COURT OF APPEAL FOR ONTARIO

CITATION: First Elgin Mills Developments Inc. v. Romandale Farms Limited, 2014 ONCA 573

DATE: 20140806

DOCKET: C57028

Epstein, Lauwers and Pardu JJ.A.

BETWEEN

First Elgin Mills Developments Inc.

Applicant

(Appellant)

and

Romandale Farms Limited, Angela Maria Roman,

Anne Catherine Ruth Roman, David Andrew Roman,

Stephen George Roman, and Helen Elizabeth Roman-Barber

Respondents

(Respondents)

John J. Longo and Martin J. Henderson, for the appellant

R. Leigh Youd and Adam J. Wygodny, for the respondents

Heard: December 11, 2013

On appeal from the decision of Justice Edward M. Morgan of the Superior Court of Justice, dated June 19, 2013, with reasons reported at 2013 ONSC 4220.

Lauwers J.A.:

OVERVIEW

[1] The appellant, First Elgin Mills Developments Inc., purchased development land from the respondents for slightly more than $12.5 million dollars, secured by an interest-free vendor take-back (“VTB”) mortgage payable over seven years. The agreement of purchase and sale contained a price adjustment clause by which the purchase price could be reduced if the amount of developable land was less than expected. The appellant applied for a declaration that, as a result of the operation of the price adjustment clause, nothing was owed on account of the purchase price. The appellant also sought a consequential order discharging the mortgage. The respondents cross-applied for a declaration that the price adjustment clause would not operate to reduce the purchase price because it had expired and, as a result, the appellant was obliged to pay the remaining balance of about $1.4 million to the respondents.

[2] The application judge dismissed the First Elgin’s application and allowed the respondents’ cross-application.

[3] For the reasons set out below, I would allow First Elgin’s appeal.

FACTS

[4] An understanding of the facts and circumstances affecting the future development of the property is critical to interpreting the agreement of purchase and sale. There are no material facts in dispute.

[5] At issue is the “Triple R property” (the “property”), which comprises 71.7175 acres, and is largely farmland. It is located in a part of Ontario affected by the Greenbelt Act, 2005, S.O. 2005, c.1 and its regulatory structure. The Act came into force in February 2005 and limited the amount of acreage of the property that could be developed for residential or other more intense uses.

The Agreement of Purchase and Sale

[6] The respondent, Romandale Farms Ltd., and 2001251 Ontario Inc., a numbered company affiliated with the appellant, First Elgin Mills Developments Inc., entered into the agreement of purchase and sale (the “Agreement”) on August 29, 2005. The Agreement covered three properties: one was known as the Snider/McGrisken property; the second as the Elgin South property; and the third was the subject of First Elgin’s application and this appeal. The Agreement was amended by an Amending Agreement dated March 14, 2006 that resolved issues between Romandale Farms and other related owners of the property without affecting the basic elements of the deal between First Elgin and Romandale Farms.

[7] First Elgin bought the property for $12,550,562 (71.7175 acres at $175,000), calculated on the basis that the entire property was developable. The Agreement contained a price adjustment clause that would reduce the purchase price if, on March 16, 2011, the proportion of non-developable land exceeded 20 per cent of the total acreage. On March 16, 2006, when the transaction closed, First Elgin paid more than $8.7 million to the respondents (70 per cent of the total value).

[8] The Agreement contemplated a single VTB mortgage. As the result of the Amending Agreement, the balance of $3,765,770 was secured, not by one, but by two interest-free VTB mortgages in equal amounts of $1,882,885, each having a term of seven years. As part of the settlement among the Romandale Farms-related entities that led to the Amending Agreement, the other named respondents were not to be affected by the price adjustment clause. Only the balance to be paid to Romandale Farms under its VTB mortgage was required to absorb the impact of the clause’s operation. The Amending Agreement further provided that any price reduction in excess of the amount owed on the Romandale Farms VTB mortgage would be satisfied out of a transaction related to other lands.

[9] The Agreement used the short form, “ND Land”, to denote the non-developable land, which was defined, in s. 2(a), as:

land prohibited from development by law, subject to environmental protection requirements, wood lots, land below top-of-bank and the set-backs from top-of-bank, streams and floodplain, existing easements but not including up to half of the existing lake on the subject property to a maximum of two acres.

[10] The payment provisions and the price adjustment clause were set out in ss. 3(a) and (b) of the Agreement:

(a) The purchase price shall be based on the sum of $175,000 per acre which price will be calculated using the existing most recent survey of the subject property which Romandale represents and warrants accurately describes the subject property. The purchase price shall be reduced at the end of the 5th year of the term of the VTB #2 Mortgage (as hereinafter described) by the amount that the acreage of the ND Land within the Triple R Property exceeds 20% of the total acreage. The determination of the amount of acreage of such ND Land shall be made in the same manner as that described in section 2(a) hereof;

(b) The purchase price shall be paid to the extent of 70% thereof by certified cheque on closing and the balance by way of a vendor take-back mortgage (the VTB #2 Mortgage) with a term of 7 years, bearing no interest, with a balloon principal payment of $1 million at the end of the 3rd year of the term. The price adjustment described in section 3(a) hereof shall be applied at the end of the 5th year of the term, and 50% of the balance owing under the VTB #2 Mortgage shall be paid at the end of the 6th year of the term and the balance at the end of the 7th year of the term.

[11] The VTB #2 Mortgage was intended to be the mortgage on the property. It was replaced by the two VTB mortgages referred to above in para. 8.

[12] The reference in s. 3(a) to “section 2(a) hereof” was to another provision in the Agreement that created a mechanism for determining the acreage of non-developable land for the purpose of calculating any reduction in the purchase price under the price adjustment clause. Section 2(a) provided:

(a) The parties shall each retain their own consultant to determine the acreage of the ND Land and both parties shall agree upon a third independent qualified consultant to determine the acreage of the ND Land in the event that their own consultants cannot agree upon such acreage. In the event of such disagreement, the amount of the ND Land shall be deemed to be the average of the amounts determined by the 3 consultants. Such determination of the amount of acreage of the ND Land shall be final and binding upon the parties, with no rights of appeal therefrom. The parties shall each bear the cost of their own consultant and 50% of the cost of the third consultant.

[13] Section 7(c) of the Agreement provided that “[t]ime shall be of the essence hereof”. The Amending Agreement confirmed that “time continues to be of the essence of the Agreement”.

[14] As required by s. 3(b) of the Agreement, the “balloon principal payment of $1 million” was made at the end of the third year of the term in March 2009. The remaining balance of $1,332,884.48 on each VTB mortgage was to be paid in equal amounts at the end of the sixth and seventh years of the term, assuming that there was no price reduction to account for excess non-developable land.

[15] As noted, under s. 3(a) of the Agreement, the price reduction was to occur “at the end of the 5th year of the term of the VTB #2 Mortgage”, which was March 16, 2011. First Elgin did not seek a price adjustment on or before that day.

[16] On the day the Agreement was signed, the parties were, on paper, already anticipating a price reduction because the greenbelt legislation identified 9.231 hectares (22.8102 acres) of the property as non-developable. This was 11.8046 percent or 8.4682 acres above the 20 per cent threshold in the Agreement. (The respondents claim that the correct figure is 8.4662 acres.) Accordingly, on the date of the Agreement, First Elgin was already eligible for a price reduction of at least $1,481,935, (8.4682 acres x $175,000) before taking into account the other elements included in the definition of ND Land (for example, wood lots). However, that possible price reduction would only occur if there were no offsetting changes in the greenbelt legislation that would expand the amount of developable acreage before March 16, 2011.

[17] The property is located in the North Markham development area. The landowners in that area, including First Elgin and Romandale Farms, joined together to form the North Markham Landowners Group. The Group jointly shared the cost of various studies and consultations required by the land development process. These included on-site surveys and measurements of environmental and natural heritage features, including mapping by environmental consultants such as terrestrial and aquatic ecologists, hydrogeologists, and civil engineers with expertise in storm water management.

[18] During the environmental assessment process, it appeared that a minnow known as the redside dace, an endangered species, might have a habitat in the waterways on or around the property. This could have affected the development potential, or “developability”, of the property. By November 2011, however, it was known that the property did not contain a redside dace habitat.

[19] On January 2, 2012, Elgin Mills provided the respondents with an “area certificate” that showed the amount of non-developable land assessed by the consultant, a surveyor, after considering the information provided by the engineering consultants. The certificate stated that there were 15.8696 acres of excess non-developable land. If that figure were accurate, the purchase price would be reduced by $2,777,180 (15.8696 acres x $175,000) through the operation of the price adjustment clause.

[20] The respondents’ expert, in his report dated June 2, 2012, determined that only the greenbelt lands, totalling 9.231 hectares, should be taken into account when using the price adjustment clause, assuming that it was still enforceable. This would yield a price reduction of $1,481,935. He considered that the woodlots and other features of the property listed in the definition of ND Land were, nonetheless, developable.

[21] It appears, therefore, to be common ground that, if the price adjustment clause is found to apply, First Elgin would be entitled to a price reduction of at least $1,481,935.

The Decision under Appeal

[22] The nub of the application judge’s decision is found in para. 43:

Under the Agreement, in order for the party proposing a price adjustment to assess the quantity of ND Land that the fluid development approval process might produce, the assessment had to be tied to a specific point in time. What is developable today may be only partially developable in five years and entirely non-developable in seven, or vice versa. For this reason, time was of the essence under the Agreement in choosing the 5 year point for the assessment to be done. [Emphasis added.]

[23] The application judge noted, at para. 47 that:

Five years under the Mortgage came and went and [First Elgin] said and did nothing. No communication about the calculation of ND Land was sent to the Respondents, no consultant report was prepared and, in fact, no consultant was retained by [First Elgin] until the five year point was long gone. The key moment in time for calculating any price adjustment passed the parties by. [Emphasis added.]

[24] He concluded, at para. 48, that:

As indicated, change in some of the variables that define ND Land was as inevitable as it was unpredictable. For that reason, no change in any one of the variables could displace the chosen five year point for exchanging the expert reports and calculating the ND Land. [Emphasis added.]

[25] The application judge, at para. 26, set out and specifically rejected First Elgin’s argument that it was impossible to determine the extent of the non-developable land on March 16, 2011 - the five year point.

The Positions of the Parties

[26] First Elgin asserts that the application judge erred in concluding that: (i) the Agreement required the purchase price adjustment to be determined by the fifth anniversary of the mortgage; (ii) time was of the essence in relation to that exercise; and (iii) First Elgin was obliged to trigger the price adjustment process. Before this court, First Elgin continues to assert that it was “not possible” to make the price adjustment in March 2011, “because the planning process was not sufficiently advanced by that time to permit a fully informed determination”.

[27] First Elgin argues that it is entitled to a total purchase price reduction of $2,777,180 (15.8696 acres x $175,000) as a result of excess non-developable lands. Although this would exceed the amount owing under the Romandale Farms mortgage, the Amending Agreement provided that any price reduction in excess of the amount owed on the mortgage would be satisfied out of a transaction related to other lands. Finally, First Elgin asserts that, if this court finds that the application judge was correct in his interpretation of the Agreement, then First Elgin is entitled to relief from forfeiture.

[28] The respondents argue that the application judge correctly interpreted the Agreement and that his interpretation is entitled to deference. Time was of the essence, and First Elgin “was required to take steps towards realizing the ND Land Adjustment prior to March 2011”. Since First Elgin took no such steps, the respondents contend that it is not entitled to a reduction in the purchase price. They add that First Elgin’s explanation for its delay in pursuing the price reduction is not credible and should not influence the result. Finally, the respondents submit that relief from forfeiture is not available to First Elgin

The Standard of Review

[29] In my view, the standard of review on this appeal is correctness, since it involves the interpretation of a contract, with due deference to be paid to the application judge on those determinations in which the facts dominate: The Plan Group v. Bell Canada, 2009 ONCA 548, 96 O.R. (3d) 81, at paras. 19-20, 27, 30, 31.

ISSUES

[30] First Elgin poses two issues to be resolved on this appeal:

(1) Was the application judge correct in interpreting the date on which the amount of non-developable land was to be determined as a form of limitation period to which the Agreement’s “time of the essence” clause was applicable; and

(2) If so, is First Elgin entitled to relief from forfeiture?

Since, in my view the answer to the first question is “no”, I see no need to address the second.

ANALYSIS

[31] The process of moving raw land through the land development process is complex, time consuming, and expensive. The outcome is frequently uncertain. The application judge’s description of the vagaries of the land development system, found in paras. 11-13 and 35-42, are entirely accurate. His use of the adjective “fluid” to describe the land development process, at para. 43, is apt.

[32] The parties to this litigation are sophisticated and experienced land developers and were legally represented throughout the proceedings. The principals’ affidavits show that, when they entered into the Agreement, they were aware that the process of developing the property would be fluid and the outcome somewhat unpredictable, and that it would take time – perhaps years– to finalize the property’s development potential. There were provincial, regional, and local requirements to be met, any of which could affect the property’s development potential of the property.

[33] In my view, the structure and the provisions of the Agreement show four salient features relevant to its interpretation. First, the parties were sufficiently confident about the future prospects of the property to set the price and to allocate between them the risk that less than its full area would be developable. This is shown by the adoption of a 20 per cent threshold before the price adjustment clause could be triggered. The value lies in the developable land. Both parties assumed that most of the property, at least 80 per cent of it, would eventually be developable.

[34] Second, the nature of the transaction in this fluid context therefore had a constitutive tension that is reflected in the Agreement. First Elgin was interested in paying only for developable land. Putting off the date on which the amount of developable land would be determined for the purpose of applying the price adjustment clause would be to First Elgin’s advantage, since the passage of time increased certainty. The respondents, however, did not want to wait forever for the purchase price to be finalized. The parties compromised on a horizon of five years, and set the date on which the amount of non-developable land would be determined as March 16, 2011, being the fifth anniversary (the “determination date”).

[35] I therefore agree with the application judge’s comments in para. 43, which I reproduce here for convenience, except for the italicized sentence:

Under the Agreement, in order for the party proposing a price adjustment to assess the quantity of ND Land that the fluid development approval process might produce, the assessment had to be tied to a specific point in time. What is developable today may be only partially developable in five years and entirely non-developable in seven, or vice versa. For this reason, time was of the essence under the Agreement in choosing the 5 year point for the assessment to be done. [Emphasis added.]

[36] I also agree with the application judge’s view, expressed at para. 44, that “a determination can be made at any given point in time, recognizing that it may be different at yet some other point in time”. He was right to reject First Elgin’s position that such a determination on the determination date was impossible.

[37] Third, the parties agreed on a mechanism for determining the quantum of non-developable land. That mechanism, if fully deployed, would have taken some time since it involved three different consultants. Although s. 2(a) of the Agreement contemplates that both parties would retain their own consultants to assess the non-developable acreage, I agree with the application judge’s observation, at para. 25, that, since the price adjustment clause could only result in a reduction of the purchase price, the practical onus was on First Elgin to be the first to retain a consultant and obtain a report. I also agree with him that the respondents were not in breach of the Agreement by failing to retain a consultant until after the determination date. As the respondents note, they could well have simply accepted First Elgin’s consultant’s report. In such circumstances, there would have been no need to retain their own expert and run the entire process for determining the quantum of non-developable acreage, through to its conclusion.

[38] Fourth, the parties agreed on a mechanism for recovering any overpayment on account of the purchase price out of what was owing on the mortgage on the sixth and seventh anniversaries, with the possibility of collecting excess overpayments through a transaction on another property. No doubt, the parties wanted to avoid the need for legal proceedings.

The Agreement set a Valuation Date, not a Deadline

[39] Although I agree with many of the application judge’s observations, in my view, he erred in his interpretation of the Agreement. In particular, he interpreted s. 3(a) and the line, “the purchase price shall be reduced at the end of the fifth year of the term”, as a deadline that operated in a manner similar to the expiry of a limitation period. As I read the Agreement, that interpretation is not consistent with the commercial purpose of the provision in the Agreement; it would produce a result that is not commercially reasonable in the context of the transaction, the structure of the Agreement, and the facts on the ground. I disagree specifically with the last sentence of para. 43, which states that: “[f]or this reason, time was of the essence under the Agreement in choosing the 5 year point for the assessment to be done”.

[40] In my view, the application judge erred in framing the question, at para. 26:

[First Elgin’s] case, therefore, turns on its assertion that the determination of ND Land was impossible at the five year point. [First Elgin] must establish that it was necessary, not just for itself but for both parties, to wait until a later date in order to make a definitive determination.

[41] While First Elgin framed its case that way, at least in part, the real issue before the application judge was how the price adjustment clause in the Agreement should be interpreted in the context of this case.

[42] For the following reasons, I am of the view that the application judge erred in characterizing the provision as a hard deadline by which the price adjustment had to be made. First, the language of s. 3(a) does not expressly specify a date by which the actual amount of developable acreage must be determined and the calculation of the purchase price completed, nor does s. 2(a), which prescribes the mechanism by which the amount of ND Land was to be determined.

[43] Second, the conclusion that s. 3(a) imposes a deadline is not consistent with the nature of the mechanism for determining the developable acreage. While s. 2(a) does not set the timelines for the various steps to be taken, it is obvious that time would be necessary to complete the process.

[44] Third, the information which the parties needed to establish the developable acreage would not be finalized until after the determination date. Only at that point would it be clear that an event that affected the property’s development potential, such as some municipal enactment or a change to the greenbelt regulation, had not occurred.

[45] Fourth, the application judge’s finding is inconsistent with the inherent timeline in the Agreement. The fixing of the value on the fifth anniversary date would have cash-flow implications for the parties until a year later when it came time to pay the next instalment under the VTB mortgage. While the Agreement is silent on the date by which the process to determine the quantum of non-developable land was to begin, it is arguably implicit that the parties intended the process to have been completed before the second last balloon payment under the mortgage, although they did not impose that deadline. I draw this inference from the fact that the balloon payment was itself to have been the primary mechanism to adjust the cash to be paid to complete the purchase.

[46] There is no evidence that the determination process could not have been accomplished in time, even with the starting date of January 2, 2012, the date on which First Elgin provided the respondents with the “area certificate” setting out its position on the ND Land. In short, there was no functional necessity for the deadline that the application judge’s interpretation would impose.

[47] I note that the application judge seems somewhat uncertain about the effect of the notional deadline. When was the determination process to establish the quantum of non-developable land to start and end? One reading of his reasons is that the determination process must be completed by the fifth anniversary. Another reading is that he thought the process must be commenced by that date.

[48] In my view, there is no basis for the argument that the process was to have been concluded by the end of the fifth year. That would have pushed back the exchange of consultants’ reports and the determination process involving the third consultant by some time, when even less of the relevant information about the development potential of the land would have been available. Similarly, nothing in the Agreement indicates that the parties were required to commence the process by the end of the fifth year.

[49] Fifth, the application judge effectively implied a term where the normal conditions for doing so are not met. A court may imply a term in a contract where doing so is necessary to give effect to the intention of the parties and to give business efficacy to the agreement: see M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd.,[1999] 1 S.C.R. 619, at paras. 27-29. Further, it must be obvious that the parties intended the contract to include such a term before a court will imply it.

[50] In my view, the term implied by the application judge, that the price adjustment process had to be completed (or, at least, commenced) by the fifth year of the mortgage, does not make business sense in the context of this case and does not meet this standard for implying a contractual term: see Venture Capital USA Inc. v. Yorkton Securities Inc. (2005), 2005 CanLII 15708 (ON CA), 75 O.R. (3d) 325, leave to appeal to S.C.C. dismissed, [2005] S.C.C.A. No. 334.

[51] Finally, I note that the application judge’s decision would mean that First Elgin left about $1.4 million on the table by waiting until after the determination date, if it really was meant to operate as a deadline. This makes no commercial sense. If anything, it is the respondents who were unreasonable in thinking that they could get away without a price reduction if the date passed without an adjustment being sought.

[52] There is, in short, no date to which the “time of the essence” clause attaches in determining the ND Land. The application judge misapprehended the role of the determination date in s. 3(a) of the Agreement. In my view, the determination date is best interpreted and understood as an “as of” date for the purposes of calculating the quantum of non-developable acreage, similar to a valuation date. Future possible variations would not be taken into account. I agree with the application judge’s observation, at para. 48:

As indicated, change in some of the variables that define ND Land was as inevitable as it was unpredictable. For that reason, no change in any one of the variables could displace the chosen five year point for exchanging the expert reports and calculating the ND Land.

[53] The application judge was correct to say that the parties chose the end of the fifth year of the mortgage as the relevant time for calculating the proportion of the land that was not developable. They did so in order to bring some certainty to the process. He erred, however, in also holding that First Elgin was required to complete, or even commence, the process for determining the proportion of ND land by that date. Such a requirement does not make business sense in the context of the rest of the Agreement and the overarching land development process.

[54] In my view, as noted earlier, the determination date in the Agreement is analogous to the “valuation date” that occurs in other commercial contexts, such as the date “as of” which the value of expropriated land, or the value of a minority interest in an oppression case, or the calculation of unfunded liability in a pension plan, is to be determined. In effect, the motion judge conflated the concepts of a valuation date and a deadline date, and erred by turning the determination date into a deadline.

[55] In such valuation cases, the date of valuation usually has nothing to do with the dates by which the process of valuation must be started and ended. The timing for that process is found elsewhere, in agreements or in legislation like the Expropriations Act, R.S.O. 1990, c. E.26. In expropriation cases, for example, land is valued at the date of expropriation, although the determination of that value normally does not occur until much later. The parties are obliged to retain experts who will, using the best available evidence, value the property as of the date of expropriation.

DISPOSITION

[56] I would set aside the judgment of the application judge, and declare that First Elgin is entitled to a purchase price reduction in accordance with the Agreement to be determined by the mechanism set forth in that document.

[57] I would fix the costs of the appeal in the amount of $10,000, all inclusive, and reverse the costs award in the court below and order the respondents to pay First Elgin the same amount for the costs of that proceeding.

Released: August 6, 2014 “GE”

“P. Lauwers J.A.”

“I agree Gloria Epstein J.A.”

“I agree G. Pardu J.A.”