and recognizes that there’s a huge issue with this,” says Michalenko, “so now it’s time for some action.”

“There’s a sense of urgency to start addressing the situation,” says Scheben-Edey. It’s not something we can take likely sometimes it’s life and death.”

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