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Damages - Loss of Profit. The Rosseau Group Inc. v. 2528061 Ontario Inc.
In The Rosseau Group Inc. v. 2528061 Ontario Inc. (Ont CA, 2023) the Court of Appeal considered (and allowed on this issue) an appeal by the defendant where a commercial development purchaser sued successfully at trial for 'loss of profit' for vendor-breached APS.
In these quotes to court addresses the unusual 'loss of profit' damages issue, which the court resolved essentially on 'date of assessment' damages doctrine - which it held to be a 'measure of damages' issue rather than a 'type' of damages issue:[1] When a vendor breaches an agreement to sell real estate, the normal measure of the innocent purchaser’s damages is the difference between the purchase price and the market value of the property on the date the sale was to be completed. Among other issues, this appeal raises the question of whether a departure from the normal measure of damages is appropriate because the subject of the sale was land the purchaser intended to develop.
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[3] The purchase did not close. Rosseau Group brought an action alleging that 252 breached the agreement. Rosseau Group did not, however, seek the normal measure of damages for that breach, and led no expert appraisal evidence that the property was worth more on the closing date than the contractual purchase price. Instead, it sought the profits it claimed it would have earned had it acquired the property and developed it into serviced residential lots over a period of about six years after closing.
[4] The trial judge found that 252 had breached the APS. She held that this was an appropriate case to depart from the normal measure of damages and awarded Rosseau Group over $11 million as a “reasonable estimate” of its “lost expected profit”.
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[60] 252 submits that the trial judge erred in departing from the normal measure of damages, awarded damages that violated the remoteness principle, did not use the proper date for assessment of damages, and made an award that failed to address contingencies.
[61] I do not agree with 252 that an award that takes into account the loss to Rosseau Group flowing from it being deprived of the opportunity to acquire developable property violates the remoteness principle. However, the question of remoteness − whether the type of loss is recoverable − is separate from the question of how to measure the loss. In my view, the trial judge erred in departing from the normal measure of damages in the absence of anything that suggested that that measure would not address Rosseau Group’s recoverable loss. That conclusion is supported by the issues about the assessment date and contingencies that 252 raises in connection with the trial judge’s approach.
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(ii) The Remoteness Test Does Not Determine the Measure of Damages
[66] The trial judge noted that Rosseau Group, in calculating its lost expected profit from the opportunity it would have had to develop the property, was not claiming damages according to the normal measure. She said that “there is a general discretion in the court to depart from that [measure] if circumstances warrant”. She held the circumstances here justified the departure because the “parties in this case specifically contemplated that the [p]roperty would be developed into serviced lots…[t]hese were special circumstances known to the parties at the time they made the APS and amended [the] APS”.
[67] In my view, it was an error to rely solely on the parties’ contemplation of future development to justify a departure from the normal measure of damages in this case. The existence of what the trial judge referred to as special circumstances only meant that a type of loss was recoverable − in other words, it was not too remote. That conclusion is not the same as, let alone determinative of, the question of whether the normal measure is somehow inadequate to measure that loss.
[68] To explain, the term special circumstances known to the parties at the time of contracting, in the context of damages for breach of contract, is a reference to the second of the two branches of the remoteness limit on such damages. As this court stated in Saramia Crescent General Partner Inc. v. Delco Wire and Cable Limited, 2018 ONCA 519, at para. 36: “…there are two branches to the Hadley v. Baxendale remoteness test. Damages may be recovered if: (i) in the “usual course of things”, they arise fairly, reasonably, and naturally as a result of the breach of contract; or (ii) they were within the reasonable contemplation of the parties at the time of contract”. Damages that fall outside of either branch are not recoverable because they are too remote.
[69] The fact the property had known development potential, and therefore that if Rosseau Group acquired ownership it could benefit from having land with that potential, meant that damages for loss of the value of that potential (that is, the development value) would not be too remote. Indeed, even without the trial judge’s finding of special circumstances the same result would follow. The APS, originally and as amended, provided for the sale of development lands. The price was a direct function of the net developable acres for residential purposes. The APS was conditional on Rosseau Group satisfying itself as to the economic feasibility of development. The loss, measured in money, of the ability to acquire development lands and the opportunity that provided would, on an objective basis, flow fairly, reasonably, and naturally from the breach of the APS. Loss of development value would not be too remote even on the first branch of the remoteness test.
[70] But, importantly, the remoteness test deals with the “type” of loss that is recoverable, while the measure is about how the loss is quantified. Regardless of the branch of the remoteness test into which the loss of an opportunity to acquire lands that can be developed falls, the normal measure of damages should not be departed from unless the party seeking damages shows that that measure does not address that type of loss. The trial judge made no such finding, nor, in my view, was it available on the record[4].
[71] The key driver of damages under the normal measure is the market value of the land on the assessment date. 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. The concept of market value of the land takes into account the value the land has because it can be developed.
[72] In Musqueam Indian Band v. Glass, 2000 SCC 52, [2000] 2 S.C.R. 633, at para. 37, Gonthier J. drew on precedents from various situations in which the term value is used in connection with real estate to provide an all-compendious general definition. He said: “‘Value’ in real estate law generally means the fair market value of the land, which is based on what a seller and buyer, ‘each knowledgeable and willing,’ would pay for it on the open market”.
[73] One of the cases relied on by Gonthier J. was the decision of this court in Re Farlinger Developments Ltd. and Borough of East York, 1975 CanLII 587 (ON CA), [1975] 61 D.L.R. (3d) 193, 9 O.R. (2d) 553, an expropriation case. As that case shows, determining market value in the expropriation context relies on expert appraisal evidence that considers the highest and best use of the property, that is, the use to which the property could reasonably and probably be put in the future to maximize its economic return, including by redevelopment: at pp. 199-200.
[74] Assessing market value for the purpose of damages for breach of a purchase agreement for the sale of land employs the same concepts. It generally requires appraisal evidence: DHMK Properties Inc. v. 2296608 Ontario Inc., 2017 ONSC 2432, at para. 56, rev’d on other grounds 2017 ONCA 961. Appraisal evidence can take into account the value of the property based on what would be its reasonable and probable highest and best use and that includes development: see for example 1427814 Ontario Limited v. 3697584 Canada Inc., 2012 ONSC 156, at paras. 511-17; WED Investments Limited v. Showcase Woodycrest Inc., 2021 ONSC 237, at paras. 149, 151, and 155. In other words, the market value of the land can take into account, as at the valuation date, the market’s perspective of the value of the current and potential future uses and opportunities available to the land’s owner, including development.
[75] There was no suggestion here that a calculation of market value at the closing date would somehow miss or exclude the development value of the lands. The APS, negotiated in January 2017 between arms’ length market participants, attributed value to the property solely by reference to its potential development, as the price was $350,000 per developable acre for residential development. The trial judge found that 252 had knowledge that the value of the property had increased by the closing date based on market evidence − 252 received an offer to purchase the property of $11 million in April 2017, a Letter of Intent at $640,000 per developable acre (almost double that in the APS) in September 2017, and an additional offer to purchase the property that same month for $14 million.
[76] The trial judge referred to the decision in WED Investments Limited as support for her approach. In my view, it does not provide that support. In that case Schabas J., at paras. 93-97, considered it permissible for the plaintiff purchaser to “advance” two approaches to damages: “The first approach seeks the lost profits the plaintiff says it would have earned if it had acquired the properties and developed them, as was its intention when it signed the Agreements in 2016….[T]he second approach considers the increase in value of the properties as undeveloped land calculated on expected closing dates in July 2018.” The first approach is similar to that of the trial judge. The second approach is the normal measure.
[77] Importantly, Schabas J. did not award damages under the first approach, which he found “to be quite speculative and uncertain”: at para. 147. He did award damages based on the second approach, the difference between the purchase price and the market value of the property on the closing date. To determine the latter amount, he relied on appraisal evidence that “treated the property as vacant land available for redevelopment for a highest and best use of medium or higher density residential development….”: at paras. 149, 151, and 155. In other words, he used the normal measure, and that measure took into account the development value of the land.
[78] The trial judge also referred to Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC 19, [2002] 1 S.C.R. 678. In that case, the parties had agreed to jointly own golf course lands, and that an area around the 18th hole could be developed either by a third party or by one of the parties to the joint venture. Bell, the joint venturer who wished to develop was later prevented from proceeding with development by the other joint venturer’s insistence on the terms of their written agreement which did not reflect the terms that had been orally agreed to. The trial judge found the written agreement should be rectified and granted damages in lieu of rectification equal to “the amount of money that Bell would have been entitled to have received had he been permitted to complete the residential development of the 18th hole in accordance with the terms of the rectified [agreement]”: 1999 ABQB 479, 246 A.R. 272, at para. 92. Although the award was considered generous by the Alberta Court of Appeal due to the failure of the trial judge to fully consider contingencies, the award was upheld: 2000 ABCA 116, 185 D.L.R. (4th) 269, at paras. 27-29.
[79] The Supreme Court of Canada also upheld the award. Binnie J. rejected the argument that damages should not include the “reasonably expected profit from a 58-lot housing development” and should instead be limited to the difference between the market value of the land and the option price (which presumably would not include any of that housing development value). He noted that the parties had specifically contemplated “the optioned land would be put to the use of residential housing”, therefore the damages should include the losses flowing from those circumstances: at paras. 72-73.
[80] The normal measure will not be appropriate where it will not address the type of loss suffered by the innocent party. In Performance Industries, one joint venturer was denied a promised opportunity to engage in a specific development. It is implicit in the argument that Binnie J. rejected that for those lands, in those circumstances, the market value would not take into account expected profit from the residential development. I do not take Performance Industries to stand for the proposition that the normal measure of damages is not to be used for a failed arms’ length sale of development lands, such as occurred in this case, simply because the parties had an awareness that the lands could be developed, where there is no suggestion that development value is ignored or excluded by the normal measure.
[81] Rosseau Group’s compensation for breach of the APS should take into account development value of the lands. That loss is not too remote. But absent anything that suggests the normal measure of damages would not address development value, Performance Industries did not require departure from the normal measure in this case.
(iii) Assessment Date Concerns and Contingencies Support the Use of the Normal Measure
[82] Two additional issues that 252 raises about the trial judge’s approach to damages reinforce the conclusion that use of the normal measure of damages is appropriate.
[83] The first issue has to do with calculating damages as of an assessment date. The assessment date is presumptively the date of closing. It can be moved, in the discretion of the court, where to do so is fair, which usually has to do with when the innocent party should re-enter the market so they can engage in mitigating transactions. As this court stated in Akelius: “the date of breach remains a starting point for the assessment of loss, modified only to the extent that the innocent party satisfies the court that a later date is appropriate on the grounds that it is the first date upon which the party could reasonably have been expected to re-enter the market and mitigate its damages”: at para. 27.
[84] The trial judge did not use the date of closing as the assessment date. She was of the view that for a calculation of damages based on an estimate of lost profits, no date of assessment was necessary. Nor does it appear that she used a later date (in the sense of a specific date). Instead, she stated that if a date was required, she considered it to be fair in the circumstances “to start the assessment at the date of closing and estimate the expenses and revenue over the period over which the land would be developed − in this case, six years from the closing date”.
[85] The trial judge did not otherwise explain why no date of assessment was required. Her alternative approach does not identify an assessment date but instead a period of six years. Other than a statement that this is fair, the trial judge does not explain why using a six-year period instead of a date is appropriate. Although when she came to consider mitigation, the trial judge found that 252 had not satisfied its onus of showing Rosseau Group did not take reasonable efforts to mitigate, she did not expressly link that conclusion to the lack of a specific assessment date or the use of a six year period, or specifically equate it to Rosseau Group having satisfied its onus to depart from the presumptive date, or to use a later specific date.
[86] The lack of a specific date of assessment of damages is problematic. First, the expected profit is inherent in the value of the land at the date of closing. Second, because the normal measure of damages compares the purchase price to the market value at the date of closing, it compares outflows and inflows of value at the same date. When a later date of assessment is used, expected inflows and outflows of value may have to be adjusted so they are measured consistently, given considerations of interest, the time value of money, inflation, etc. But if no date, or multiple dates over a period are used, there can be concerns about what is being measured, and whether amounts are being measured and treated consistently.
[87] The second concern raised by 252 with the trial judge’s approach has to do with contingencies. When damages are assessed on the basis that an opportunity to make a profit in a certain way was lost, the question arises as to whether a discount is appropriate to reflect the contingency that the opportunity may not be realized, perfectly or at all: Eastwalsh Homes Ltd. v. Anatal Developments Ltd., 1993 CanLII 3431 (ON CA), [1993] 12 O.R. (3d) 675, at para. 38. 252 argues that the trial judge failed to apply any discount notwithstanding what it argues was Mr. Quarcoopome’s concession that there were risks that the project might not proceed as he envisaged it.
[88] I need not decide whether or what contingency discount should have been applied to Mr. Quarcoopome’s calculations, as the trial judge erred in using them as she did. But I note that the normal measure of damages accounts for contingencies through its use of market value, which represents the price at which knowledgeable arms’ length parties are prepared to transact given their assessment of the opportunity the property provides and the chance of realizing on it successfully.
(iv) Conclusion on Damages
[89] The trial judge erred in not using the normal measure of damages. Her award must be set aside.
[90] I do not consider that it would be appropriate to substitute an award of nominal damages. The trial judge found that the property had increased in value by the closing date (meaning there were damages according to the normal measure), but she did not make a specific finding as to what that value was, and this court is not in a position to determine that value. A new hearing on the issue of damages according to the normal measure is therefore required.
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