Lost Opportunity Damages

What are the remedies available to an innocent purchaser when the seller is unable to close? Is the purchaser entitled to claim profits that the seller realized 2.5 years later?

By Slonee Malhotra

A look into Akelius Canada Ltd. v. 2436196 Ontario Inc., et al., 2022 ONCA 259

When one party breaches an agreement of purchase and sale, as occurred in Akelius, the innocent party has the ability to apply to the court for damages. While there are different types of damages available, the basic principle is that damages should put the injured party as nearly as possible in the position it would have been in had the contract not been breached. In the ordinary case of an aborted transaction, this principle is put into effect by assessing damages at the closing date.

Akelius Canada Inc (“Akelius”) is an international real estate investor. On August 25, 2015, Akelius entered into an agreement to purchase seven residential apartment buildings in Toronto (“the Properties”) from 2436196 Ontario Inc (“the Seller”). The purchase price was set at almost $229 million ($228,958,320.00). However, shortly after entering into this agreement, Akelius discovered several unpermitted encumbrances on some of the buildings. An encumbrance is a legal claim on a property by a third party, that impacts the ability to transfer that property in title. This can often be in the form of a mortgage. In this case, the Seller was either unable, or unwilling to deal with these encumbrances. They offered Akelius the buildings at a lower selling price, but Akelius was unwilling to concede on the matter. As a result, the transaction was cancelled. The Seller was in breach of the agreement.

Over two years later, the Seller was able to sell the Properties to another purchaser for an amount that was over $56M more than what Akelius agreed to originally pay. In turn, Akelius commenced an action for damages, stating that this $56M in lost profit should be included as part of his damages. The trial judge disagreed.

On September 23, 2020, Justice Morgan ruled that Akelius was entitled to the return of its “sunk costs” only - meaning legal fees, professional fees, negotiation, drafting and executing fees, due diligence fees. In regards to the claim for $56M: the court noted, "the fact that a party is innocent does not displace the date of breach as the presumptive date for the measure of damages in a real estate case.” The 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.

In claiming lost profit damages, Akelius was trying to change the date on which damages were to be assessed. While the standard for such date would be when the transaction was in default, Akelius tried to move it into the future, at which point the property had sold for a higher value. The Supreme Court of Canada had previously allowed a change in date for damages to be assessed, depending on the context. Three important contextual considerations are:

1. the plaintiff's duty to take reasonable steps to avoid its loss,
2. the nature of the property and
3. the nature of the market.

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 the vendor retains the property in order to speculate on the market, damages will be assessed at the date of closing.

Justice Morgan wrote for the Court,

“…the Plaintiff is not a property speculator; it is an income property investor. Notwithstanding its business model, it currently seeks damages that mirror what a disappointed speculator would seek – i.e. the dollar differential between the APS price and the price achieved had the Plaintiff been able to flip the properties two and a half years later like the Defendants did. The Plaintiff’s idea is to measure the position it would have been in but for the Defendant’s breach by matching the position the Defendants found themselves in as a result of their own breach.

The problem with this way of measuring damages is that it is directly contrary to the express guidance of the Court of Appeal. “Where…the vendor retains the property in order to speculate on the market, damages will be assessed at the date of closing.” If the Defendants had breached in order to deprive the Plaintiff of a speculator’s capital gain, the Plaintiff’s damages would have to be measured as of the closing date. Since the evidence in the record shows that the sale price under the APS matched the fair market value of the properties on the closing date, there would be no damages to assess.”

The Court of Appeal agreed with the lower Court. Akelius sought leave to appeal the decision of the Court of Appeal and just last month, the Supreme Court of Canada dismissed the application to appeal.

If you are entering into a real estate transaction, and things go wrong, think carefully about what damages you are entitled to. The case law sets clear standards. If you have any questions about your real estate transaction, contact one of our qualified real estate lawyers today.