Commercial property deal collapse costs vendor $11 million
The prospect of compensation for lost profits means it’s not just buyers who must beware when a commercial real estate deal collapses — sellers found responsible for the failure to close could find themselves on the hook for a huge award of damages.
Anyone who has sold their residential home in a hot property market knows that breaching an agreement to sell will not only entitle the thwarted buyer to the return of their deposit, but it may also leave them liable for damages to make up the difference between the agreed price and the updated market value of the home.
In the context of commercial real estate, the consequences of a breach are slightly different, but potentially much more costly, as the owners of a parcel of undeveloped land in the Greater Toronto Area recently discovered.
In the case of The Rosseau Group Inc. v. 2528061 Ontario Inc., Ontario Superior Court Justice Kendra Coats ordered the numbered company vendor to pay $11.1 million in damages for lost profits she found TRG would have made on its planned housing development totalling, almost doubling the $6.6-million purchase price agreed by the parties.
The roots of the dispute over the 46-acre farmland and wetland property can be found in the 2017 agreement of purchase and sale, which originally set the price of the Peel Region land at $10.5 million for approximately 30 developable acres. At this time, TRG paid a $50,000 deposit and committed to $400,000 more once all conditions in the agreement of purchase and sale (APS) were waived.
During the 90-day due diligence period built into the APS, the parties revised the purchase price down to $6.6 million after agreeing that development was feasible on only 18.9 acres, with the buyer waiving conditions after agreeing to assume the seller’s existing $1.6-million mortgage on the property.
However, relations between the parties subsequently deteriorated and the transaction never closed. Each side blamed the other for the collapse, with arguments centring over the additional $400,000 deposit due under the original APS. While the seller claimed that the buyer had repudiated the deal for its failure to pay the extra money, TRG claimed that its assumption of the seller’s existing mortgage was contingent on the vendor dropping the requirement for the larger deposit.
After a nine-day trial, the judge sided with TRG, concluding that the amended agreement no longer required the additional $400,000 deposit to be paid, and that the seller committed an anticipatory breach of the APS when it returned TRG’s initial $50,000 deposit and confirmed that it considered the deal off.
When it came to damages, Justice Coats accepted that a departure from the “normal measure” was warranted, allowing TRG’s claim for compensatory damages for the lost profits it would have earned on its planned housing development on the site.
Referencing the landmark 2002 Supreme Court of Canada decision in Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., the judge found that both parties had specifically considered the buyer’s planned development of the property into serviced lots at the time of the agreed sale.
“Rosseau’s damages must be assessed with reference to the profits which both parties contemplated that Rosseau would make but for the breach,” she wrote. “It is not necessary that there be a precise pre-estimate or calculation of the losses, only ‘a contemplation of circumstances which embrace the head or type of damage in question.’”
Over the objections of the seller, the judge accepted the evidence of an expert retained by TRG, who provided an estimate based on his experience as a development consultant. Overall, he testified that TRG’s planned project could have generated revenue of between $21.5 million and $23.5 million, compared with construction, tax and legal expenses of around $11.4 million. Calculating her award of damages, Justice Coats accepted the expert’s evidence as uncontradicted, taking the midpoint between the scenarios presented to the court.
In a final throw of the dice, the seller argued that TRG had failed to mitigate its damages by neglecting to use its funds on a substitute property for development. However, the judge was satisfied that there was no failure to mitigate as there were no other similar properties available for the buyer to purchase at that time.
Any party committing a contractual breach should expect to face consequences, but the severity of the penalty for this vendor will come as a shock to many.
Vendors of commercial real estate will want to take particular care if there appears to be a danger the deal will not close, especially if development is intended or if the land has unique properties not easily replicated elsewhere.
Not every situation will match the facts here, but it should prompt disappointed buyers to consider whether compensation for lost profits is a possibility, rather than limiting their claim to damages based on market value.
This case should also serve as a reminder of the importance of strong expert evidence to back up parties’ estimates and valuations in commercial real estate matters. While the losing defendant focussed its efforts on challenging the admissibility of evidence from the plaintiff’s expert witness, it may now rue the decision not to retain its own expert to provide an alternative opinion on the value of TRG’s lost profits.