Ontario Court of Appeal confirms no claim by innocent buyer to rise in property value after failed transaction

Key facts

In August 2015, Akelius, as buyer, and 243 Ontario, as seller, entered into an Agreement of Purchase and Sale for seven residential apartment buildings in the Parkdale neighbourhood of Toronto. The purchase price was close to $230 million.

This was the market price of the properties at the time of the agreement. The sale transaction was scheduled to close in January 2016. Akelius paid about $10 million in deposits.  However, 243 Ontario failed to remove about $49 million of encumbrances from title to the properties. The transaction failed and 243 Ontario returned the deposits.

In September 2018, 243 Ontario sold the properties to a new buyer for about $56.5 million more than the sale price to Akelius. After that, Akelius sued 243 Ontario for its costs thrown away due to the breach of the APS, which were in the amount of about $775,000.  It also sued for the difference in the purchase price in the amount of about $56.5 million.

On a motion for summary judgment, the motion judge allowed Akelius’ claim for its costs thrown away but dismissed Akelius’ claim for the capital appreciation of the property. No side was awarded costs.

Akelius appealed the decision, alleging that it was entitled to the capital appreciation. 243 Ontario cross-appealed, alleging that the motion judge erred in giving Akelius every dollar of its claim for costs thrown away, and by failing to award to it costs of the proceeding.

The Court of Appeal dismissed both the appeal and cross-appeal

The Court of Appeal upheld the motion judge’s decision. It agreed that the presumptive date when damages are to be assessed in a case involving breach of a real estate contract is the date of the breach, not a later date. The court noted that whether a party is innocent does not displace the presumptive date of assessment of damages.

Damages are presumptively the difference between the sale price and the market value of the property on the date of the breach of the APS. A later date may be appropriate if the buyer has sufficient evidence to establish that it could not re-enter the market to buy an alternative property on the date of the breach.

Akelius argued on appeal that the later date for the assessment of its losses should apply because it may be difficult for an innocent purchaser to buy a similar portfolio of properties.  However, Akelius did not show any reason why it could not re-enter the market in the two and a half years between the date that the APS fell through and the date of the eventual sale of the properties to a third party. Akelius had not provided any evidence about loss of revenue and had not shown what it would have sold the properties for – as opposed to what 243 Ontario sold the properties for.

There was also no evidence why Akelius should be entitled to the sale price as of the date that 243 Ontario sold the properties, since Akelius was in the business of holding properties for the long term. Akelius was a long-term investor that intended to acquire the properties to generate income. It did not intend to flip the properties for a capital gain.  In this context, it did not make sense to assume that Akelius would sell at the market high point.

The Court of Appeal also dismissed 243 Ontario’s cross-appeal, on the basis that the motion judge made no reversible error and the discretionary nature of costs awards.

The takeaway

In this case, the real estate market went up after the seller’s breach. Even though the buyer was innocent, there was no reason why it could not re-enter the market and buy an alternative property.

This case reinforces the legal presumption in disputes of real estate contracts – that damages are calculated as of the date of the breach. For a party to rebut that presumption, it must have compelling evidence.

It should be noted that this legal presumption operates differently when the buyer is at fault by reneging on a purchase of a property, and the property value subsequently depreciates. In that scenario, there is a duty on the seller to mitigate its losses by taking all reasonable steps to re-sell the property on the market. The seller can then claim against the defaulting buyer the difference between the original purchase price and the eventual lower sale price.