Canada: Ontario Court Of Appeal Reverses $11 Million Real Estate Award: A Victory For Predictability In Land Deals

Overview

A controversial trial court decision, particularly troubling for those selling land for development, has been partially reversed.

The Ontario Court of Appeal ("ONCA") in The Rosseau Group Inc. v. 2528061 Ontario Inc., 2023 ONCA 814, overturned a trial decision that had awarded a real estate buyer over $11 million in damages arising from a vendor's breach of contract. The ONCA determined that the trial judge erred by departing from the normal measure of damages for breach of a land purchase agreement: being the difference between the market value of the land at the time of closing and the purchase price under the agreement.

Trial Decision

In January 2017, the Rosseau Group Inc., (the "Purchaser") entered into an agreement with 2528061 Ontario Inc. (the "Vendor") for the purchase of development lands. The property, intended for a large residential development, was initially valued at $10.5 million based on its development potential. During the inspection, the Purchaser found less land was developable than estimated, leading to a price reduction to $6,615,000. An impasse over an additional deposit and the assumption of a mortgage resulted in the Vendor returning the initial deposit and refusing to close the transaction.

The Purchaser commenced an action against the Vendor and sought an order to compel the Vendor to honour the agreement and complete the transaction. At trial, the Purchaser abandoned the claim for specific performance and sought only damages. The trial judge sided with the Purchaser, finding that the Vendor's refusal to complete the sale constituted a breach of the agreement and a repudiation of the transaction, entitling the Purchaser to damages. The court awarded damages based on the Purchaser's lost profits from the intended development rather than the difference in land value over time and ordered the Vendor to pay $11.1 million in damages. For all the details of the trial decision, check out our earlier blog post here.

Court of Appeal Decision

On appeal, the Vendor argued that the trial judge erred, first in finding that the Vendor breached the agreement, and second by departing from the normal measure of damages and awarding damages based on lost profit. The ONCA allowed the appeal in part, rejecting the first argument but holding that the trial judge did err in departing from the normal measure of damages.

The normal measure of damages for a failed real estate purchase is generally calculated as the difference between the contract price and the market value of the land on the assessment date, typically the scheduled closing date. In coming to its decision, the ONCA explained that the normal measure of damages is presumptive and should not be abandoned unless it fails to address the specific type of loss suffered. The court reasoned that this measure aims to compensate the innocent party by placing them in a position as close as possible to what they would have been if the contract had been performed. Additionally, this measure promotes commercial certainty and predictability.

While the ONCA acknowledged the Purchaser's entitlement to damages for the loss of the land's development value, it disagreed with the assertion that the normal measure of damages was insufficient for calculating such losses. The court found that the market's valuation of land inherently considers the land's development potential, such that the 'special circumstances' mentioned by the trial judge were already factored into the normal calculation of damages.

The ONCA determined that the loss of the development opportunity by the Purchaser was a direct consequence of the breach, and therefore, the Purchaser was entitled to damages that flowed fairly, reasonably, and naturally from the situation. Since there were no findings or appraisal evidence from the trial judge regarding the increase in the land's value over the purchase price, and no indications of inadequacy in the normal measure of damages to assess the Purchaser's loss, the ONCA maintained that deviating from the normal measure was unwarranted. As such, the court ordered a new hearing on damages to be assessed according to the normal measure.

This decision signifies the court's reluctance to deviate from the normal measure of damages calculation and provides reassuring predictability in real estate dealings.

The firm would like to thank our Student-at-Law, Pulkit Sahi, for his assistance in writing this blog.

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