Buyer's Claim Denied for $57 Million in "Speculative" Profits on Aborted Deal

In a recent Ontario decision, the question for the court was whether a Europe-based, global real estate investor should be awarded $57 million in damages for the seller's breach of an agreement of purchase and sale, to cover the lost opportunity to "cash in" on the Toronto real estate boom.

In 2015, the buyer/investor agreed to purchase seven residential apartment buildings in Toronto, for $229 million in total.

After paying the first deposit, the buyer learned that certain mortgages still remained on title to some of the properties. The buyer asked the sellers to have them removed, and, expecting no difficulty, proceeded to advance the second deposit. As it turned out, the sellers either could not or would not remove the encumbrances from title and eventually conceded that the amounts payable totalled nearly $49 million. The sellers proposed various solutions, including one that would have the buyer assume the mortgages and take a price abatement. The buyer refused, and when the deal did not close, litigation ensued.

The court first concluded that the buyer had no obligation to accept the sellers' abatement offer or similar proposals. The buyer was ready, willing, and able to close as agreed, had tendered the balance of the purchase price on closing, and took all other needed steps. In contrast, the sellers did not do "all that they could" to make good on their promise to convey good title; they merely made some initial inquiries with the mortgagees.

The court noted the sellers' fundamental obligation under the agreement and under the law of conveyancing was to convey good title, clear of the mortgages, rather than an "encumbered title with a cash-back equivalent or some other compensatory measure no matter how reasonable." Having failed to convey clear title, the sellers were in breach and were liable for damages to the buyer.

The more complex issue was how to quantify the buyer's damages. The buyer calculated them at $57 million in lost profits, being the difference between the purchase price under the agreement, and the greatly-increased price at which the sellers sold to a new buyer more than two years later, during the Toronto real estate boom. The buyer complained that the sellers' breach had prevented it from realization these hefty gains.

The court rejected that argument and declined to award damages of this nature. It did accept that the properties were worth $225 million in January 2016 when the deal was slated to close. Under Canadian law, the properties' value on that date was the customary starting point for assessing damages, which involved looking at the difference between the contract price and the market price. There could be some flexibility to this approach, but it depended on what was fair on the facts of the case, including the nature of the properties.

Here, the buyer was not in the business of flipping apartment buildings; it was an income property investor with holdings worldwide. Although the buyer had wanted to invest specifically in the Toronto market, even without anticipating the boom, the court was shown no evidence to prove that it could not replicate the same kind of capital appreciation "by buying a building in Boston or Stockholm or Zurich". Indeed, the buyer had fulfilled its post-breach mitigation duty by actually investing in other properties elsewhere in the world.

Ultimately, the court ruled the buyer was not entitled to receive the $57 million in damages for speculative profit merely because the sellers later realized that same profit more than two years later. As the court put it, "[t]he damages must make up what the purchaser lost in value on the closing date, not what a property speculator standing in the purchaser's shoes would have lost." However, the buyer was entitled to nearly $776,000 for expenses reasonably incurred to pursue the aborted transaction, including legal and professional fees and conducting due diligence. See: Akelius Canada Inc. v. 2436196 Ontario Inc., 2020 ONSC 6182.