This column originally appeared on the Real Estate News Exchange (renx.ca).
After a recent large-scale development deal failed, the Ontario Superior Court of Justice provided guidance on how damages should be measured when commercial real estate deals go wrong. The court also ruled on the damages that could result from the registration of a Certificate of Pending Litigation (a “CPL”).
In WED Investments Limited v. Showcase Woodycrest Inc., 2021 ONSC 237, three parties entered into an agreement to purchase land for development. WED Investments Limited (the “Buyer“) entered into agreements of purchase and sale (the “APS’”) with Showcase Woodycrest Inc. (“Showcase”) and 2442459 Ontario Inc. (“244”) (collectively, the “Sellers”) to acquire two properties in Whitby, Ontario (the Brock Street property and the Hopkins Street property, respectively) for residential development. The Brock Street property is owned by Showcase and the Hopkins Street property is owned by 244. Showcase’s sole owner, Elliot Kirshenbaum (“Kirshenbaum”) is also one of the owners of 244.
Both APS contained conditions which the Buyer had to waive before a specific date, failing which the agreements would be void and the transactions terminated. The buyer provided a waiver in time for the Brock Street property, but not for the Hopkins Street property due to an unexpected issue. Accordingly, the sellers took the position that both agreements were terminated.
The buyer sued the sellers and registered CPLs on both properties. The buyer claimed that the sellers breached both DPAs and alleged that the sellers wanted out of the agreements due to the rise in the real estate market since the agreements were negotiated.
Buyer initially requested specific performance, but that request was dropped before trial. Instead, the buyer claimed damages in the form of profits he allegedly derived from redevelopment of the properties or, alternatively, from their increase in value. The sellers filed a counterclaim, seeking damages arising from their inability to sell the properties due to the CPLs.
The Brock Street property
The buyer argued that the APS for the Brock Street property was valid and enforceable because the waiver was issued pursuant to the agreement. Showcase argued that the agreement could not be executed because the waiver was delivered by email and not by hand, as required by APS.
The APS provided that any notice related to the agreement must be in writing and delivered by hand. However, the Court noted that the APS provided that in the event of a conflict or discrepancy between a provision added to the APS and the standard part, the added provision would prevail. Schedule A of the APS provided that written notice of the waiver must be given to Showcase; however, he did not specify How? ‘Or’ What it had to be delivered. This constituted a “conflict or deviation” according to the Court, according to which the annex prevailed.
The Court also considered the contract as a whole, the surrounding circumstances, the purpose of the notice provision and the nature of the parties’ relationship and conduct. These factors were found to support a conclusion that the intention of the parties was to communicate by email on all matters. The Court held that it was unfair to require a party to read the APS strictly regarding the giving of notice, as the parties’ clear practice of communicating by email contradicted this.
As such, the delivery of the email waiver was determined to be in accordance with the APS, and therefore the agreement was wrongfully terminated by Showcase. This gave rise to a claim for damages from the Buyer.
The Hopkins Street Property
During the transaction, a number of issues arose with the Hopkins Street property, which led 244 to extend the time within which the buyer was required to provide their waiver. However, the buyer ultimately failed to deliver the waiver in time, leading 244 to terminate the APS.
The buyer said his inability to deliver the waiver was due to his reliance on statements made by Kirshenbaum that 244 needed more time to resolve issues with the property. However, the Court rejected this argument and found that the Buyer and 244 had orally agreed to a final deadline and that no further extension had been agreed. The Buyer did not respect this last deadline and the APS became null and void as a result.
It was therefore judged that the Buyer was not entitled to claim damages from 244 due to the failure of the transaction.
The buyer advanced two bases for calculating the damages: (a) the loss of profit it would have realized if it had acquired the properties and redeveloped them; and (b) the increase in the value of the properties as vacant land, as calculated on the expected closing dates.
In assessing the damages for the Brock Street property, the Court first considered the opinions of two planners obtained by the buyer and Showcase. The Buyer’s planner proposed high-density development, while Showcase’s planner felt this was not feasible and instead supported medium-density development.
The Court found Showcase’s planner’s proposal more pragmatic. It was also noted that the proposal given by the buyer’s planner had several issues that probably would not have been approved by the municipality. The Court found that a smaller scale project was more likely to have been approved.
The Court then assessed the opinions of the appraisers called by the Buyer and Showcase regarding the potential revenues that could have been realized if the redevelopment had taken place. The Court arrived at square footage figures it deemed appropriate for the apartments and townhouses that would have been developed, based on estimates provided by appraisers.
Finally, the Court examined the potential construction costs of the project based on the analysis of the Buyer’s expert. The Court held that the loss of profits approach to damages was speculative and uncertain because it did not take into account the likely scenario that the buyer’s proposed high-density development would not approved.
The Court then considered an alternative approach to damages, which was to consider the increase in value of the land at the expected closing date, based on the opinion of the Buyer’s expert. The appraiser treated the property as vacant land for medium to high density development and compared the property to sales of comparable properties in the area, making whatever adjustments it deemed appropriate. The Court accepted this approach and deemed it appropriate to assess damages reflecting the difference in value between the time the APS was executed and the closing date, which was $3,200,000.
With respect to the Hopkins Street property, the Court considered what it would have calculated as damages had it found that 244 violated the APS. The Court used the method of calculating damages based on the increase in value of the property, unbuilt, from the date of the APS to the closing date to arrive at a hypothetical amount of damages.
The Sellers’ Counterclaim
In assessing whether the Sellers were entitled to claim damages as a result of the CPLs, the Court said the burden of proof was on the Sellers to show that the CPLs had been recorded “without reasonable cause” or “without request”. reasonable interest in the country.”
In this case, it was held that since the buyer had been successful in its claim arising from Brock Street’s DPA, Showcase’s counterclaim had failed. It was also noted that Showcase continued to bear the costs of the property, the value of which had increased significantly, despite knowing the buyer’s CPL. There was also no evidence of Showcase’s attempts to sell the property. The Court therefore concluded that Showcase had not suffered any damage due to the CPL on the property.
With respect to 244’s counterclaim arising out of the CPL over the Hopkins Street property, it was held that although the buyer’s claim was ultimately unsuccessful, he did not act unreasonably in claiming an interest in the property. Moreover, had the Court found otherwise, it would not have awarded damages to 244 arising from the CPL, since 244 had not proven that it had suffered damages. The property had also increased significantly in value by the time the CPL was removed and 244 took no action to sell the property while the CPL was still on title. This supported the Buyer’s claim that 244 terminated the APS because it realized it could sell the property for a much higher price than agreed with the Buyer. The counterclaim of the sellers was therefore dismissed.
This decision follows the principle recently affirmed by the Superior Court of Ontario in Akelius Canada Inc. c. 2436196 Ontario Inc.. where a party’s claim for damages for loss of opportunity in a failed large-scale real estate transaction was dismissed by the court.
In Akelius, two real estate investors entered into a purchase and sale agreement in 2015 for seven residential properties in Toronto for a negotiated purchase price of $225,400,000. After the agreement was signed and prior to closing, the buyer discovered that there were $48 million in outstanding mortgages on the properties, which was a breach of the agreement. The buyer sued for breach of contract, and the sellers eventually sold the properties in 2018 for around $50 million more than the original purchase price. The buyer sought $50 million in damages, reflecting the appreciation realized by the sellers, as well as approximately $770,000 in sunk costs it incurred as a result of the failed transaction.
In the end, the buyer was only awarded damages for the amount of sunk costs lost in the transaction. The buyer’s claim for damages for loss of opportunity was dismissed.
These decisions are important in that they provide insight into the extent of the damage caused by the failure of development agreements. These decisions also show how difficult it is to reap damages for a missed opportunity, even when buyers are unfairly deprived of lucrative opportunities.
the WD Investments The decision also indicates when damages can be claimed as a result of a CPL. Even if a buyer fails to claim damages for a transaction gone wrong, this does not necessarily entitle the seller to damages from a CPL.