A Failed Real Estate Deal—What's the Damage?

January 09, 2024

Written By Jane Helmstadter and Mykala Way

Overview

The Rosseau Group Inc. (Rosseau) was a real estate developer. Rosseau entered into an agreement of purchase and sale with 2528061 Ontario Inc. to buy land for development purposes. Once the land had been rezoned and subdivided, Rosseau planned to sell the serviced lots. At trial, it was estimated that Rosseau would make a profit of around C$10 million to C$12 million dollars from the sale of the serviced lots.

The vendor failed to close, and the land had gone up in value since the agreement of purchase and sale was signed.

How to measure the damages?

In instances where a vendor fails to complete an agreement of purchase and sale, the conventional measure for assessing the innocent purchaser's damages is the difference between the agreed-upon purchase price and the market value of the property as of the closing date. In Rosseau Group Inc. v. 2528061 Ontario Inc., the Ontario Court of Appeal overturned the decision of a trial judge who had departed from this standard and awarded over C$11 million in damages to a developer for lost profits. The Ontario Court of Appeal reinstated the conventional measure of damages—the difference in the agreed-upon purchase price and the market value as of the closing date.

Facts and Trial Decision

The Rosseau Group Inc., as purchaser, and 2528061 Ontario Inc. (the Vendor), as vendor, entered into an agreement for the sale of development lands in January 2017 (the Purchase Agreement). The purchase price was C$350,000 per developable acre of the property. Prior to closing, a dispute arose as to whether a further deposit was to be paid. Rosseau did not pay the further deposit and the Vendor terminated the deal. Litigation ensued. Rosseau claimed specific performance¹ and, in the alternative, damages. The court did not have an opportunity to consider the claim for specific performance as Rosseau later abandoned the claim for specific performance and the action continued as a claim for damages alone.

Having found that the Vendor improperly terminated the Purchase Agreement, the trial judge determined that there were special circumstances that warranted an exceptional measure of damages and awarded Rosseau damages based on its expected profit instead of awarding damages based on the normal measure of damages, being the difference between the price stated in the Purchase Agreement and the market value of the land on the closing date. The trial judge determined this was justified because of 'special circumstances' known to the parties at the time they entered into (and amended) the Purchase Agreement. These special circumstances included that the Vendor knew that Rosseau intended to acquire the property for the purposes of developing it, as evidenced by the terms of the Purchase Agreement, which based the purchase price on the developable acreage of the land and was conditional on Rosseau satisfying itself as to the economic feasibility of development. 

Court of Appeal Decision

On appeal, the Vendor argued that it did not breach the Purchase Agreement and was not liable for damages. While the Ontario Court of Appeal (ONCA) rejected this argument, it did find that the trial judge erred in departing from the normal measure of damages.

The normal measure of damages for failure to complete a purchase of land is intended to represent the lost benefit of the bargain to the purchaser. In its analysis, the ONCA addressed why the normal measure of damages is the presumptive measure and should not be departed from. First, the normal measure fulfills the purpose of an award of damages, which is to put an innocent party in the position it would have been had the contract been fulfilled, and second, the normal measure reinforces commercial certainty and promotes efficient behaviour.

By having a consistent framework to calculate damages, parties can predict the potential consequences of entering into a commercial contract. This predictability is critical for businesses when making informed decisions and assessing risks during negotiations and encourages parties to honour the terms of their agreements as the repercussions of a breach are well-defined. 

The court has a general discretion to depart from the normal measure of damages if the circumstances warrant it. In this case, the trial court determined that departure from the normal measure of damages, and the award of damages based on lost profits, was justified. Although the ONCA agreed that Rosseau was entitled to damages for the loss of the development value of the land, it disagreed that the normal measure of damages was inadequate to calculate such loss. The ONCA found that the value the market places on land takes in account whether or not the land can be developed. The 'special circumstances' referred to by the trial judge were therefore already accounted for in the normal measure of damages. No further damages arose fairly, reasonably and naturally as a result of the breach of contract; or were within the reasonable contemplation of the parties at the time of contract. The ONCA drew a distinction between whether a loss had occurred that was recoverable and how to quantify that loss. The ONCA found the trial judge had confused the two concepts. 

The ONCA found that because the purchase price was a direct function of the number of developable acres, the loss of the development opportunity suffered by Rosseau flowed fairly, reasonably and naturally from the breach so Rosseau was entitled to damages. The question therefore became 'how much'? With no finding from the trial judge (Rosseau had not led any appraisal evidence as to the increase of the value of the property over the purchase price) nor any available evidence to suggest why the normal measure of damages was inadequate to quantify Rosseau's loss, the ONCA affirmed that the normal measure of damages should not have been departed from. There was no reason to suggest that using the normal measure to calculate damages would result in an award that failed to account for the development value of the lands.

Accordingly, the ONCA allowed the appeal on the issue of quantum of damages and ordered a new hearing to assess damages using the normal measure. 

Takeaway

Real estate professionals can now, collectively, breathe a sigh of relief. A trial court decision that initially frightened the industry, particularly those in the business of selling to developers, has been overturned. By returning to the normal measure of damages as the prevailing method from which courts should not easily depart, the ONCA has reinforced commercial certainty in these matters. After all, even if a vendor knows it is selling its land for development purposes, how can it guess what profits the developer may make?

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