Amy owns a commercial property in the GTA that she decides to sell. She enters into an Agreement of Purchase and Sale (“APS”) to sell her property to Bob for $10m. The completion date stated in the APS is December 1, 2024.
December 1 arrives, and Bob fails to tender the purchase price. The market is falling, and Amy is not happy. She can no longer sell her property for $10m after Bob breached the APS.
At a high level, the principles that apply to the calculation of Amy’s damages suggest it does not matter if Amy had agreed to sell Bob a 10 + million dollar commercial property or her 2 million dollar home.
Amy’s recoverable loss depends on two fundamental legal principles:
- Amy should, as nearly as possible, be put in the position she would have been in had Bob honoured his obligations under the contract; and
- Amy must take reasonable steps to mitigate her loss, so that the damages she is seeking from Bob are reasonably reduced.
The net effect of the operation of these principles together generally means that as long as Amy has taken reasonable steps to mitigate her loss, she can recover from Bob the shortfall between the price Bob agreed to pay and Amy’s re-sale price to a third party.
This article considers what constitutes “reasonable steps” in a falling market.
Reasonable steps in mitigation
What do reasonable steps mean in the context of mitigation? Generally, they involve the following:
- Amy must promptly re-list the property after Bob’s failure to tender the purchase price on the completion date;
- Amy has to re-list the property at a reasonable price, and adjust the re-sale price depending on the market conditions; and
- ideally, the property should be sold within a reasonable time from the original completion date. When it is not, the issue becomes more complicated.
What amounts to a reasonable period for re-sale of a commercial or residential property is a fact-sensitive question. The duration of a reasonable period will depend on market conditions. At what price does Amy re-list the property for sale? What, if any, offers does Amy receive in response to the new listing price?
While there is no general rule dictating what constitutes a reasonable period for the re-sale, courts have found – to give some examples – four months, 1Hassel v. Khoshgoo, 2010 BCSC 233 (CanLII) five and a half months, 2Greenberg & Greenberg v. Shanghai Real Estate Limited, 2010 BCSC 1837 (CanLII) and six months, 3Ranisavljevic v Sathasivam, 2020 BCSC 413 (CanLII) to be reasonable. Depending on the facts of each case, the court may rule that a shorter or longer period is reasonable.
Property not resold within a reasonable time
As noted, when the property is not resold within a reasonable time, the calculation of damages can be much more complicated.
In 642947 Ontario Ltd. v. Fleischer, 2001 CanLII 8623 (ON CA), Laskin J.A. writing for a unanimous Ontario Court of Appeal panel, set out various principles for damage quantification, including the following:
“…if the vendor takes reasonable steps to sell from the date of breach and resells the property in some reasonable time after the breach, the court may award the vendor damages equal to the difference between the contract price and the resale price, instead of the difference between the contract price and the fair market value on the date of closing.
Therefore, as a general rule, in a falling market the court should award the vendor damages equal to the difference between the contract price and the highest price obtainable within a reasonable time after the contractual date for completion following the making of reasonable efforts to sell the property commencing on that date …
Where, however, the vendor retains the property in order to speculate on the market, damages will be assessed at the date of closing.”
[emphasis added]
Let’s return to the example of our good friend, Amy.
What if the rise in interest rates and inflationary pressures (sound familiar?) incline Amy to conclude the value of her property is dropping precipitously? She may decide not to re-list the property for sale, hoping the price will go up.
Following the above principles set out by Justice Laskin in Fleisher, a court addressing the dispute between Amy and Bob may determine that Amy “speculated on the market”, and only assess Amy’s loss at the closing date of her APS with Bob (December 1 in our example).
In those circumstances, since there is no actual re-sale price, the court will have to consider expert evidence on valuation to determine the value of the property on December 1. The court may award Amy damages equal to the sale price to Bob ($10 million) less the market value of Amy’s property on December 1. Amy’s expert might opine the value was 7 million dollars. Bob’s valuation expert might conclude the right number was 9 million dollars. If the court accepts Bob’s expert’s opinion, Amy’s damages award against Bob would be 1 million dollars ($10m-$9m).
In a varied scenario, let’s assume Amy promptly re-listed the property after Bob failed to close. She re-listed it at $10m, and after receiving no offers, reduced the sale price to $9m. After receiving no offers, Amy reduced the list price further to $8m but still received no offers. Finally, one potential purchaser surfaces. Cathy submits an offer to purchase Amy’s property for $7m and refuses to pay a dime more. Amy agrees to sell and is arguably entitled to $3m in damages from Bob (difference between $10m and $7m).
But what if Amy decides not to sell to Cathy for $7m. Can Amy still get $3m in damages from Bob?
Now the ultimate determination of damages is even less certain. Amy is taking a risk in not selling to Cathy. Bob’s lawyer can argue that Amy has decided to speculate on the market and that damages should be quantified as at the date of closing. If the court accepts that argument, it may ignore any decrease in value of the property after the closing date, and simply assess the value of Amy’s property at the closing date (December 1) for Amy’s loss of the bargain. If that’s $9m, Amy may only get the shortfall of $1m instead of $3m.
All of this might seem unfair to Amy – who is, in effect, being forced to sell her property before she can claim the loss of the bargain within a reasonable period after the closing date – for at least two reasons. First, it is unfair because whether Amy sells to Cathy or not, the $7m offer does offer evidence of Amy’s loss. Second, it is unfair that Amy is the party left suffering from the inherent uncertainty in litigation created by Bob’s breach (for example, even if Amy accepts Cathy’s offer, Bob may not have sufficient assets to satisfy any judgment that Amy obtains).
That said, unless and until we have clearer case law, it will be prudent for Amy to accept Cathy’s offer. Otherwise, she risks being stuck with the value at the closing date for assessing her loss of the bargain.
Takeaways
The key takeaways:
- If you are Amy, and have resold the property within a reasonable time, you may be able to recover the difference between the original contractual price and the resale price in a declining market;
- If you have not resold the property within a reasonable time, but can show you have taken all reasonable steps to mitigate, it is possible for the court to award damages as the difference between the original contractual price and the “highest obtainable price” of the property within the reasonable period after the original completion date;
- If you have not resold the property within a reasonable time, and cannot demonstrate your reasonable steps to mitigate (e.g., by not accepting a reasonable offer), you risk the court only awarding damages as the difference between the original contractual price and the market value of the property at the original completion date;
- For the above reasons, valuation or other evidence showing the market price of your property, whether on the original completion date, or during a reasonable period afterwards, may be important, particularly if your property is not resold within a reasonable time.
- This is an area of law with some uncertainty. It is important to preserve evidence to demonstrate that you have taken reasonable steps to mitigate your loss and that your decisions in the re-sale process are reasonable.
Disclaimer: This newsletter is for informational purposes only and should not be used as a substitute for competent legal advice from a licensed professional in your region.
Dan Chitiz