Court of Appeal for Ontario
Date: June 7, 2018
Docket: C63845
Judges: Pepall, Trotter and Nordheimer JJ.A.
Between
Saramia Crescent General Partner Inc. Plaintiff (Respondent)
and
Delco Wire and Cable Limited and IEWC Canada Corp. Defendants (Appellants)
Counsel
David R. Byers, Patrick G. Duffy and Michael Currie, for the appellants
Luisa J. Ritacca and Fredrick R. Schumann, for the respondent
Heard: March 26, 2018
On appeal from: The judgment of Justice Jasmine T. Akbarali of the Superior Court of Justice, dated May 2, 2017, with reasons for judgment reported at 2017 ONSC 961 and reasons for costs reported at 2017 ONSC 3507.
Nordheimer J.A.:
Introduction
[1] The defendants appeal from the judgment of Akbarali J. that awarded the plaintiff damages in the amount of $1,277,000, along with interest and costs. The claim arises out of the defendants' repudiation of a commercial lease respecting a property owned by the plaintiff. Subsequent to the repudiation, the plaintiff sold the property. Liability was admitted and the only issue at trial was the assessment of what damages, if any, were due to the plaintiff by the defendants. The trial judge found that the property was not sold at fair market value and awarded damages for loss of rental profits as well as loss of capital appreciation on the property.
[2] On appeal, the appellants primarily argue that the sale of the property fully mitigated or avoided any damages, and that damages for lost capital appreciation were too remote. Thus the central issue in this appeal is how damages arising from the repudiation of a commercial lease should be calculated.
[3] In my view, the trial judge erred in some aspects of her assessment of the damages arising from the repudiation. I would therefore allow the appeal for the reasons that follow.
Background
[4] The respondent/plaintiff, Saramia Crescent General Partner Inc. ("Saramia"), is a single-purpose Ontario company. It owned a single-tenant industrial property known municipally as 1 Saramia Crescent in the City of Vaughan, Ontario (the "Property").
[5] The appellant/defendant, Delco Wire and Cable Limited ("Delco"), entered into a lease on August 3, 2000 with the prior owner of the Property (the "Lease"). The Lease was for a term of 15 years, expiring August 31, 2015.
[6] On November 15, 2011, Agellan Capital Partners Inc. ("Agellan"), a company associated with Saramia, closed its purchase of the Property through a shell corporation for $2,575,000. The agreement of purchase and sale was then assigned to Saramia on the same day and Saramia engaged Agellan to be the asset manager for the Property. As a result, Saramia acquired the rights and responsibilities of the landlord under the Lease on November 15, 2011. Concurrently, Saramia and Delco agreed to extend the term of the Lease for a period of six years, from September 1, 2015 to August 30, 2021. The trial judge found that Saramia would not have purchased the Property if it had been unable to negotiate the lease extension.
[7] In December 2012, the appellant/defendant, IEWC Canada Corp. ("IEWC"), purchased Delco's assets, including its interest in the Lease. The Lease was assigned to IEWC, with Saramia's consent, on or about December 31, 2012.
[8] Shortly after its acquisition of Delco, IEWC decided to consolidate its overall operations at a facility that it owned in Aurora, Ontario. Consequently, it began efforts to sublease the Property. IEWC contacted CBRE Limited ("CBRE"), a commercial real estate services firm, to assist in locating a subtenant.
[9] In the course of its search, CBRE did not find anyone who was interested in leasing the Property. However, it did identify a number of parties that were interested in purchasing and occupying the Property for their own use. CBRE approached Agellan about the possibility of selling the Property and was told by Agellan to "bring me a buyer". CBRE located at least three such potential buyers.
[10] Saramia then negotiated agreements of purchase and sale with each of these three potential purchasers. Saramia set the purchase price at $3,450,000 based on its knowledge of the market and on the understanding that it would also receive a lease buy-out from IEWC. The agreements of purchase and sale included a vacant possession condition, allowing Saramia to refuse to carry out the transaction if vacant possession could not be provided by the closing date. Two of the three potential purchasers were unable to complete the transaction. However, the third purchaser was able to do so.
[11] As part of this process, Saramia told CBRE that it would only consider selling the Property on the condition that it could negotiate a lease buyout with IEWC. CBRE said that IEWC was amenable to that.
[12] In late October 2013, representatives of IEWC and Saramia attempted to negotiate mutually agreeable terms for the early termination of the Lease. However, an impasse developed over what the two parties thought was the appropriate measure for the lease buyout. Negotiations broke down.
[13] On November 1, 2013, IEWC advised Saramia that it had paid rent to the end of November 2013, but that no further rent payments would be made under the Lease. Saramia accepted the repudiation of the Lease on November 14, 2013. On November 15, 2013, IEWC's lawyer wrote to Saramia advising that Saramia should proceed to sell the Property to mitigate its loss. On December 10, 2013, Saramia closed the sale of the Property. Saramia received $3,450,000 for the Property but incurred a $103,458 mortgage break fee for the early termination of the mortgage.
[14] On February 5, 2014, Saramia commenced the underlying action against the appellants for damages for breach of the Lease. A five-day trial was held in December 2016.
The Trial Judge's Findings
[15] The trial judge found that Saramia was forced to sell the Property when the appellants repudiated the Lease. She found that Saramia could not afford the ongoing maintenance and mortgage expenses associated with the Property without the rental income.
[16] The trial judge also found that the sale of the Property in 2013 was not at fair market value. She found, as a consequence, that the sale of the Property did not make Saramia whole for the losses sustained as a result of the repudiation of the Lease.
[17] The trial judge then reviewed the decision in Highway Properties Ltd. v. Kelly, Douglas & Co., [1971] S.C.R. 562 for the basic principles relating to the proper assessment of damages arising from the breach of a lease. The trial judge then said, at para. 46:
Laskin J.'s reasons are consistent with the fundamental principle that the goal of a damages award for breach of contract (including breach of lease) is to put the innocent party in the position it would have been in had the contract been performed as agreed. Ordinary principles of mitigation and remoteness are relevant. In the case of a breach of lease, the proper measure of damages is unpaid rent to the date of the breach plus the present value of the loss of the future rent, which is the present value of the unpaid rent for the unexpired period of the lease less the actual rental value of the premises for that period: see Morguard Corp. v. 2063881 Ontario Inc., 2013 ONSC 7213 at para. 23.
[18] The trial judge, however, did not employ the above method of calculating the damages due to Saramia. Rather, she concluded that Saramia not only would have enjoyed the benefit of the lost rental profits under the Lease, but that it would also have enjoyed the capital appreciation of the Property. The trial judge concluded that the sale of the Property in 2013 did not account for these benefits, which Saramia would have enjoyed had the Lease been honoured.
[19] The trial judge then proceeded to consider the three expert reports that were provided to her. One concerned the valuation of the Property as at December 31, 2015. The other two expert reports involved different discounted cash flow ("DCF") analyses presented for the purpose of quantifying the damages.
[20] The expert report on valuation, prepared by Avison Young, appraised the Property's value as at December 31, 2015 on either an income generation measure or direct comparator measure. On the income measure, the Property was appraised at $4,180,000. On the direct comparator measure, the Property was appraised at $4,465,000. The trial judge accepted the $4,465,000 appraisal in her reasons. That appraisal value was then used in the DCF analyses to calculate total damages.
[21] The first set of DCF analyses were prepared by Saramia's expert, KPMG. There were two primary scenarios analyzed in this report. The first scenario assumed a sale price for the Property in 2021 (the end of the Lease term) by projecting the December 10, 2013 sale price of $3,450,000 forward to 2021 at an assumed growth rate and discount rate of 2% per year. Thus the DCF effectively assumed that the real value of the Property would remain constant past 2013. The respondent's damages under this scenario were $357,000.
[22] In the second scenario, the 2021 sale price was arrived at using the December 31, 2015 appraised value of the Property of $4,465,000. This price was then projected forward to 2021 at the same assumed growth rate of 2% per year along with the same 2% discount rate. This, in turn, assumed that the 2015 real value for the Property remained constant. This scenario calculated Saramia's damages at $1,124,000.
[23] The second set of DCF analyses were prepared by the appellants' expert, Cohen Hamilton Steger. This report responded to the various DCF scenarios presented in KPMG's report. Based on the two sale prices described above, the Cohen report concluded that Saramia suffered no loss from the breach of the Lease. To the contrary, Saramia was, in fact, better off as a result of the repudiation.
[24] The trial judge adopted KPMG's second scenario as the basis for her damages award, that is, the scenario that employed the December 31, 2015 appraised value of the Property. However, she deducted the mortgage break fee amount that Saramia had to pay from the principal amount available for reinvestment for mitigation purposes. The trial judge also awarded an amount of contractual interest owing under the Lease. Ultimately, she left the calculation of the actual loss to the parties to work out.
Issues on Appeal
[25] The appellants submit that the Property was sold at fair market value. The sale of the Property, therefore, fully mitigated Saramia's claimed capital loss and foregone rental profits attributable to the unexpired Lease term. Moreover, the appellants submit that damages for lost capital appreciation are too remote, the DCF is too unreliable, and the award of contractual interest amounted to double recovery. In any event, the appellants argue that the sale of the Property should have ended the accrual of damages past the date of sale.
[26] Saramia submits that all of the trial judge's findings and conclusions are correct. Saramia contends that the purpose of contract damages is full indemnification and the trial judge's award reflects that fundamental principle.
[27] As such, the issues on appeal are as follow:
(a) What is the proper measure of damages for breach of a commercial lease?
(b) Were the damages for lost capital appreciation too remote?
(c) Were the damages mitigated?
(d) Does the sale of the Property stop damages from accruing beyond the date of the sale?
(e) Are the damages as calculated by the DCF too uncertain?
(f) Was it an error to award the contractual interest amount as damages?
Standard of Review
[28] A trial judge's determination of damages is a question of mixed fact and law. Thus, it attracts deference on review. In order for an appellate court to interfere with a determination of damages, the appellants must generally show that the trial judge committed a palpable and overriding error. However, there is an exception to that standard. Where the determination of damages involves extricable questions of law, those questions are subject to review for correctness.
[29] In that regard, the proper approach to be taken by an appellate court in reviewing a damages award was summarized in Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58, [2001] 2 S.C.R. 943 where Binnie J. said, at para. 80:
It is common ground that the Court of Appeal was not entitled to substitute its own view of a proper award unless it could be shown that the trial judge had made an error of principle of law, or misapprehended the evidence […] or it could be shown there was no evidence on which the trial judge could have reached his or her conclusion […] or the trial judge failed to consider relevant factors in the assessment of damages, or considered irrelevant factors, or otherwise, in the result, made "a palpably incorrect" or "wholly erroneous" assessment of the damages […] Where one or more of these conditions are met, however, the appellate court is obliged to interfere.
[Citations omitted.]
Analysis
(a) The measure of damages for the breach of a lease
[30] As the trial judge recognized, the fundamental principles to be applied in calculating damages arising from the breach of a lease are set out in the Highway Properties decision. The applicable principle was stated by Laskin J., at p. 570:
The landlord may elect to terminate the lease but with notice to the defaulting tenant that damages will be claimed on the footing of a present recovery of damages for losing the benefit of the lease over its unexpired term. One element of such damages would be, of course, the present value of the unpaid future rent for the unexpired period of the lease less the actual rental value of the premises for that period. Another element would be the loss, so far as provable, resulting from the repudiation…
[31] In this case, however, Saramia did not re-lease the Property. Rather, it sold the Property. While I will discuss the ramifications of that decision on the issue of mitigation of damages later, it still leaves Saramia with its claim for the present value of the unpaid rent. However, from that value, Saramia would be required to deduct any savings it obtained as a result of no longer owning the Property. Only then will the award of unpaid rent conform with the general principle that contract damages are intended to place the plaintiff in the position it would have occupied had the contract been performed.
[32] In this case, the commercial lease was a "carefree" lease to Saramia, that is, the ongoing costs associated with the Property were to be borne by the appellants. Consequently, no deduction had to be made for those ongoing costs. However, Saramia, on the sale of the Property, no longer had to make the mortgage payments associated with the Property. Those savings had to be deducted from the lost rental payments in the DCF calculation. The same concern arises with respect to any fees due to Agellan or that otherwise would have been incurred had the Lease been honoured. The respondent's expert, KPMG, made those deductions in arriving at their damages calculations.
[33] Had the trial judge's analysis ended at that point, there would be much less of an issue to address. However, the trial judge went on to consider the loss of capital appreciation on the Property. After reviewing some additional authorities on the issue, the trial judge said, at para. 58:
The measure of damages for IEWC's breach must put Saramia in the position it would have been in had the lease obligations been honoured. Had IEWC not breached its obligations, Saramia would have continued to enjoy the stream of lease income. By 2015, it would have enjoyed significant capital appreciation in the property. By 2021, it would have enjoyed more lease income and the opportunity for further capital appreciation in the property (although it would also have run the risk of depreciation in the property). There is no evidence to allow me to conclude that the fair market value of the property in 2013 would account for these specific economic benefits that Saramia would have enjoyed had IEWC not repudiated the lease and forced the property's sale.
[34] The first two sentences from this portion of the trial judge's decision are correct. The balance of that portion, however, reflects an error by the trial judge. As I have already set out, the law is clear that what the appellants are liable for are the rental payments that they did not make, subject to Saramia's duty to mitigate and the expenses Saramia avoided by selling the Property. Whatever "but for" capital appreciation there may, or may not, have been in the Property going forward, it is not a proper head of damages for which the appellants are liable through their repudiation of the Lease, if those losses are too remote – an issue to which I now turn.
(b) Remoteness of damages for lost capital appreciation
[35] In order for a party to be liable for damages for the breach of a contract, the damages must not be too remote. The test for remoteness of contract damages was set out in the seminal decision of Hadley v. Baxendale (1854), 156 E.R. 145 (U.K. Ex. Ct.), at p. 151 per Alderson B.:
Now we think the proper rule in such a case as the present is this: Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.
This test has been expressly adopted by the Supreme Court of Canada in several cases, including Honda Canada Inc. v. Keays, 2008 SCC 39, [2008] 2 S.C.R. 362, at para. 54.
[36] As such, there are two branches to the Hadley v. Baxendale remoteness test. Damages may be recovered if: (i) in the "usual course of things", they arise fairly, reasonably, and naturally as a result of the breach of contract; or (ii) they were within the reasonable contemplation of the parties at the time of contract. It is important to highlight that remoteness applies to the type of loss suffered, not the quantity of a proximate loss: 1298417 Ontario Ltd. v. Lakeshore (Town), 2014 ONCA 802, 122 O.R. (3d) 401, at para. 137. The claimed damages for lost capital appreciation in the instant case, however, fall outside of both branches of Hadley v. Baxendale.
[37] With respect to the first branch, the trial judge held at para. 91 of her reasons that "[i]n these circumstances, the loss of the capital appreciation was foreseeable and arose naturally from the breach of contract" (emphasis added). In so saying, the trial judge appears to conflate the two branches set out in Hadley v. Baxendale, and in doing so she erred.
[38] The test under the first branch of remoteness is objective: KPM Industries Ltd. v. Elmford Construction Co. (1996), 30 C.L.R. (2d) 245, 1996 CarswellOnt 3594 (Gen. Div.), at para. 152, affirmed (1998), 113 O.A.C. 369 (C.A.); The Queen v. Canamerican Auto Lease & Rental Ltd. (1987), 37 D.L.R. (4th) 591 (Fed. C.A.), at p. 604; and G.H.L. Fridman, The Law of Contract in Canada, 6th ed. (Toronto: Carswell, 2011), at p. 679.
[39] The question is not whether the type of loss, i.e. lost capital appreciation, was foreseeable as arising naturally in this case. The inquiry is whether, as a general matter and objectively viewed, lost capital appreciation is a type of loss that foreseeably and naturally arises "according to the usual course of things" from the breach of a commercial lease. One of the factors that could be used to define the foreseeable and natural types of losses recoverable upon breach of contract is the objective bargain inherent in the contract. In a commercial lease, the tenant's bargain is the use of the premises for trade or commerce and the landlord's bargain is the receipt of rental income. Objectively viewed, the inherent bargain in a commercial lease does not include the opportunity to profit from speculative capital appreciation. In my view, therefore, damages for lost capital appreciation do not fairly and reasonably arise from the breach of a commercial lease.
[40] This conclusion is consistent with other decisions that have considered the issue including, Canadian Medical Laboratories Ltd. v. Stabile (1992), 25 R.P.R. (2d) 106, 1992 CarswellOnt 593 (Gen. Div.), at para. 69, where Mandel J. found that the loss of capital appreciation does not "naturally arise from the breach or repudiation of a lease." Indeed, counsel did not refer us to any case where loss of capital appreciation constituted damages flowing from the repudiation of a lease.
[41] With respect to the second branch of remoteness from Hadley v. Baxendale, there is nothing in the evidence that would support a conclusion that the parties contemplated, at the time that they entered into or extended the Lease, that capital appreciation of the Property would be something for which the tenant would be liable to the landlord if the Lease was breached. Indeed, at the time that the Lease was first signed, neither IEWC nor Saramia were parties to it. Nor is there any evidence that a reasonable person would have contemplated such a loss in light of the circumstances known to the parties.
[42] The lost capital appreciation ought not to have formed part of the damages calculation in this case because it was not a matter that was in the reasonable contemplation of the parties at the time that the Lease was entered into. It is a head of damages that is simply too remote. I note that this same conclusion was reached by Wilson J. in Keneric Tractor Sales Ltd. v. Langille, [1987] 2 S.C.R. 440, at pp. 456-57 when dealing with the assessment of damages arising from the breach of a lease of chattels.
[43] Moreover, in analyzing the second branch of Hadley v. Baxendale as she did, the trial judge looked at the reasonable contemplation of the parties as at the time of the breach, instead of at the time that the Lease was entered into. In this regard, the trial judge stated at para. 91 of her reasons:
If the parties had contemplated this breach of contract at the time they entered into the contract, they would have contemplated the lost stream of lease income and the lost capital appreciation. I reach these conclusions because the breach of contract was not just the repudiation of the lease; it cannot be separated from the manner of the repudiation of lease that forced the sale of the property in December 2013. The defendants knew that Saramia wanted a long-term lease and was not intending to sell; Saramia had negotiated the lease extension before purchasing the property. IEWC's broker was involved in efforts to sublet, then sell the property; IEWC thus knew that there were no prospective tenants for the single-tenanted property and that the property had appreciated significantly […] IEWC knew that Saramia had agreed to sell expecting a lease buy-out but IEWC failed to meaningfully engage in negotiations. Instead it repudiated the lease in a manner that bound Saramia to the sale price to which it had agreed in the expectation it would also receive a lease buy-out.
[Emphasis added.]
In doing so, it appears that the trial judge fell into the same error that was identified in RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc., 2008 SCC 54, [2008] 3 S.C.R. 79.
[44] The relevant inquiry is not if the parties contemplated the breach. Rather, it is whether the parties reasonably contemplated that the type of damages claimed would be the probable result of a breach of the contract at the time of contract. As McLachlin C.J.C. said in RBC, at para. 12:
It is apparent that the majority of the Court of Appeal applied the proximity test wrongly. Instead of asking whether damages of this sort would have been within the reasonable contemplation of the parties had they put their minds to the potential breach when the contract was entered into, the majority of the Court of Appeal asked whether the breach was foreseeable.
[Emphasis in original.]
[45] The Supreme Court has repeatedly held that the second branch of Hadley v. Baxendale is to be assessed from the standpoint of the parties at the time of contract. In Fidler v. Sun Life Assurance Co. of Canada, 2006 SCC 30, [2006] 2 S.C.R. 3, at paras. 54-55, the court held:
It follows that there is only one rule by which compensatory damages for breach of contract should be assessed: the rule in Hadley v. Baxendale. The Hadley test unites all forms of contractual damages under a single principle […] In all cases, these results are based on what was in the reasonable contemplation of the parties at the time of contract formation.
[Emphasis added.]
See also Keays, at paras. 55-56; and Mustapha v. Culligan of Canada Ltd. (2006), 84 O.R. (3d) 457 (C.A.), 275 D.L.R. (4th) 473, at paras. 61-67, affirmed 2008 SCC 27, [2008] 2 S.C.R. 114, at para. 19.
[46] The requirement to assess the parties' reasonable contemplation at the time of contract also accords with one of the objectives of the second branch of Hadley v. Baxendale, which is to allocate the risk of loss for types of damages that do not arise naturally from a breach of the contract to the party that bargained to bear it. See, for example, Transfield Shipping Inc. v. Mercator Shipping Inc., [2008] U.K.H.L. 48 per Lord Hoffmann. As Abella J. (dissenting in part) said in RBC, at para. 64 (and as this court noted in Lakeshore, at para. 138):
The principle of remoteness "imposes on damage awards reasonable limits which are required by fairness" […] It aims "to prevent unfair surprise to the defendant, to ensure a fair allocation of the risks of the transaction, and to avoid any overly chilling effects on useful activities by the threat of unlimited liability" […] This principle will be informed by the nature and culture of the business in question, and the particular contractual relationship between the parties…
[47] In the instant case, however, the trial judge appears to have first identified the unique circumstances of the breach, and the losses flowing therefrom, and then reasoned back to conclude that the parties would have contemplated that such losses were to be borne by the appellants. The trial judge did not, as she should have, begin her analysis with whether there was evidence that, at the time of contract, the loss of capital appreciation, in the face of a breach, would reasonably have been in the contemplation of the parties.
[48] Indeed, apart from the appellants' knowledge that Saramia wanted a long-term tenant, the remaining bases for the trial judge's determination on this point were all events that arose after the Lease and the extension agreement were concluded. But it does not follow that knowledge that a landlord wants a long-term lease translates into knowledge that a landlord will be forced to sell the leased premises, much less sell at a loss, if the tenant repudiates the lease. There is simply no evidence that the parties, on or before November 15, 2011, reasonably contemplated who should bear the risk for lost capital appreciation. In my view, the claimed damages for lost capital appreciation on the Property were neither natural consequences of the breach of the Lease nor were they reasonably contemplated by the parties at the time of contract. As such, damages for lost capital appreciation are too remote in this case.
(c) Mitigation of damages for the breach of a lease
[49] I now turn to the issue of how the damages are to be calculated given that Saramia did not re-lease the Property. Instead, Saramia sold the Property. On this issue, the appellants submit that the "first principle" of asset valuation prescribes that the fair market value of an asset is equivalent to the present value of future net cash flows that can be generated by that asset. As a result, the appellants contend that Saramia fully mitigated its damages, both lost rental income and lost capital appreciation, through its sale of the Property at fair market value, since the sale price necessarily includes the present value of future lost rental profits. The appellants argue that any damages award in this case would amount to double recovery.
[50] The trial judge attempted to overcome this argument by finding that the sale of the Property was not at fair market value. Thus the sale could not have made Saramia "whole" by fully mitigating its losses since the sale price did not accurately reflect the present value of future cash flows.
[51] I disagree with both the trial judge's reasons as well as the appellants' submissions on this issue.
(i) Trial judge's finding of not at fair market value
[52] I start with the finding that the sale was not at fair market value. This finding reflects both a factual palpable and overriding error and a legal error in interpreting the term "fair market value".
[53] I begin with the trial judge's finding that Saramia could not afford to hold the Property, without the receipt of the rental payments, and thus Saramia was forced to sell the Property when the appellants repudiated the Lease. That was a conclusion that was open to the trial judge on the evidence and there is no basis for this court to interfere with it. However, having reached that conclusion, the palpable and overriding factual error arises from the fact that there was virtually no evidence that, when Saramia chose to sell the Property, it did so at anything other than fair market value. I note that neither party filed an appraisal of the Property as at 2013.
[54] It was Saramia that set the sale price for the Property. There is no clear and objective evidence that in doing so Saramia sought a price that was anything less than what it thought the Property was worth. Although there was some evidence that Saramia set the sale price while, at the same time, understanding that it would also receive a lease buyout from IEWC, there is no evidence that the sale price was set at a lower amount because of this understanding. Rather, it appears that Saramia expected to receive the lease buyout in addition to the sale price it could achieve for the Property.
[55] Nevertheless, the trial judge found that the sale was not at fair market value. In doing so, the trial judge relied on the evidence of Ms. Attard, a Vice-President of Saramia, and of Frank Camenzuli, an executive at Agellan, that the requirement that Saramia sell the Property with a vacant possession condition "negatively affected the value of the property".
[56] In my view, it was a palpable and overriding error for the trial judge to have used this evidence while ignoring other relevant evidence on the issue, to reach the conclusion that she did. I say this for the following reasons.
[57] First, as the trial judge acknowledged, neither Ms. Attard nor Mr. Camenzuli were experts. Their view on this issue was therefore of no real assistance. Indeed, it might fairly be viewed as being entirely self-serving given their respective connections to Saramia.
[58] Second, their opinions appear to be contradicted by Saramia's own Property appraisal expert. In deciding on the fair market value of the Property in 2015, Avison Young was of the opinion that the Property was worth more without a tenant than with one – hence the higher appraisal on the direct comparator measure as opposed to the income generation measure. There was no evidence to suggest that this disparity in value would have been any different in 2013.
[59] Third, in terms of the evidence on this point, KPMG said in its report, at p. 11:
Our analysis of other market transactional data occurring throughout 2013 suggests Saramia achieved a price that was generally not lower than other comparable industrial properties transacting in the local market.
[Footnote omitted.]
[60] In reaching her conclusion about fair market value, the trial judge also expressed concern that the Property was only marketed for sale through one broker. However, there was no evidence that Saramia was precluded from using other brokers. If Saramia chose to rely solely on CBRE, it cannot now complain that the process was inadequate. The same holds true regarding Saramia's complaint that the Property was unlisted.
[61] In the end result, the objective evidence was that CBRE obtained three prospective purchasers, all of whom were interested in purchasing the Property at the price set by Saramia. The available expert evidence was that the Property was worth more without a tenant than with one. The expert evidence also established that the sale price was comparable with other "industrial properties transacting in the local market". The trial judge's conclusion that the Property was not sold at fair market value is "not reasonably supported by the evidence" and thus constitutes a palpable and overriding error: H.L. v. Canada (Attorney General), 2005 SCC 25, [2005] 1 S.C.R. 401, at para. 110.
[62] In addition, the trial judge's conclusion on this issue reflects an error of law in her understanding of the meaning of "fair market value". The well-established legal definition of fair market value is what a seller is willing to accept and a buyer is willing to pay on the open market in an arm's length transaction: Musqueam Indian Band v. Glass, 2000 SCC 52, [2000] 2 S.C.R. 633, at paras. 9 and 37; Prolink Broker Network Inc. v. Jaitley, 2015 ONSC 6484 (Div. Ct.), at para. 45; and Victoria University v. GE Canada Real Estate Equity, 2016 ONCA 646, 76 R.P.R. (5th) 104, at para. 103.
[63] In reaching her conclusion on fair market value, the trial judge focussed on the fact that Saramia was not a willing seller because it was forced to sell the Property. With respect, that is not what "willing" relates to in this context. What "willing" refers to is the price that is to be offered and accepted. As Gonthier J. said in Musqueam Indian Band, at para. 37:
"Value" in real estate law generally means the fair market value of the land, which is based on what a seller and buyer, "each knowledgeable and willing", would pay for it on the open market.
[Emphasis added.]
[64] There was no evidence that Saramia sold the Property at a "fire sale" price or that it otherwise did not obtain the price that it wanted. Indeed, the presence of Agellan, on Saramia's side, a company experienced in dealing with commercial properties who had been the original purchaser of the Property, would make it difficult to accept that anything other than a fair price would have been accepted. Further, the fact that three different purchasers were engaged in the sale process would strongly suggest that the sale reflected fair market value. In my view, the trial judge's confusion with respect to the meaning of fair market value also renders her conclusion on this issue an error of law.
(ii) Appellants' submissions on mitigation
[65] Despite my conclusion that the Property was sold at fair market value, I nevertheless reject the appellants' submission that damages were fully mitigated for two reasons.
[66] First, as this court held in Ticketnet Corp. v. Air Canada (1997), 154 D.L.R. (4th) 271 (C.A.), at paras. 92-97 per Laskin J.A., there are circumstances where the sale of an asset will not fully indemnify the plaintiff for the lost value of future net cash flows. In all private law damages cases, the guiding principle is to award damages to place the plaintiff in the position he or she would have occupied had the wrong not occurred.
[67] Second, the circumstances in this case differ from those in Ronald Elwyn Lister Ltd. v. Dayton Tire Canada Ltd. (1985), 52 O.R. (2d) 88 (C.A.), where this court accepted the appellants' proposed valuation method. In that case, the plaintiffs claimed conversion of business assets against the defendants. This court held that the value of the converted assets was equal to the net cash flows that would have been generated by the assets when used in the plaintiffs' business as a going concern. This court stated, at para. 64, that the plaintiff:
…cannot recover both the value of its business as a going concern and, also, damages based on the value of its assets that were converted. The latter are, logically, contained in the former. They are reflected in the profit-earning potential of the company which is embodied in the capitalization approach. To give both net asset value and the value of the business as a going concern would be contrary to the business practice reflected in [the accounting expert's] evidence and, also, the law respecting damages…
[Citation omitted.]
[68] Here, however, Saramia did not sell its business as a going concern. The respondent was a single-purpose corporation. Its business was comprised of the Property and the Lease. The respondent was only able to sell the Property. It was not able to sell the Property with the Lease since the appellants had repudiated the Lease. The proceeds from the sale of the Property, therefore, only account for the value of the Property. They do not account for the economic value that is derived from the Lease. This distinction between the value of land and the value of a lease was highlighted by the Supreme Court in Musqueam. Though the court split four-four-one on how the value of a leasehold interest should have affected the outcome in that case, both McLachlin C.J.C. and Gonthier J. (writing for the two four-judge opinions) at paras. 9 and 38, respectively, agreed that the fair market value of land is the exchange value of the land in fee simple – and does not include the value of a lease.
[69] In my view, in the particular circumstances of this case, the proceeds from the fair market value sale of the Property do not compensate Saramia for the lost economic value derived from the Lease.
(iii) The proper application of mitigation
[70] The conclusions above, however, do not mean that the sale of the Property has no impact on the mitigation of damages. The appellants would have been entitled to a reduction in the damages for the rental payments that Saramia should have received by re-leasing the Property, except that did not happen. Put another way, Saramia did not lessen its damages by finding another tenant to occupy the Property. While this might be said to be a failure of the duty to mitigate, this court observed in Canadian Medical Laboratories Ltd. v. Stabile (1997), 98 O.A.C. 3, varying (1992), 25 R.P.R. (2d) 106, 1992 CarswellOnt 593 (Gen. Div.) that, in some instances, a landlord can mitigate its damages by selling, rather than re-leasing, the premises. As Carthy J.A. said, at para. 34:
It is my view that in appropriate circumstances a sale could be mitigation for loss of a tenant, and in those circumstances efforts to sell could be considered as satisfying the duty to mitigate.
[71] I pointed out earlier that the trial judge found that Saramia could not afford to hold the Property while it looked for another tenant. It consequently had to sell the Property. In those factual circumstances, the sale of the Property satisfies the duty to mitigate. Indeed, IEWC invited Saramia to sell the Property precisely for the purpose of mitigating its damages.
[72] The issue then becomes how damages are properly calculated where the Property has been sold. I return again to the basic approach established by Highway Properties, that is, that the damages are the present value of the unpaid stream of rental payments to the expiration of the lease. From that amount, however, all amounts saved by Saramia as a consequence of selling the Property must be deducted. This would include, in this case, the mortgage payments and any fees due to Agellan or that otherwise would have been incurred by Saramia had the Lease been honoured.
[73] There is, however, another amount that, in my view, must fairly be deducted from the damages claimed. As a consequence of selling the Property, Saramia received a lump sum (the net sale proceeds after paying off the mortgage and other expenses) earlier than it otherwise may have if the Lease had been performed. Indeed, in this case, it received that lump sum some eight years before the intended termination of the Lease. Having chosen to mitigate its damages by selling the Property, and thus not be able to re-lease it, Saramia must account for the monies that it could have earned through an investment of that lump sum for the period of time remaining on the Lease. In other words, the return on the alternate investment of that lump sum becomes, in one sense, the equivalent of a replacement for the net cash flow stream that was lost when the rental payments ceased.
[74] The selection of the appropriate Property value to be used in the DCF is therefore material to the damages analysis because it determines the amount available to be reinvested for mitigation purposes. The appropriate Property value to be used in the DCF was the 2013 sale price. On this point, I note that there was no basis for using the value of the Property in 2015 to calculate the damages for lost capital appreciation, even if those damages were not too remote. Indeed, it is not evident what legal foundation there was for using the 2015 value in this case.
[75] What seems to have happened is that Saramia obtained the 2015 value and then submitted it as the appropriate value to use on the basis that it was reasonably limiting its claim to just that amount. The trial judge appears to have accepted this proposition.
[76] With respect, a plaintiff does not get to unilaterally decide what factors are appropriately considered in a damages assessment. It is the court's obligation to make those determinations and the court must do so based on the application of proper legal principles. In this case, if the claim for lost capital appreciation was not too remote, the relevant capital appreciation would have been as of the completion of the Lease in 2021. No evidence was led as to what the value of the Property would have been in 2021. Indeed, the only evidence on this point, as noted by the trial judge at para. 94 of her reasons, was that everyone acknowledged that "the real estate market is volatile and it is impossible to know whether the property's value in 2021 will be greater than or less than the 2015 fair market value appraisal".
[77] Given that acknowledgement, using the 2015 fair market value was simply arbitrary. I also note that the use of the 2015 fair market value increased Saramia's damages calculation significantly.
[78] The Property was sold in 2013 and Saramia received actual proceeds from that sale. The 2013 sale price was the only value that reflected how much Saramia had available to invest for mitigation purposes on a balance of probabilities. Thus damages should be calculated pursuant to the DCF scenario that was based on the 2013 sale price.
[79] To dispel any suggestion to the contrary, I should add that this conclusion does not bring the issue of capital appreciation back into the equation because, at this stage of the analysis, I am not dealing with how the sale price related to the purchase price or how that relationship might have changed in the future. Rather, I am simply recognizing the reality that Saramia received a lump sum of cash earlier than it otherwise may have. Any benefit that Saramia obtains from that earlier receipt must be accounted for and applied against the loss it incurred as a result of the appellants' repudiation.
[80] I recognize that the appellants might say that the amount that Saramia could have earned from investing the sale proceeds may be substantially less than what a new tenant would have paid by way of rent. I do not dispute that possibility, but it was open to the appellants to lead evidence as to when a new tenant would likely have been found and the likely rent that a new tenant would have paid. They chose not to lead any of that evidence. They cannot now complain that those considerations are not taken into account in the mitigation of damages assessment when they did not provide the evidence to permit that analysis. This is especially so since it is the appellants who bear the onus of proving that mitigation was possible and that Saramia has failed in its duty to mitigate. In addition, and importantly, the duty to mitigate only requires Saramia to take reasonable steps, not any and all steps: Asamera Oil Corp. v. Seal Oil & General Corp., [1979] 1 S.C.R. 633, at pp. 660-61; and Evans v. Teamsters Local Union No. 31, 2008 SCC 20, [2008] 1 S.C.R. 661, at para. 30.
[81] I am aware that, in this case, Saramia was apparently contractually bound to remit the proceeds of the sale of the Property to its limited partners and thus could not invest the monies and receive a return. However, that contractual requirement does not release Saramia from its duty to mitigate. The damages were incurred by Saramia and it is Saramia's duty to mitigate them. The Supreme Court expressly held in Southcott Estates Inc. v. Toronto Catholic District School Board, 2012 SCC 51, [2012] 2 S.C.R. 675, at paras. 26-30, that a single-purpose corporation has a duty to mitigate. Saramia must therefore account for what it could reasonably have done with the lump sum it received, regardless of its particular corporate structure. I note on this point that Saramia accepts that its damages must be reduced by the opportunity it had to invest the net sale proceeds.
[82] The trial judge accepted that the hypothetical investment in a REIT basket, focused on Canadian industrial, commercial, and retail assets with a return of 6.0%, as utilized by KPMG, was appropriate. I do not see any basis to interfere with her conclusion in that regard. The trial judge was entitled to reach that conclusion on the evidence that was placed before her.
(d) Accrual of damages after the sale of the Property
[83] The appellants submit that Saramia's sale of the Property prevented Saramia from being able to perform the Lease and therefore the accrual of damages for lost rental profits should end at the date of sale. In support of this proposition, the appellants cite the trial court's decision in Canadian Medical, at para. 73. This issue of whether a plaintiff (who accepts a defendant's repudiation) must remain ready, willing, and able to perform the repudiated contract in order to claim damages for the breach has been described as "unresolved" in Canadian law: Webster Estate v. Thomson, 2008 ONCA 730, 241 O.A.C. 360, at para. 24, citing G.H.L. Fridman, The Law of Contract in Canada, 5th ed. (Toronto: Carswell, 2006), at pp. 550-51.
[84] The confusion appears to stem from a line of English authorities, including for example, Maredelanto Compania Naviera S.A. v. Bergbau-Handel G.m.b.H. Mihalis Angelos, The (1970), [1971] 1 Q.B. 164 (E.W.C.A.) where Megaw L.J. stated, at pp. 209-10:
In my view, where there is an anticipatory breach of contract, the breach is the repudiation once it has been accepted, and the other party is entitled to recover by way of damages the true value of the contractual rights which he has thereby lost; subject to his duty to mitigate. If the contractual rights which he has lost were capable by the terms of the contract of being rendered either less valuable or valueless in certain events, and if it can be shown that those events were, at the date of acceptance of the repudiation, predestined to happen, then in my view the damages which he can recover are not more than the true value, if any, of the rights which he has lost, having regard to those predestined events.
[85] In my view, those authorities are not apt in this case. Unlike the authorities that support the appellants' submission, Saramia's sale of the Property in this case was not an independent and inevitable event that would have occurred regardless of the appellants' repudiation of the contract. In this regard, I share the trial judge's opinion that the trial decision in Canadian Medical is distinguishable because the breach of the lease in that case was not the factual cause of the sale of the property.
[86] Moreover, it would be anathema to the purpose of the mitigation doctrine to hold that a reasonable action taken by the innocent party intended to mitigate damages could be used by the wrongdoer as a means to escape liability. To the extent that a defendant landlord sells a leased premises as a reasonable means of mitigating damages following a tenant's repudiation of a lease, the sale of the leased premises does not bar the landlord's claim for lost rental payments after the date of sale.
(e) The certainty of damages calculated by the DCF
[87] I turn now to the calculation of damages using the DCF analysis. I begin by rejecting the appellants' submission that the DCF was "purely hypothetical" and that "the trial judge resorted to speculation to assess the landlord's damages – precisely what the case law warns against". DCF calculations based on projections of future performance have been accepted by this court as a sufficiently certain means of quantifying damages where the projections constitute a close approximation of what would have occurred on a balance of probabilities: Ticketnet, at para. 87.
[88] I agree with the trial judge that the proper approach to calculating the damages in this case was the DCF method. I disagree, however, with the trial judge's conclusion that the 2015 fair market value appraisal was the appropriate value to use in the DCF calculation. The appropriate value to be used was the 2013 sale price, for the reasons that I have already given.
[89] The trial judge referred to other differences in the DCF analyses that the experts undertook. She favoured the approach taken by KPMG on these issues. There is no basis upon which this court should interfere with those findings.
[90] The trial judge also found that the mortgage break fee of $103,458, that Saramia had to pay in order to sell the Property in 2013, ought to have been deducted from the amount of the proceeds of sale that were available to invest for the balance of the term of the Lease, as opposed to simply awarding that amount as a separate head of damages. KPMG had done the latter. While I doubt that this makes any significant difference to the overall damages calculation, I agree with the trial judge that it makes more sense to treat that amount as reducing the sale proceeds that were available to be reinvested. This conclusion by the trial judge required the appropriate DCF calculation to be redone.
(f) The award of contractual interest
[91] Finally, the trial judge awarded interest on a portion of the damages at the rate of 24% per year, as purportedly provided for in one clause of the Lease. That clause related to the interest that would accrue on rent not paid when it was due. It seems to me to involve a rather strained interpretation of that clause in the Lease to apply the interest rate to a portion of the damages calculated under the DCF analysis. This is especially so given that Saramia's interest calculations were "imprecise", to adopt the trial judge's characterization of them.
[92] In any event, the trial judge's reasons are unclear as to the legal basis for the award of contractual interest. The reasons show that she could have intended either that the contractual interest was a head of expectation damages resulting from a breached contract, or an amount awarded pursuant to the enforcement of a subsisting contract. In both cases, the award was in error.
[93] In the first case of expectation damages, the trial judge's award of contractual interest relies upon the assumption that, if the appellants remained in the tenancy until 2021, the appellants would have, in fact, defaulted on future rent payments such that this clause could be invoked. The trial judge simply stated that Saramia estimated that the appellants would incur such defaults for approximately 3/8 of the remaining eight years of the Lease. The trial judge did not analyze why she accepted Saramia's submission. The reasons therefore do not provide the necessary basis for meaningful appellate review on this issue. That failure warrants appellate intervention because the reasons fail to provide the required link between the "what" and the "why": Dovbush v. Mouzitchka, 2016 ONCA 381, 131 O.R. (3d) 474, at paras. 19-25.
[94] In the second case, Saramia's acceptance of the appellants' repudiation of the Lease terminated the Lease. As such, Saramia cannot claim that rent arrears following the appellants' repudiation continued to accrue past the date of termination. Saramia's remedy in this case is a claim for expectation damages, subject to sufficient proof as explained above. Saramia could have chosen not to accept the repudiation and sue for rent arrears accruing under what would then be an enforceable Lease, but it chose not to. Therefore, if the trial judge awarded contractual interest on the basis that rent arrears continued to accrue past the termination date, it was an error of law reviewable for correctness.
[95] I do not see any reason to strain the language of the Lease in order to have some portion of the damages attract this higher rate of interest. Rather, the damages, calculated as of December 1, 2013, should attract prejudgment interest in the usual course, that is, under s. 128(1) of the Courts of Justice Act, R.S.O. 1990, c. C.43 to the date of judgment.
Conclusion
[96] I would allow the appeal and set aside the trial judgment and the damages award. In its place, I would award damages and interest to be calculated in accordance with these reasons, which I summarize here for convenience:
Damages are to be calculated using the KPMG DCF scenario based upon the Property's 2013 sale price and a REIT return of 6.0%.
The mortgage break fee should be deducted from the net sale proceeds that are available to be reinvested based on the above KPMG DCF scenario.
The loss of capital appreciation on the Property is not recoverable.
The award of contractual interest is not recoverable. It is replaced with an award of prejudgment interest under s. 128(1) of the Courts of Justice Act.
[97] If there are any issues in this regard, I would remit them back to the trial judge for resolution.
[98] The appellants are entitled to their costs of the appeal in the agreed amount of $30,000, inclusive of disbursements and HST.
[99] In terms of the costs of the trial, I recognize that, depending on the reduction in damages upon the recalculation, the offers to settle that were made may have a different effect than they first had before the trial judge. I therefore also remit both the award of trial costs, and the issue of the quantum of the trial costs, back to the trial judge for a fresh determination.
Released: June 7, 2018
I.V.B. Nordheimer J.A.
I agree. S.E. Pepall J.A.
I agree. Trotter J.A.
