A buyer is generally entitled to damages when a seller in a commercial real estate transaction breaches an Agreement of Purchase and Sale by failing to complete the sale, but how do courts calculate the quantum of damages owing?
Typically, the standard measure of damages for a seller’s failure to complete a purchase of land is the difference between the contract price of the property that was to be purchased and the market value of the land. This is intended to represent the lost benefit of the bargain (for example, see Marshall v. Meirik).
However, this method of calculating damages may be changing. In a recent decision of the Ontario Superior Court, the seller under an Agreement for Purchase and Sale was held liable for the loss of the developer buyer’s expected business profits after the seller aborted the sale.
Parties enter into an agreement of purchase of sale
In The Rosseau Group Inc. v. 2528061 Ontario Inc., the parties entered into an Agreement of Purchase and Sale on January 17, 2017. The agreement stipulated that the defendant vendor would sell the property in question to the plaintiff purchaser at a purchase price of $10,500,000, with an initial deposit of $50,000, subject to certain conditions. One of the conditions required the purchaser to pay $400,000 to be held in the trust of the seller’s solicitor upon waiving all the conditions.
On March 10, 2017, the parties entered into an amended Agreement of Purchase and Sale. The purchase price was reduced to $6,615,000 to reflect a lower “net developable area” on the property than that set out in the original agreement.
The plaintiff purchaser “waived all the conditions” during the due diligence period but did not make the $400,000 payment following the waiver of the conditions. The defendant seller treated this failure to pay the $400,000 as a repudiation of the amended Agreement of Purchase and Sale and communicated this view to the plaintiff purchaser, returning the $50,000 deposit. The plaintiff initially sought an order for specific performance but then abandoned that relief and instead sought general damages for all expenses, losses, including economic losses, and lost profits arising from the defendant’s alleged failure to close the transaction.
Individual interpretations of the agreement unhelpful
The court applied the principles of contract interpretation to the original and amended Agreements of Purchase and Sale. It noted that while the surrounding circumstances will be considered in interpreting the terms of a contract, those circumstances cannot “overwhelm the words” of the agreement. The court must ground its interpretation in the contract’s text, looking at the objective evidence. Evidence of an individual’s interpretation of the agreement is not helpful.
Overall, the court found no provision for a $400,000 deposit in the amended Agreement of Purchase and Sale, and there was no provision for it to be paid and be reduced from the amount payable on closing. The parties did not have to include an explicit deletion of the $400,000 deposit in the amended Agreement of Purchase and Sale. It was evident by the terms of the amended Agreement of Purchase and Sale that it was no longer payable.
Seller found to have committed anticipatory breach
The court found that the seller, through its words and conduct, repudiated the agreements before the buyer’s performance was due. As the court found that the further $400,000 deposit was not payable by the buyer at the time of waiver of the conditions, the seller repudiated the contract when it said in writing that it considered the Agreement of Purchase and Sale and amended Agreement of Purchase and Sale at an end and returned the $50,000 deposit. The seller clearly expressed an intention not to be bound by the contract before the performance was due.
Damages awarded for buyer’s estimated lost profits
In awarding damages for lost profits, the court relied on a 2002 Supreme Court of Canada decision which held that lost profits were an appropriate measure for damages in a development case. The buyer was a developer, and, in reviewing the evidence, the court found that the parties contemplated explicitly that the buyer was acquiring the property to develop it. In fact, as part of the conditions of the sale, the buyer was required to satisfy itself concerning zoning and restrictions and the economic feasibility of the development of the site.
In calculating its lost profits, the buyer submitted expert evidence from a development consultant who estimated the costs that would have been incurred to buy, develop, construct, and rezone the land and the associated tax and legal costs of this venture. In reviewing the buyer’s development plans, he concluded that the project could have yielded an estimated $21.5 million to $23.5 million in revenue, with a cost of $11 million. Therefore, the buyers’ estimated profit was between approximately $10 million and $12.1 million.
The court rejected the seller’s argument that the buyer had failed to mitigate its damages by not purchasing another comparable property. The evidence demonstrated that the buyer was constantly looking for properties and typically purchased between five and six annually. Further, the development work in the community for the proposed development had begun 12 years prior.
Given this analysis, the court held that the buyer was owed $11.1 million, which represented the midpoint between the estimated range provided by the buyer’s expert.
Contact Bader Law in Mississauga for Knowledgeable Advice in Commercial Real Estate Transactions
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