Court of Appeal for Ontario

Docket: C63805

Judges: Rouleau, Benotto and Roberts JJ.A.

Parties

Between

DHMK Properties Inc. Respondent

and

2296608 Ontario Inc. and Mund Real Estate Group Inc. Appellants

Counsel

Michael A. Katzman and Jessica R. Hewlett, for the appellants

Geoffrey D.E. Adair, Q.C., and Gordon McGuire, for the respondent

Hearing and Appeal

Heard: November 28, 2017

On appeal from: The judgment of Justice Paul Perell, dated April 20, 2017, with reasons reported at 2017 ONSC 2432.

Reasons for Decision

Background

[1] The appellants appeal from the judgment granted in favour of the respondent, DHMK Properties Inc., following a motion for summary judgment on the issue of damages.

[2] Effective January 30, 2013, the appellant, Mund Real Estate Group Inc., entered into an agreement of purchase and sale with DHMK to purchase DHMK's commercial property for the amount of $5,300,000. The agreement provided for the following warranty in paragraph 2: "The Vendor warrants that the reports of revenue and operating expenses to be given to the purchaser are true and correct in all respects, and the property will have a net cash flow prior to debt service ("the Net Income") of not less than $441,925.00". The agreement also permitted Mund to conduct due diligence inquiries and to terminate the agreement by the "Notice Date", which the parties subsequently agreed was June 13, 2013. The transaction was scheduled to close at the end of June 2013.

[3] Mund did not terminate the agreement before the notice date. Instead, Mund took the position that it would only close the transaction with a substantial abatement of the purchase price, alleging that the net income from the property was materially less than the amount warranted in the agreement. DHMK did not agree to close the transaction on this basis.

[4] Mund brought an application for specific performance of the agreement with an abatement of the purchase price. In response, DHMK instigated an application for damages incurred as a result of the failed transaction.

[5] The applications were heard by Justice Brian O'Marra who found that Mund had breached the agreement of purchase and sale by failing to close without the abatement of the purchase price, stating that Mund had the option of either terminating the agreement by the notice date or closing and suing on the warranty. He ordered the forfeiture to DHMK of Mund's $100,000 deposit, costs, and an assessment of the issue of DHMK's damages from the failed transaction.

[6] The appellants abandoned their appeal from O'Marra J.'s judgment in August 2014.

Motion Judge's Damages Assessment

[7] The assessment of damages was heard by the motion judge. He found that the damages were the difference between the agreed upon price of the contract ($5.3 million) and market value of the land in August 2014 ($4.27 million). He did not discount the $5.3 million for the vendor's potential liability under the warranty. Nor did he explain why he chose August 2014 – the date the appeal from O'Marra J. was abandoned – as opposed to the date of closing.

[8] With respect to the damages assessment, the appellants raise several grounds of appeal. However, to dispose of this appeal, it is necessary to address only the following:

i. The failure to take into account the effect of DHMK's warranty of the net income from the property when calculating DHMK's loss of bargain from the failed transaction;

ii. The choice of August 2014, without reasons or analysis, as the date for the valuation of the property for the purpose of calculating DHMK's loss of bargain.

Legal Principles on Damages

[9] It is common ground that in assessing DHMK's damages arising from Mund's breach of the agreement of purchase and sale, DHMK is entitled to be put, as far as damages permit, into the same economic position that it would have occupied had the transaction closed, subject to DHMK's duty to mitigate its damages: Bank of America Canada v. Mutual Trust Co., 2002 SCC 43, [2002] 2 SCR 601, at para. 26; Dasham Carriers Inc. v. Gerlach, 2013 ONCA 707, at para. 29, 38 R.P.R. (5th) 183; Asamera Oil Corporation Ltd. v. Sea Oil & General Corporation et al., [1979] 1 S.C.R. 633; 100 Main Street Ltd. v. W.B. Sullivan Construction (1978), 20 O.R. (2d) 401 (C.A.), at p. 415. Although correctly referencing this principle at para. 47 of his reasons, the motion judge erred in failing to apply it.

[10] Specifically, the motion judge erred by finding that because Mund breached the agreement, Mund's potential claim for damages for DHMK's breach of warranty need not be considered. Notwithstanding Mund's repudiation of the agreement, DHMK's prospective warranty obligations as embodied in the agreement are relevant, and are to be taken into account in the assessment of damages: Keneric Tractor Sales Ltd. v. Langille, [1987] 2 S.C.R. 440, at p. 455.

[11] As O'Marra J. stated, Mund had the option of closing the transaction and suing for breach of DHMK's warranty concerning the net income from the property. It is not seriously contested that had the transaction closed, Mund would have sued for breach of the warranty. The motion judge should have taken this factor into account in his assessment of DHMK's damages.

[12] However, DHMK submits that it would have made no difference to the outcome because Mund's potential action for breach of warranty had no chance of success.

[13] In our view, the effect, if any, that Mund's potential lawsuit for DHMK's breach of warranty could have had on the assessment of DHMK's damages is best determined at first instance after full argument. In light of our disposition, we express no view on the merits of the potential claim.

Valuation Date Error

[14] We also conclude that the motion judge erred by selecting August 2014 as the date for assessing the value of the property for the purpose of calculating DHMK's loss of bargain without providing any analysis or reasons on this issue. The absence of reasons precludes meaningful appellate review.

[15] The choice of the August 2014 date departs from the general principle noted by the motion judge at para. 50 of his reasons that "the proper date for taking the market value should be the time fixed for closing": 100 Main Street Ltd., at p. 415. Although there is judicial discretion to select another date than the closing date, the difficulty here is that the basis for the motion judge's exercise of that discretion is not explained and the difference in the market valuation dates materially affects the assessment of DHMK's damages.

[16] The difference in dates amounts to a substantial variance in damages of some $230,000: the June 2013 appraised value of the property as at the date of closing is $4,500,000; whereas the appraised value of the property, over a year later, in August 2014 is $4,270,000.

[17] There are other issues relating to the assessment of damages that we have not discussed in these reasons because it is not necessary to do so for the purposes of disposing of the appeal. However, by referring to only two of the arguments raised by the appellants, we do not wish to be taken as confirming any of the motion judge's conclusions on the issue of damages, including the question of mitigation. These issues remain open for determination.

Disposition

[18] As a result, the motion judge's judgment shall be set aside, including the costs order. We remit the assessment of DHMK's damages to the Superior Court. The disposition of the costs of the motion are reserved to the judge hearing the matter.

[19] With respect to the issue of the costs of the appeal, as agreed, the appellants as the successful party are entitled to payment of their costs in the amount of $30,000, inclusive of disbursements and applicable taxes.

"Paul Rouleau J.A."

"M.L. Benotto J.A."

"L.B. Roberts J.A."

Footnote

[1] The parties are agreed that it was an error for the motion judge to award judgment against 2296608 Ontario Inc.