A recent decision from the Ontario Superior Court of Justice has confirmed that damages for lost opportunity will not be awarded when a real estate deal goes wrong.
In Akelius Canada Inc. v. 2436196 Ontario Inc., 2020 ONSC 6182, Justice Morgan held that when a real estate deal falls apart due to a seller’s default, damages are to be determined at the closing date and a claim for the future appreciation of the property is therefore not available.
In Akelius, two sophisticated real estate investors entered into an Agreement of Purchase and Sale (“APS”) in 2015 for seven residential apartment buildings in Toronto. The plaintiff buyer was a Canadian subsidiary of a large international investment corporation with holdings across Europe, the United States, and Canada. Over the course of the transaction, the purchase price was negotiated to a final price of $225,400,000.
After the APS was executed and prior to closing, the buyer discovered that there were several mortgages encumbering the title of some of the properties with total outstanding amounts of over $48 million. The existence of the mortgages constituted a breach of the APS and the buyer therefore objected after discovering them.
The defendant sellers failed to remove the mortgages. However, in an attempt to salvage the transaction, the sellers proposed to revise the APS to exclude the encumbered properties from the sale or alternatively, they proposed that the buyer could assume the mortgages with a price abatement.
The buyer refused the sellers propositions, sued for breach of contract, and brought a motion for summary judgment. The sellers eventually sold the properties in 2018 for about $50 million more than the purchase price in the APS. In its damages claim, the buyer sought $50 million, reflecting the appreciation reaped by the sellers, as well as about $770,000 in sunk costs that it incurred as a result of the failed transaction.
Justice Morgan had little difficulty finding that the sellers breached the APS. The buyer was ready, willing, and able to close the transaction and the sellers were unable to convey good title on the closing date as a result of the mortgages.
As such, the primary issue for determination was the appropriate measure of damages. Justice Morgan noted that the basic principle is that damages should put the injured party back in the position it would have been in if the contract had not been breached. There is some flexibility to this approach; courts have stated that the date of assessment should be determined by what is fair on the facts of the case.
However, it has also been well established that damages for lost speculation profits is not an available remedy in a real estate transaction. The damages must make up what the purchaser lost in value on the closing date, not what a property speculator standing in the purchaser’s shoes would have lost.
It was also noted that it did not matter in this case that the buyer was an “income investor” rather than a true property speculator. Damages were therefore measured at the date of closing, which precluded any claims for lost appreciation profits.
While the case law provided a complete answer to the lost profit claim, the court in Akelius went on to discuss mitigation, because the parties had spent much of their time fighting over that issue. The court held that the buyer had either failed to mitigate its damages or, more likely, fully mitigated its damages. The buyer refused to produce records of its transactions after January 2016, and Justice Morgan accordingly drew an adverse inference that the funds saved on this transaction were spent on other comparable investments.
As a result, it was held that the buyer was only entitled to damages for the amount of sunk costs thrown away on the transaction. Damages for lost opportunity were not awarded. Because both parties had mixed success, no costs were awarded to either side.
This decision affirms the courts’ reluctance to consider claims for lost profits from capital appreciation, even where a buyer is unfairly deprived of a lucrative opportunity. Real estate investors should be mindful of this before they opt to sue for damages.
Author: Daniel Waldman, Lawyer
The author would like to thank Allan Tung, Articling Student, for his assistance with this article.