This column was originally published on the Real Estate News Exchange (renx.ca).
If a buyer enters into a real estate deal with the intention of developing the land, there can be serious consequences if the seller does not honour its side of the bargain.
In our blog on WED Investments Limited v. Showcase Woodycrest Inc., the situation was explained. In that case, a land purchase transaction fell through, and the seller was held to be liable. In the result, the court awarded $3.2 million in damages to the buyer, which was the land’s increased value, as calculated between the time of the purchase agreement and the closing date.
In a more recent decision, however, a seller in similar circumstances was ordered to pay a buyer over $11 million in damages, representing the amount of profit that the buyer may have reaped had it been able to purchase and develop the lands.
In The Rousseau Group v. 2528061 Ontario Inc. two parties entered into an agreement for a property sale in January 2017. The property was 45-acres with natural heritage features and was situated in a developing community that was expanding at the time. The buyer intended to undergo a large residential development on the land and the agreement specifically stated that the land was being purchased for development.
The purchase price was $10.5 million and the value of the land was based on its development potential. The purchase price was therefore determined on the “net developable acreage” of the land, which was estimated to be 30 acres when the agreement was signed.
A $50,000 deposit was payable upfront and an additional $400,000 deposit was payable when the buyer waived all the conditions in the agreement. The agreement was also conditional on the buyer satisfying itself as to whether the development was economically feasible, and it was given wide latitude to conduct its diligence and inspect the property.
During its inspection, the buyer determined that much less of the land was developable than originally estimated. Based on this finding, the buyer and seller agreed to that the purchase price would be reduced by about 40 percent to $6,615,000. However, the buyer also agreed to assume an existing mortgage that the seller had on the property as part of the deal.
After the parties agreed to the amendment, the buyer waived all conditions in the purchase agreement and started operations to develop the lands upon the completion of the transaction. However, both sides reached an impasse regarding the terms of the amended deal. The buyer asserted that, by agreeing to assume the mortgage, the seller waived the requirement to provide the additional $400,000 deposit, and therefore did not pay it. The seller, in turn, insisted that the deposit was still payable and the buyer’s refusal to provide it constituted a breach of the agreement. As a result, in July 2017, the seller returned the initial deposit and refused to close the transaction in August 2017, as scheduled.
The buyer commenced an action against the seller right away and sought an order to compel the seller to honour the agreement and complete the transaction. However, the matter did not go to trial until April 2021; and, by that time, the buyer abandoned its claim to purchase the land. Instead, damages were sought for all the losses it incurred related to the aborted transaction, including the loss of profits it would have realized if it were able to develop the property.
The court sided with the buyer and agreed that the $400,000 deposit was not payable under the amended deal. As such, by refusing to complete the sale by the closing date, the seller breached the agreement and repudiated the transaction, which entitled the buyer to damages.
In awarding damages, the court departed from the reasoning in Wed Investments, where damages were awarded based on the difference in value of the land from the time the purchase agreement was executed and the closing date. Rather, in this case, the buyer succeeded on its claim for lost profits, had it been able to develop the property as intended. In deciding to award damages on this basis, the court paid special attention to the fact that both the wording of the purchase agreement and the buyer’s actions showed that it was always its intention to purchase the land for development, and that the seller understood this.
In proving its damages, the buyer provided expert evidence of the costs and profits of comparable developments. In this case, the buyer’s expert estimated that the development costs would have been about $11 million and roughly $21-$23 million in revenue would have been generated. The projected profits were therefore in the range of $10-$12 million.
The seller challenged the buyer’s damages claim on the basis that the projected profits were overstated and that the buyer did not mitigate its damages by purchasing another property for a similar project. These arguments were not accepted for a number of reasons – most notably, there was no basis to challenge the expert evidence and the buyer established that no similar properties were available to purchase. The court noted the fact that the property was situated in an expanding community and therefore had strong development potential.
The court therefore accepted the damages claim and ordered the seller to pay $11.1 million, based on the projected lost profits that the buyer would have collected from its intended development project.
As this decision shows, courts have not been taking kindly to sellers refusing to honour purchase agreements, especially when the subject buyer intends on developing the land. If a seller chooses to terminate the deal, it should be sure that it is entitled to do so. If the termination is unlawful, the resulting damages can end up being far more than what the land is worth.