Could a Lease-Back Agreement Legitimately Derail a Sale of Development Lands?

In a recent Saskatchewan Court of Appeal decision, the court considered whether the pre-closing failure to finalize certain details on a lease-back arrangement was significant enough to scuttle a $3 million deal involving farm property that was ripe for development and whether specific performance was the appropriate remedy.

The dispute arose in connection with an agreement to sell, then lease-back, a 1600-acre farm near Regina. The owners were the Harles, and they were interested in selling only if they received an exceptionally favourable offer.  They hired a real estate agent to solicit offers.

The agent put them on to a newly-created company that he also acted for, named 101090442 Saskatchewan Ltd. (the “Company”).  The Company had been incorporated specifically to buy lands for future sale or development on behalf of a parent corporation which developed residential neighbourhoods.

The Company offered to buy the Harles’ farm land for just over $3 million, which was acknowledged as being twice the farm land’s market value.  The offer was on a standard form but was amended to include various conditions as to possession date and certain rights of first refusal.

Because the Harles had wanted to continue to farm the land pending its eventual development, the agent confirmed with the Company that it would be content to hold the land for long-term development potential, but give the Harles a long-term lease-back in the meantime. The Harles accordingly submitted a counter-offer which specifically included a condition that “a farmland lease agreement be in place prior to closing date.”  Specific terms of the proposed lease-back were also set out.

The Company accepted the counter-offer, and the Harles’ lawyer wrote to emphasize that the lease-back agreement needed to be in place prior to the August 2007 closing date.   The Company did not reply, however, even after the lawyer’s further follow-up.

Meanwhile, land prices around Regina started to rise.  Two weeks before closing, the Company did provide a 13-page draft lease to the Harles, but it did not conform to the various terms they had proposed, added new obligations and in the Harles’ view, changed the deal entirely.

Still, the Company forwarded the full amount of the purchase price the day before closing and both the closing date and the possession date passed without any communication from the Harles whatsoever.  The deal did not close.

A week after that, the Harles indicated that they considered the agreement to be at an end because the required lease was not in place prior to closing as had been agreed.  The Company, in contrast, claimed that there was a valid and enforceable agreement and that it had the right to sue, which – after some additional but unsuccessful negotiations with the Harles – it did.  At trial, the Company succeeded in obtaining an order for specific performance.

The Harles appealed.  They claimed that the agreement to sell was too uncertain and that the pre-condition as to executing a lease-back of the land was not satisfied.  They also claimed that awarding the Company damages would have been adequate as a remedy, since the property was not truly “unique” under the law relating to specific performance.

The Appeal Court disagreed in part:  it found that the trial judge was correct in finding that there was no contractual uncertainty and that the exchange of documents was a valid contract for both the sale and lease-back of land. However, it disagreed that an order for specific performance was appropriate here.

First, the Appeal Court agreed that the contract consisted of the offer, the counter-offer, and two amending documents and that when read together, they contained all the essential terms of the lease-back (including the parties names, the rental rate and term and how the lease could be brought to an end).  A separate formal lease was unnecessary, even if certain terms might have to be imputed later, in order to address future issues.

Next, the Court pointed out that the parties clearly intended to be bound by their overall agreement even before the formal lease was signed.  There was no true condition precedent in the traditional sense; rather the lease was part of a larger transaction.   There was no uncertainty and the contract was valid and enforceable.

With that said, the Appeal Court also concluded that the trial judge erred in forcing the agreement to go through by ordering specific performance.

In particular, it took issue with the trial judge’s approach to assessing the facts.   It was true that the land was a 1600-acre, single-ownership property located close to Regina and that replacement land was likely unavailable.  However, the judge should have started the examination with whether damages were an adequate remedy; once that assessment was done, the judge could then turn to considering whether the property was “unique”.   The overriding legal test is whether justice calls for a specific performance order because damages would be inadequate.

Here, the Company did not have a specific plan for the land; rather it was content to wait-and-see on the best course in the future (i.e. development or re-sale).  This meant it was incapable of establishing the necessary evidence that money was not an adequate remedy, or that damages were too speculative or uncertain and that an order for specific performance was necessary. The Court also pointed out that since the Company was buying with a view to future profits, an order for specific performance would give it a risk-free period of speculation between the date of the breach and the date of the trial – all at the Harles’ expense.

Accordingly, the specific performance order was set aside, and – notwithstanding the Company’s vague plans for the land – damages could still be assessed and the matter was remitted back to the trial judge to do so. See Harle v. 101090442 Saskatchewan Ltd, 2014 (SKCA).