You can count your losses, but not your lost profits: Rosseau Group Inc. v. 2528061 Ontario Inc.

The Ontario Court of Appeal recently considered the award of lost profits in the context of the purchase of land for development. The vendor was found to have breached the agreement of purchase and sale. The trial judge awarded the purchaser profits on account of lost development opportunity on the property. The Court of Appeal overturned the decision, holding that the ordinary measure damages must apply: the difference between the market value of the land at the time of closing and the purchase price under the agreement.

What you need to know

• The normal measure of damages for a failed real estate purchase is the difference between the contract price and the market value of the land on the intended closing date under the contract. This normal measure of damages incorporates the potential development value of land.
• The presumption in favour of the normal measure is not easily displaced. This is despite the fact that there is general discretion for the court to depart from the market value approach if special circumstances warrant.

The facts

The respondent was the purchaser, and the appellant was the vendor, under an agreement of purchase and sale (APS) for the sale of development lands. The purchase price was based on the number of developable acres within the Caledon property. At the time of the APS, the property was undeveloped.

Between signing and the waiver of conditions, the property appreciated in value and the vendor received an offer well exceeding the original purchase price of $6.6 million. The vendor then alleged a breach of the agreement by the purchaser and repudiated the APS. The purchaser rejected the repudiation and sued for breach of contract. At trial the purchaser did not claim for specific performance.

The trial judge held that the purchaser had not breached the APS. While she accepted that the ordinary approach to damages is based on the difference between the purchase price and market value at the time of closing, she held that she could depart from this standard in special circumstances. The special circumstances here were the parties’ contemplation, at the time of signing the APS, that the land would be developed into serviced lots. The trial judge accepted expert evidence from a development consultant, with experience in helping landowners determine the financial cost and potential profits of real estate development, that the estimated profits of the purchaser’s proposed developments were $11.1 million.

The Court of Appeal’s decision

The vendor appealed on liability and damages. The appeal with respect to liability was dismissed: the Court of Appeal agreed that the vendor had breached the APS by repudiating it. But the appeal of damages was allowed.

The Court of Appeal held that the trial judge had erred in departing from the normal measure of damages. The normal measure of damages compensates the innocent purchaser for the loss of the market value of the lands on the closing date less the purchase price that had to be paid to acquire them. This approach takes into account the value the land has at its probable highest and best use, including development.

It was not appropriate to depart from the market value approach in the absence of anything that suggested that the normal measure would not address the purchaser’s recoverable loss.

Why the normal measure of damages applies

The Court of Appeal explained that the normal measure of damages exists for several reasons, including: i) to represent the financial equivalent of the asset; and ii) to enhance commercial certainty of an innocent party’s damage and promote efficient behaviour.

The Court of Appeal held that the normal measure for damages in a failed real estate purchase is presumptive, and that presumption should not be departed from unless the party seeking damages shows that that measure does not address their type of loss.

The Court of Appeal provided examples of types of loss that may overcome the presumption:

• if a purchaser could extract a special value from developing the land that other market participants could not because, for example, it owned adjacent land and could combine it in a unique way with the land to be acquired
• if a purchaser had special development techniques not known generally to the market.

In those examples, the normal measure of damages may not be adequate, because the key driver of damages according to the normal measure—the market value of the land—may not reflect the development value the disappointed purchaser had lost.

A note on liability

In upholding the trial judge’s decision on liability, the Court of Appeal offered some helpful insights on what it means to be “ready, willing and able to close” in the face of a repudiation—i.e., showing that a party is willing and able to close and therefore enforce the contract:

• The trial judge was correct that the purchaser was not required to tender. Tendering is only one way of showing that a party is ready, willing and able to close, but it is not the only way. It is also not required from an innocent purchaser when the vendor has clearly repudiated the contract or made clear that they have no intention of closing.
• Despite not tendering, the purchaser here was ready, willing and able to close. The fact that the purchaser had not assumed the mortgage from the vendor, which was a required condition of the APS, did not undermine this finding. It was sufficient that the funds required to close were available to the purchaser and the purchaser could have assumed the mortgage.

Implications of the decision

The normal measure of market value damages will usually prevail for failed arm’s length sales of development land. Parties seeking a different measure of damages will need to show that in their special circumstances the market value of the land does not reflect the development value lost.