Disputes about real estate agreements (part 1 – commercial)

Under what conditions can a buyer get out of an agreement for the purchase of a business?

Generally, a buyer can get out of an agreement for the purchase of real estate if the seller has breached its obligation under the agreement.  

However, it is not enough to simply rely on a breach of the seller’s obligation.  A seller cannot rely on a technical breach of the agreement if it has no real impact on its rights, and if it has not engaged in discussions with the buyer about it.  More specifically, there are two main conditions to the right of a buyer to rely on the seller’s breach: 

• first, the breach must have a genuine impact on the buyer’s contractual rights under the agreement; 
• second, the buyer acts reasonably and engages in a meaningful way to discuss its concerns and objectives with the seller. 

In the case of Skyline Real Estate Acquisitions (III) v. Peterborough Retail Portfolio LP, 2023, Skyline as buyer entered into an agreement with Peterborough Retail Portfolio, as seller, to acquire two shopping plazas in Peterborough, Ontario, for $70 million. Skyline, the buyer, refused to close the transaction, alleging that the seller failed to satisfy tenancy conditions involving two key tenants (Walmart and Dollarama).  

The buyer relied on a condition in the agreement requiring the seller to provide estoppel certificates from tenants (certificates confirming that the landlord was in compliance with its lease obligations and that there were no defaults under the lease), and a lease extension for Dollarama before the closing date. The buyer sought to get out of the agreement and get its $3.25 million deposit returned.  

The application judge found that the seller delivered at least three versions of the Walmart estoppel certificate and Dollarama lease extension to the buyer and, in doing so, “more than met its obligation to make commercially reasonable efforts relative to the APS and the transaction”. The court dismissed the buyer’s court application and ruled that the seller was entitled to keep the deposit. The Court of Appeal for Ontario upheld the decision.  

If a property goes up in value after a failed closing, can the original buyer on the failed transaction claim the increase in value on the property?

No – a buyer of the failed deal has no right to claim the future increase in the value of the property after the deal failed. Damages are normally calculated based on the difference between the sale price and the market value on the date of the breach – not after the breach.    

An evaluation of damages based on a future date may be suitable only if the buyer has evidence that it could not re-enter the market to buy an alternative property after the breach. 

In the case of Akelius Canda Ltd. v 2436196 Ontario Inc., 2022, Akelius, as buyer, entered into an agreement in 2015 to buy seven residential apartment buildings in Toronto for close to $230 million (the 2015 market value). Akelius paid $19 million in deposits, but the seller refused to remove significant encumbrances from title to the properties. The transaction failed to close and the seller returned the deposits.  

Three years later, the seller sold the properties to a new unrelated buyer for $56.5 million more than the price in the 2015 agreement with Akelius. Akelius sued the seller for its costs thrown away due to the breach of the agreement of purchase and sale (about $775,000) and the significant difference in the purchase price. The motion judge allowed the buyer’s claim for cost thrown away but dismissed the claim for the increase in the value of the property. The Court of Appeal upheld the decision, holding that the buyer failed to establish that it suffered a loss as of the date of breach in 2016, and did not provide evidence it could not re-enter the market to buy an alternative property on the date of the breach to support a later evaluation date.  

Can a seller rely on an “entire-agreement” clause to exclude fraudulent or misleading representations it made before entering into the contract?

A seller cannot rely on fraudulent or misleading representations that it made before entering into an agreement for the sale of commercial real estate. A buyer can rely on a fraudulent misrepresentation as a ground against enforcing a commercial real estate agreement: an innocent party may legally rescind a contract that results from a fraudulent misrepresentation.  

Entire-agreement clauses are generally intended to exclude the parties’ negotiations, and what was said or done before the agreement was made, so as to exclude these negotiations from affecting the interpretation of the agreement. But an entire-agreement agreement clause cannot limit legal remedies to an innocent party arising from fraudulent misrepresentations. 

In the case of 104433204 Canada Inc. v. 2701835 Ontario Inc., 2022, the parties signed an agreement of purchase and sale for the assets of a Brampton coin laundry for $290,000, payable with a portion on closing and the balance in monthly payments over a four-year period as a vendor take-back mortgage. The buyer defaulted on its monthly payments and the seller made a claim for payment of the entire balance of the purchase price.  

Central to the case was that in the negotiations, the seller claimed the laundry generated $12,000 per month in revenue. The buyers exercised their right to visit the premise 14 times in the 15 days after signing the APS to verify the income and were presented with daily totals that were consistent with that revenue. This turned out to be a misrepresentation of the gross income of the business – the daily totals had been falsified to induce the buyer to purchase the business. A motion judge ruled in favour of the seller and held that the misrepresentation was not a genuine issue for trial because of the entire agreement clause. However, the Court of Appeal overturned the motion judge’s decision, ruling that the alleged fraudulent misrepresentation merited a trial of the dispute because, if successful, it could act as a ground for the buyer to get out of the purchase.

Conclusion

In navigating disputes over agreements for the purchase and sale of commercial real estate, parties must adhere to legal standards, act only on genuine breaches, engage in transparent communications, and present thorough evidence in support of their positions. This approach can safeguard against legal pitfalls and foster fair and equitable resolutions in commercial real estate dealings. 

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The information contained in this article is provided for informational purposes only and does not constitute legal advice. Readers should not act on this information without seeking professional legal advice from a lawyer experienced in this area. The content in this article may not reflect the most current legal developments, and the application of law can vary in different provinces and territories. As such, the information in this article is not guaranteed to be complete, correct, or up to date. The author and the publisher of this article disclaim all liability for any actions taken or not taken based on any or all of the contents of this site.

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