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getting real about breach of real estate agreements in ontario
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Whether you are new to the real estate market or an experienced land owner, you should be aware of consequences for failing to complete an agreement of purchase and sale (“APS”). An APS is essentially a contract for the purchase and sale of land. Consequently, a typical lawsuit for a failed real estate deal is an action for breach of contract.
In Ontario it has long been the law that the innocent non-breaching party (“Innocent Party”) should be put back in the position they would have been in had the real estate transaction closed, subject to some qualifying principles. The Innocent Party’s expectation is to be compensated for what they did not receive for their end of the bargain from the party that violated the APS (“Violating Party”). This compensation is called “expectation damages”.
To be recoverable, expectation damages for breach of contract: (1) must be reasonably foreseeable; (2) must be unavoidable in the sense that the Innocent Party is treated as if it had an obligation to take reasonable steps to avoid loss, that is to mitigate; and (3) must be proved with some certainty. With respect to the duty to mitigate, mitigation does not need to be flawless or perfect; it only needs to be reasonable in view of the prevailing circumstances known at the time to exist without relying on hindsight. The Innocent Party is not expected to take unreasonable risk. For example, if the Innocent Party is the seller, then the seller is usually required to relist the property for sale. Failure to do so may reduce any damages awarded by a judge.
For a breach of the APS that occurs on or around the closing date set in the APS, the Innocent Party’s expectation damages are generally calculated or measured based on the difference between the contract price and the time fixed for closing by looking at the market value at the time of closing.[1] Market value is assessed on an objective basis based on what a willing buyer would pay for the property on the open market having reasonable knowledge of the value of the property.
For an anticipatory breach[2], the normal measure of damages is the difference between the contract price and the date of closing, although this amount is subject to being reduced if the seller fails to mitigate after acceptance of the Violating Party’s repudiation of the APS. Upon anticipatory breach or repudiation, the Innocent Party has two choices: (1) to accept the repudiation and sue for damages, without the further need to perform any remaining obligations of the APS[3]; or (2) insist on strict performance and completion of the APS and wait until the closing date to assess the outcome.
Recall that the Innocent Party has a duty to mitigate its damages upon breach of the APS by the Violating Party. Judges retain discretionary power to deviate from the normal calculation or measure of damages if it is fair in the circumstances to do so because mitigation efforts are different in each case. Each case is different and must be assessed on its own merits. Typically, the Innocent Party is entitled to the resale price loss and special damages.[4]
How then does one prove what calculation or measure of damages a judge should use in each case? Typically, where there are sophisticated parties, a more complex real estate deal involved, and a highly fluctuating real estate market, appraisal evidence will be required to assist the judge in determining what a reasonable and objective amount of damages would be in that case. The disparity in damages between a calculation based on (i) the difference between the contract price and market value on the date of closing as compared with (ii) the difference between the contract price and the market value on some date before or after closing could be significant, as demonstrated in numerous cases in Ontario.
When such significant costs are involved for failing to complete an APS, parties to an APS would be well-served by having experienced counsel to protect their rights in the event of a breach.
Our experienced team at Keyser Mason Ball, LLP is dedicated to achieving the best results for you in every real estate transaction or dispute, whether residential or commercial property is involved. Please contact Charles Lun (CLun@kmblaw.com) and he will be happy to assist.
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[1] There is little better evidence for market value of a property than the price at which the property actually sold following a breach of the APS and following what appears to be reasonable mitigation of damages.
[2] Generally, an anticipatory breach occurs where the Violating Party reveals an intention not to be bound by the terms of the APS and deprives the Innocent Party of substantially the entire benefit of the APS. Typical examples are where a buyer states that they will not close due to lack of funds or where a seller refuses to sell the property.
[3] A typical example of repudiation is where a buyer cannot close due to lack of funds, advises the seller of this, and the seller relists the property for sale and commences a lawsuit for the amount of the deposit and additional damages.
[4] Special damages are damages to compensate the Innocent Party for actual expenses incurred. For example, if the seller is the Innocent Party, the seller is likely entitled to their carrying costs after the closing date for items such as property taxes, utilities, insurance, and the like that are reasonably foreseeable “losses” (i.e., out-of-pocket expenses) carried by the Innocent Party.
In Ontario it has long been the law that the innocent non-breaching party (“Innocent Party”) should be put back in the position they would have been in had the real estate transaction closed, subject to some qualifying principles. The Innocent Party’s expectation is to be compensated for what they did not receive for their end of the bargain from the party that violated the APS (“Violating Party”). This compensation is called “expectation damages”.
To be recoverable, expectation damages for breach of contract: (1) must be reasonably foreseeable; (2) must be unavoidable in the sense that the Innocent Party is treated as if it had an obligation to take reasonable steps to avoid loss, that is to mitigate; and (3) must be proved with some certainty. With respect to the duty to mitigate, mitigation does not need to be flawless or perfect; it only needs to be reasonable in view of the prevailing circumstances known at the time to exist without relying on hindsight. The Innocent Party is not expected to take unreasonable risk. For example, if the Innocent Party is the seller, then the seller is usually required to relist the property for sale. Failure to do so may reduce any damages awarded by a judge.
For a breach of the APS that occurs on or around the closing date set in the APS, the Innocent Party’s expectation damages are generally calculated or measured based on the difference between the contract price and the time fixed for closing by looking at the market value at the time of closing.[1] Market value is assessed on an objective basis based on what a willing buyer would pay for the property on the open market having reasonable knowledge of the value of the property.
For an anticipatory breach[2], the normal measure of damages is the difference between the contract price and the date of closing, although this amount is subject to being reduced if the seller fails to mitigate after acceptance of the Violating Party’s repudiation of the APS. Upon anticipatory breach or repudiation, the Innocent Party has two choices: (1) to accept the repudiation and sue for damages, without the further need to perform any remaining obligations of the APS[3]; or (2) insist on strict performance and completion of the APS and wait until the closing date to assess the outcome.
Recall that the Innocent Party has a duty to mitigate its damages upon breach of the APS by the Violating Party. Judges retain discretionary power to deviate from the normal calculation or measure of damages if it is fair in the circumstances to do so because mitigation efforts are different in each case. Each case is different and must be assessed on its own merits. Typically, the Innocent Party is entitled to the resale price loss and special damages.[4]
How then does one prove what calculation or measure of damages a judge should use in each case? Typically, where there are sophisticated parties, a more complex real estate deal involved, and a highly fluctuating real estate market, appraisal evidence will be required to assist the judge in determining what a reasonable and objective amount of damages would be in that case. The disparity in damages between a calculation based on (i) the difference between the contract price and market value on the date of closing as compared with (ii) the difference between the contract price and the market value on some date before or after closing could be significant, as demonstrated in numerous cases in Ontario.
When such significant costs are involved for failing to complete an APS, parties to an APS would be well-served by having experienced counsel to protect their rights in the event of a breach.
Our experienced team at Keyser Mason Ball, LLP is dedicated to achieving the best results for you in every real estate transaction or dispute, whether residential or commercial property is involved. Please contact Charles Lun (CLun@kmblaw.com) and he will be happy to assist.
_________________________________________________________________________________________
[1] There is little better evidence for market value of a property than the price at which the property actually sold following a breach of the APS and following what appears to be reasonable mitigation of damages.
[2] Generally, an anticipatory breach occurs where the Violating Party reveals an intention not to be bound by the terms of the APS and deprives the Innocent Party of substantially the entire benefit of the APS. Typical examples are where a buyer states that they will not close due to lack of funds or where a seller refuses to sell the property.
[3] A typical example of repudiation is where a buyer cannot close due to lack of funds, advises the seller of this, and the seller relists the property for sale and commences a lawsuit for the amount of the deposit and additional damages.
[4] Special damages are damages to compensate the Innocent Party for actual expenses incurred. For example, if the seller is the Innocent Party, the seller is likely entitled to their carrying costs after the closing date for items such as property taxes, utilities, insurance, and the like that are reasonably foreseeable “losses” (i.e., out-of-pocket expenses) carried by the Innocent Party.
This article is provided for general information purposes and should not be considered a legal opinion. Clients are advised to obtain legal advice on their specific situations.
