It is inevitable that some deals fall apart, but the consequences and frequency of these failures can vary based on whether it occurs in a rising, falling or stable market. The state of the market may also affect who the at-fault party is likely to be. With declining purchase prices, failed real estate deals have once again become a concern at the forefront of the profession.
Generally, in any breach of contract, the damages award is meant to put the innocent party in the position it would have been had the contract been performed. In a real estate transaction, the damages awarded will often be the difference between the contract price and the price of the replacement property/sale provided the innocent party mitigated its damages.
Starting at the closing date
In Akelius Canada Ltd v 2436196 Ontario Inc1, the Ontario Court of Appeal confirmed that the date of breach is the appropriate assessment date, which can only be rebutted where the innocent party could only be reasonably expected to re-enter the market at a later date.2
Any shift is dependent on the facts of the case and what would be fair in the circumstances.3 There are six principles to consider:4
- Damages should put the innocent party in the position it would be had the contract been performed.
- This is typically achieved by making the date of breach, often the date of closing in a real estate transaction, the assessment date.
- There are three contextual considerations when choosing a different date:
- Mitigation
- Nature of the property
- Nature of the market
- In a falling market, the nature of the property, may make resale difficult. Therefore, if the vendor mitigates from the date of breach and resells a reasonable time after that, the court may make the resale date the assessment date.
- Generally, in a falling market, the innocent vendor is awarded the difference between the contract price and the “highest price obtainable within a reasonable time provided reasonable efforts are made to sell the property starting on the closing date”.
- If the vendor decides to speculate on the market, the assessment date will be the date of closing.
Mitigation. Mitigation. Mitigation
According to the Court of Appeal, the assessment date can be shifted where the innocent party can establish that it was not able to re-enter the market at the date of breach.5 If the innocent party has taken proper steps to mitigate but was unable to re-enter the market until later, through no fault of its’ own, it is more likely that a later assessment date will be accepted.
Beware claims for lost opportunity in contemplation at the time of contract
In The Rosseau Group Inc v. 2528061 Ontario Inc6 the vendor failed to close a deal in a rising market for a piece of land intended to be developed by the buyer. The Buyer sought compensatory damages for lost profits arising from the failed transaction.7
The parties had specifically contemplated that the Property would be developed at the time of Agreement.8 Therefore, the purchaser was entitled to a claim for compensatory damages representing the loss of profits flowing from its intention to develop the land.9 The appropriate assessment date was still the date of closing, but the court also estimated the expenses and revenue for the proposed land development. This led to a much larger damages award.
Takeaways
The Courts have consistently held that the date of breach is the appropriate assessment date for damages, subject only to modification where the innocent party has established its mitigation efforts and was still unable to mitigate until a later date. This is consistent with the general rule that the innocent party will be awarded the difference between the contract price and what they were able to buy/purchase for, provided they mitigated.
If the resale or repurchase is close in time to the date of breach, then the new price may be good evidence of the fair market value at the date of breach. Alternatively, if the innocent party can establish its mitigation efforts and demonstrate that it could not re-enter the market until a later date at which the fair market value of the property has changed, then the court may shift the assessment date to that time.
A shift in assessment date can occur in a rising or falling market, however, it appears more common in a falling market where the vendor is the innocent party. In this case, provided the vendor takes reasonable efforts to mitigate by placing the property on the market, a later assessment date may be fair. In a rising market, where the purchaser is the innocent party, a later assessment date is more likely where the nature of the property is such that the purchaser requires time to find a suitable replacement. However, this does not warrant a shift that would create a windfall in the purchaser’s benefit.
Despite the relative difficulty in establishing that a shift in the assessment date is warranted, large damages may still be possible if the Innocent Party can establish that there is a lost opportunity caused by the breach which was contemplated by the parties at the time of entering into the Agreement of Purchase and Sale.
Given the relatively stable case law concerning assessment of damages in a failed real estate transaction, any claims brought forth are likely to be dealt with on summary motion, if not negotiated prior to proceeding with a claim.
Laura McFalls practices with the Siskinds Real Estate Law department. If you have questions about this article or any other real estate questions, please email laura.mcfalls@siskinds.com or call 519.660.2061.
1 Akelius Canada Ltd. v. 2436196 Ontario Inc., 2022 ONCA 259 (CanLII), https://canlii.ca/t/jndp3>[Akelius].
2 Ibid at para 27.
3 Ibid at paras 28-29.
4 Ibid at para 22 citing 100 Main Street Ltd. v. W.B. Sullivan Construction Ltd. (1978), 1978 CanLII 1630 (ON CA), 20 O.R. (2d) 401 (Ont. CA) and 6472047 Ontario Ltd. v. Fleischer (2001), 2001 CanLII 8623 (ON CA), 56 O.R. (3d) 417 (Ont. C.A.) at para 41.
5 Ibid at para 27.
6 The Rosseau Group Inc. v. 2528061 Ontario Inc., 2022 ONSC 486 (CanLII), https://canlii.ca/t/jlxr2>
7 Ibid at paras 1-2.
8 Ibid at paras 324-329.
9 Ibid at para 332.