Lost profits decision restores normalcy on damages in commercial real estate

by | Apr 8, 2024 | Contract Disputes, Litigation, Property Disputes

The commercial real estate industry can breathe a little easier after the Court of Appeal for Ontario restored a sense of normalcy to the measure of damages for collapsed property deals.

Typically, when a commercial real estate deal fails to close, the measure of damages for the innocent purchaser is calculated as the difference between the agreed purchase price and the market value of the property on the date the sale should have gone through. Still, judges retain discretion to depart from that standard when there are “special circumstances” warranting a larger award.

That’s what happened at trial in the case of The Rosseau Group Inc. v. 2528061 Ontario Inc., when the judge ordered the numbered company vendor to pay $11.1 million in damages for lost profits that TRG would have made on the housing development it had planned for the land.

The size of the award — which almost doubled the $6.6-million sale price agreed by the parties — raised concerns in the commercial real estate industry, but the Court of Appeal has now relieved them after concluding that the trial judge departed a little too easily from the standard measure of damages.

The facts

The roots of the dispute over the 46-acre farmland and wetland property can be found in the 2017 agreement of purchase and sale (APS), which set the price of the Peel Region land at $350,000 per developable acre. At this time, TRG paid a $50,000 deposit and committed to a further $400,000 once all conditions in the APS were waived.

However, relations between the parties subsequently deteriorated, and the transaction never closed, with each side blaming the other for the collapse.

Arguments at trial centred on the additional deposit before the judge sided with TRG, concluding that the seller had 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, the trial judge accepted that a departure from the “normal measure” was warranted, allowing TRG’s claim for $11.4 million in lost profits after finding that both parties had specifically considered the buyer’s planned development of the property into serviced lots at the time of the agreed sale.

The seller appealed, challenging the judge’s findings both on liability and the measure of damages.

The results

On appeal, the unanimous three-judge panel rejected the vendor’s arguments on liability, agreeing with the trial judge that they had breached the APS.

However, on the issue of damages, the appeal court panel sided with the seller, concluding that the trial judge had erred in departing from the normal measure “in the absence of anything that suggested that that measure would not address Rosseau Group’s recoverable loss.”

Explaining that the standard measure of damages applies presumptively in failed real estate purchases, the panel added that there were two key reasons that the presumption is “not easily displaced.”

First, it places the innocent party as close as possible to the position they would have been in if the contract had been performed; and second, because of the commercial certainty that comes with a predictable damages methodology.

On its own, there was nothing in the parties’ contemplation of a future development to show that this type of loss could be compensated for by the normal measure of damages, the appeal court judges wrote. They hinted that their ruling could have gone the other way if TRG had been able to demonstrate its ability to extract special value from the land not available to other market participants, for example, by owning adjacent land that could be combined in a unique way or by using unique development techniques unknown to others in the market.

“In those types of situations, the normal measure of damages may not be adequate because the key driver of damages according to the normal measure — the market value of the land — may not reflect the development value the disappointed purchaser has lost,” they wrote.

A new hearing will determine the amount of damages TRG will receive based on the standard measure, as the appeal court stated it couldn’t provide its own assessment of value.

The lessons

Vendors of commercial real estate who commit a contractual breach should still expect to face consequences, but this decision returns a sense of certainty and predictability to the risk assessment process when parties enter an APS.

Still, the door to claims for lost profits remains wedged open, and sellers should take particular care in situations that resemble those where the appeal court said that a departure from the standard measure may be warranted:

  • when a purchaser owns adjacent land that could be combined in a unique way with the land to be acquired
  • the purchaser has special development techniques not generally known in the market.

The appeal judgement also offers some useful guidance on what it means to be “ready, willing and able” to close, confirming that there is no requirement to tender by a party enforcing their contractual rights when the other party has already clearly repudiated.