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When development deals go wrong, damages come in the form of land value, not lost profits

When a deal to buy and sell land for development goes awry, an innocent purchaser can sue for the damages that it suffered.

However, in most cases, the measure of damages will be the difference between the purchase price of the land and the market value on the closing date. Lost profits from future development will only be awarded in very exceptional circumstances.

In Rosseau Group Inc. v. 2528061 Ontario Inc., the dynamics of an agreement of purchase and sale for development lands in Caledon, Ont., became a contentious matter.

The case and initial judgment

The crux of the issue revolved around the property's purchase price, which was contingent on the number of developable acres. Initially the property, still undeveloped at the time of the agreement, was set at a price of $6.6 million.

However, during the period between the signing and the waiver of conditions, the land's value surged significantly. This upswing led to the vendor receiving an offer that far exceeded the agreed purchase price. 

The vendor then accused the purchaser of breaching the agreement and reneged on the deal. In response, the purchaser sued for breach of contract, though it did not seek specific performance at trial.

The trial judge, delving into the intricacies of the case, sided with the purchaser, ruling no breach of the agreement had occurred.

In an interesting twist, the judge deviated from the conventional approach to calculating damages. 

Typically, damages are pegged to the difference between the market value at the time of closing and the purchase price. However, the judge identified special circumstances in this case. Namely, the parties had mutual understanding when the agreement was signed that the land would evolve into serviced lots.  

The judge accepted expert evidence that the proposed development would yield about $11.1 million in profits, and that amount was awarded to the purchaser in damages. See my previous column on the lower court’s decision.

Ontario Court of Appeal decision

The vendor appealed the decision and the Ontario Court of Appeal saw things differently. While the vendor's liability remained intact, the measure of damages was a different story.

Most notably, the Court of Appeal critiqued the trial judge's departure from the standard measure of damages.

The standard formula reimburses the innocent buyer for the difference between the market value of the property at the time of closing and the amount paid to purchase it. This method considers the land's potential maximum value, factoring in its optimal use, which may include development.

The court found no basis to stray from this established approach.

The rationale for sticking to the conventional measure lies in the ability to equate to the financial value of the asset and enhance certainty and efficiency in commercial transactions. The Court of Appeal underscored that this standard measure of damages in failed real estate deals is the norm, and veering away from it requires substantial justification by the party seeking damages.

Exceptions to this rule were noted, such as cases where a purchaser might have unique development prospects, either due to proprietary techniques or other exclusive circumstances. In those scenarios, the market value might not fully capture the lost development potential.

But in this case, the Court of Appeal held that an exceptional circumstance did not exist.  

The matter was therefore directed to a new hearing where damages are assessed as the difference between the purchase price and the market value of the lands on the date set for closing.

In the end, the decision reinforces the rule that when a seller backs out of a land development deal, the buyer is entitled to damages.

Lost profits, however, are a different story. 

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