Court File and Parties
COURT FILE NO.: CV-14-496482 DATE: 20170420 ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
DHMK PROPERTIES INC. Applicant – and – 2296608 ONTARIO INC. and MUND REAL ESTATE GROUP INC. Respondents
COUNSEL: G. Adair, Q.C. and G. McGuire for the Applicant M. Katzman and J. Hewlett for the Respondents
HEARD: March 29, 2017
PERELL, J.
REASONS FOR DECISION
A. Introduction
1On June 30, 2013, the Defendant 2296608 Ontario Inc., as assignee of the Defendant Mund Real Estate Group Inc. (collectively, “the Mund Group”), refused to close a real estate transaction to purchase, for $5.3 million, a single-tenant commercial building in Newfoundland from its owner, the Plaintiff, DHMK Properties Inc. (“DHMK”). Instead of closing, the Mund Group sued for specific performance with an abatement of $1.3 million. DHMK countered with a suit for forfeiture of the $100,000 deposit and a claim for damages for breach of contract. Justice B.P. O’Marra dismissed the Mund Group’s suit and granted DHMK’s counterclaim subject to DHMK proving its damages.
2Now before the court is DHMK’s summary judgment motion for damages. It claims damages of $930,000. The Mund Group resists the motion, and it submits that DHMK’s action should be dismissed because DHMK failed to mitigate its damages by its refusal to accept the Mund Group’s post-judgment offer to complete the original agreement of purchase and sale.
3For the reasons that follow, I grant DHMK judgment of $930,000.
B. Factual and Procedural Background
4In 2011, Executive Contracting, a company owned by Michael Kirby and Darren Howell, began construction of a commercial property at 5 Coish Place, Clarenville, Newfoundland & Labrador, to be occupied by Eastern Health, a branch of Newfoundland’s Ministry of Health. Eastern Health was to occupy the building pursuant to a twenty-year lease with a five-year option to renew. Messrs. Kirby and Howell incorporated DHMK to hold title to the property.
5In 2012, during the course of construction, DHMK commissioned an appraisal for the purposes of obtaining mortgage financing. By appraisal report dated March 29, 2012, Tony Hurley, of Altus Group Ltd., opined that the market value of the property as of June 1, 2012 was $5.5 million. In arriving at his opinion, Mr. Hurley estimated the property’s net operating income (“NOI”) to be $441,925 and he extrapolated the value of the land from the value of its anticipated income stream.
6In June 2012, Eastern Health took possession and began its lease of the property.
7In late 2012, Carl Hutton, a real estate agent, was provided with an information package about the property. The package included an excerpt from the Altus Group appraisal. The package also contained a document entitled “DHMK Properties Inc. Income and Expenses”, which estimated the operating expenses of the property at $161,244 per year leaving a NOI of $435,099 prior to debt servicing charges. The document had been prepared by Mr. Kirby in October 2012.
8On January 24, 2013, by email, Mr. Hutton submitted an offer from Mund Group, a Toronto-based real estate investor, whose president is Philip Mund, to purchase the property, with a purchase price of $5.3 million.
9The offer contained a provision entitled “warranty” as follows:
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. In the event it is determined that the Net Income is less than $441,225.00, then Purchaser shall have the option of reducing the Purchase Price by an amount, which would give the Purchaser the same capitalization rate as would be achieved by the Net Income represented by the Vendor.
10Mr. Kirby was not prepared to accept the offer with the warranty because he already knew that the estimated NOI was lower than what was to be warranted. He emailed Mr. Hutton and told him that the $441,925 figure was the amount determined by the appraiser and differed from the actual figures. He stated the sentence stating that the Purchaser shall have the option of reducing the purchase price had to be deleted from the offer. He said that the price for the property was $5.3 million and he would not sell the property for less.
11On January 30, 2013, Mr. Hutton responded and forwarded a revised offer from the Mund Group that removed the last sentence from the warranty. DHMK accepted the offer on February 1, 2013. The Mund Group assigned the agreement to 2296608 Ontario Inc.
12Under the agreement of purchase and sale, the purchase price was $5.3 million. There was a $100,000 deposit. The agreement provided for a 35-day due diligence period, and it specified a "Notice Date” of 5:00 p.m. three business days after the end of the due diligence period during which time the purchaser could give notice of termination, receive a return of the deposit and “walk away" without consequence.
13On February 4, 2013, DHMK sent the Mund Group a package containing, among other things, invoices relating to operating expenses actually being incurred in operating the building. The documents were reviewed by Irving Karoly who was the Mund Group’s director of due diligence. Mr. Karoly concluded that the expenses were roughly $55,000 per month higher than had been set out in the information package with a corresponding lower NOI.
14Mr. Kirby exchanged emails with Mr. Karoly and agreed that the expenses were different than had been projected. For example, property taxes had been projected to be $14,400 but a province-wide reassessment had increased the taxes to $29,777.38. Similarly, Mr. Kirby's projection of $54,000 for heating had been made before the tenant had occupied the property for a winter. The actual costs were going to be higher than projected.
15As the Notice Date of June 13, 2013 approached, the Mund Group demanded a $1,324,104 reduction in the purchase price. Mr. Kirby refused. He advised the Mund Group that it could withdraw from the transaction provided that it gave notice by the Notice Date.
16The Mund Group did not give notice. Rather, on July 5, 2013, it commenced an application seeking specific performance with an abatement of $1.3 million. DHMK responded with an application seeking forfeiture of the deposit and a declaration that it was entitled to damages.
17While the lawsuits were pending, in January 2014, DHMK met with one potential purchaser but nothing came of the meeting.
18On March 31, 2014, Justice B.P. O’Marra heard the applications, and he released his Reasons on May 22, 2014. He concluded that the Mund Group had not validly assigned the agreement of purchase and sale to 2296608 Ontario Inc.. He held that clause 2 of the agreement was a warranty and that the Mund Group’s remedy was limited to giving notice and withdrawing from the transaction (“walking away”) or closing and suing for damages for breach of the warranty.
19Justice B.P. O’Marra concluded that the Mund Group was liable for breach of contract. At para. 28 of his Reasons, reported as 2296608 Ontario Inc. v. DHMK Properties Inc., 2014 ONSC 2875, Justice O’Marra stated:
- If the purchaser alleges a breach of clause 2, which I have determined to be a warranty, its options were to either terminate the contract without penalty within the notice period provided in the agreement or to close the transaction and sue for damages related to the alleged breach of warranty. The purchaser did not file a notice to terminate the agreement as stipulated and did not close the transaction in accord with the agreement. Therefore, the purchaser repudiated the contract.
20Justice B.P. O’Marra ordered the deposit forfeited, and he held that DHMK was entitled to claim damages for the breach of the contract, to be assessed.
21The Mund Group delivered a notice of appeal, but it abandoned its appeal in August 2014.
22Prior to the Mund Group abandoning the appeal, DHMK had two meetings with another potential purchaser but, once again, nothing came of the meetings.
23Messrs. Kirby and Howell decided to wait to sell the property. They felt that with the decline in oil prices affecting Newfoundland’s economy, it would be prudent to hold off selling the property. It pursued its claim for damages against the Mund Group.
24For the purposes of the litigation, DHMK obtained another appraisal from Mr. Hurley of the Altus Group. He opined that the fair market value of the property was $4.5 million at the date of closing, $4.27 million as of the abandonment of the Mund Group’s appeal, and $4.27 million as of June 21, 2016.
25Mr. Hurley opined that the property could have been sold within six months of June 30, 2013.
26Mr. Hurley admitted on cross-examination that his original appraisal (the one that appeared in the information package) would have been closer to $4.5 million if he had the actual expenses for the property as opposed to estimates.
27The Mund Group did not obtain an appraisal but obtained an appraisal review from an expert, John Ingram. Mr. Ingram did not suggest a market value for the property. Rather, Mr. Ingram critiqued Mr. Hurley’s methodology and the choice of comparable properties as inappropriate.
28On September 16, 2016, the Mund Group offered to perform the original contract. The offer included a unilateral release and preserved the Mund Group’s right to enforce the warranty in the contract. DHMK did not accept the offer, and it was subsequently withdrawn.
C. Discussion and Analysis
1. The Positions of the Parties
29DHMK submits that the case is appropriate for a summary judgment. It argues that there is no evidence to rebut the appraisal evidence of Mr. Hurley that informs the measure of damages.
30As for the measure of damages, DHMK concedes that it must give credit for the deposit ($100,000) and then it argues that the measure of damages for an abortive real estate transaction is the difference between the purchase price ($5.3 million) and the market value of the property at the date of assessment ($4.27 million). It submits that the date of assessment is the date when the Mund Group abandoned its appeal and DHMK was freed of the claim for specific performance and could sell the property. DHMK, therefore, claims damages of $930,000.
31The Mund Group makes the Trumpian argument that the case is appropriate for a summary judgment - provided it wins - otherwise it is not appropriate because there are genuine issues requiring a trial about the assessment of damages and DHMK’s alleged failure to mitigate its damages.
32The Mund Group’s argument on the merits is that DHMK’s measure of damages is the amount of money that is necessary to place it in the same position in which it would have been had the contract been performed, subject to mitigation. In this case, the Mund Group made a without prejudice offer to settle by completing the agreement of purchase and sale, and by refusing to accept the offer, which would put DHMK in the precise position in which it would have been had the contract been performed, DHMK has failed to mitigate its loss and, therefore, its action should be dismissed.
33The Mund Group submits that DHMK’s refusal to accept the Mund Group’s offer constitutes a flagrant refusal to properly mitigate the very damages it seeks from the Mund Group.
34The Mund Group submits that the measure of DHMK's damages is the difference in value between the value of the purchase price, as set out in the underlying agreement of purchase and sale, less the fair market value of the property, if, and only if, the property were being sold subject to a vendor’s warranty respecting NOI being at least $441,925. Based on this formulation of the measure of damages, the Mund Group submits that the quantum of DHMK’s damages is nil.
35Put somewhat differently, the Mund Group submits that DHMK’s formulation of the measure of damages ignores the facts that the agreement from which damages are sought had a purchase price derived solely on the basis of the warranted NOI and that the value of the agreement from which damages are sought had a purchase price that was derived solely on the basis of the warranted NOI. The Mund Group submits that it is an error to calculate the measure of damages as the fair market value of the property without the warranty. The Mund Group submits that the value of the property must be determined having regard to the specific bargain reached by the parties. Thus, at para. 144 of its factum, the Mund Group submits:
- In circumstances where the warranty respecting NOI was the sole basis on which the [Mund Group] was prepared to pay the purchase price of 5.3 million dollars, opining on fair market value in the absence of the warranty tells the Court nothing at all about the value of the specific bargain lost by [DHMK]. Instead it provides information to the Court as to the value of a bargain never before had by [DHMK].
36The Mund Group also argues that DHMK must give credit against its $930,000 damages claim for the income it has been earning while continuing to own the property.
2. The Jurisdiction to Grant Summary Judgment
37Rule 20.04(2)(a) of the Rules of Civil Procedure provides that the court shall grant summary judgment if the court is satisfied that there is no genuine issue requiring a trial with respect to a claim or defence.
38With amendments to Rule 20 introduced in 2010, the powers of the court to grant summary judgment have been enhanced. Rule 20.04(2.1) states:
20.04 (2.1) In determining under clause (2)(a) whether there is a genuine issue requiring a trial, the court shall consider the evidence submitted by the parties and, if the determination is being made by a judge, the judge may exercise any of the following powers for the purpose, unless it is in the interest of justice for such powers to be exercised only at a trial:
- Weighing the evidence.
- Evaluating the credibility of a deponent.
- Drawing any reasonable inference from the evidence.
39In Hryniak v. Mauldin, 2014 SCC 7, the Supreme Court of Canada held that on a motion for summary judgment under Rule 20, the court should first determine if there is a genuine issue requiring trial based only on the evidence in the motion record, without using the fact-finding powers enacted when Rule 20 was amended in 2010. The analysis of whether there is a genuine issue requiring a trial should be done by reviewing the factual record and granting a summary judgment if there is sufficient evidence to fairly and justly adjudicate the dispute and a summary judgment would be a timely, affordable and proportionate procedure.
40If, however, there appears to be a genuine issue requiring a trial, then the court should determine if the need for a trial can be avoided by using the powers under rules 20.04(2.1) and (2.2). As a matter of discretion, the motions judge may use those powers, provided that their use is not against the interest of justice. Their use will not be against the interest of justice if their use will lead to a fair and just result and will serve the goals of timeliness, affordability and proportionality, in light of the litigation as a whole.
41Hryniak v. Mauldin encourages the use of a summary judgment motion to resolve cases in an expeditious manner provided that the motion can achieve a fair and just adjudication. Speaking for the Supreme Court of Canada, Justice Karakatsanis opened her judgment by stating:
Ensuring access to justice is the greatest challenge to the rule of law in Canada today. Trials have become increasingly expensive and protracted. Most Canadians cannot afford to sue when they are wronged or defend themselves when they are sued, and cannot afford to go to trial. … Increasingly, there is recognition that a culture shift is required in order to create an environment promoting timely and affordable access to the civil justice system. This shift entails simplifying pre-trial procedures and moving the emphasis away from the conventional trial in favour of proportional procedures tailored to the needs of the particular case. The balance between procedure and access struck by our justice system must come to reflect modern reality and recognize that new models of adjudication can be fair and just.
42At para. 22 of her judgment in the companion case of Bruno Appliance and Furniture, Inc. v. Hryniak, 2014 SCC 8, Justice Karakatsanis summarized the approach to determining when a summary judgment may or may not be granted; she stated:
Summary judgment may not be granted under Rule 20 where there is a genuine issue requiring a trial. As outlined in the companion Mauldin appeal, the motion judge should ask whether the matter can be resolved in a fair and just manner on a summary judgment motion. This will be the case when the process (1) allows the judge to make the necessary findings of fact, (2) allows the judge to apply the law to the facts, and (3) is a proportionate, more expeditious and less expensive means to achieve a just result. If there appears to be a genuine issue requiring a trial, based only on the record before her, the judge should then ask if the need for a trial can be avoided by using the new powers provided under Rules 20.04(2.1) and (2.2). She may, at her discretion, use those powers, provided that their use is not against the interest of justice.
43Hryniak v. Mauldin does not alter the principle that the court will assume that the parties have placed before it, in some form, all of the evidence that will be available for trial and have respectively advanced their best case: Dawson v. Rexcraft Storage & Warehouse Inc., [1998] O.J. No. 3240 (C.A.); Bluestone v. Enroute Restaurants Inc. (1994), 18 O.R (3d) 481 (Ont. C.A.); Canada (Attorney General) v. Lameman, 2008 SCC 14, [2008] 1 S.C.R. 372 at para. 11.
44The onus remains on the moving party to show that there is no genuine issue requiring a trial, but the responding party must present its best case or risk losing: Pizza Pizza Ltd. v. Gillespie (1990), 75 O.R. (2d) 255 (Gen. Div.); Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (1996), 28 O.R. (3d) 423 (Gen. Div.), aff’d [1997] O.J. No. 3754 (C.A.).
45In my opinion, the case at bar is an appropriate case for a summary judgment. As the discussion below will reveal, DHMK put its best evidentiary foot forward and provided sufficient evidence to prove its damages claim. The Mund Group relied on what was essentially a legal argument about the measure of damages and did not provide rebutting appraisal evidence to counter DHMK’s evidence, and it did not meet the onus, which is on a defendant, of proving a failure to mitigate and, once again, rather relied on a legal argument based on the uncontested or uncontestable fact that DHMK was not prepared to accept the Mund Group’s post-judgment offer to complete the agreement that the Mund Group had repudiated.
46There are no issues of credibility and the background factual record has been established by the judgment of Justice B.P. O’Marra. This is an appropriate case for summary judgment; see Cuervo-Lorens v. Carpenter, 2017 ONCA 109, which is a similar type of case that was determined by summary judgment.
3. The Measure of Damages for an Abortive Real Estate Transaction
47When a contract for the sale of land fails to close because of the default of one of the parties, the other party’s expectations will have been disappointed. In contract law, an award of damages addresses the disappointment in expectations and compensates by using money to put the innocent party in the same economic position in which he or she would have been had the contract been performed: Bank of America Canada v. Mutual Trust Co., 2002 SCC 43 at para. 26; Dasham Carriers Inc. v. Gerlach, 2013 ONCA 707 at para. 29; Baud Corp., N.V. v. Brook, [1979] 1 S.C.R. 633 at para. 18.
48This goal for damages for breach of contract is refined and qualified by requirements that, to be recoverable: (1) the damages must be reasonably foreseeable (the remoteness principle): Hadley v. Baxendale (1854), 9 Exch. 341, 156 E.R. 145; Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd., [1949] 1 All E.R. 997 (C.A.); Koufos v. C. Czarnikow Ltd. (The Heron II), [1967] 3 All E.R. 686 (H.L.); (2) they must be unavoidable in the sense that the innocent party is treated as if it had an obligation to take reasonable steps to avoid loss; that is, to mitigate: Wertheim v. Chicoutimi Pulp Co., [1991] A.C. 301 (P.C.); Robinson v. Harrison v. Harman (1848), 1 Exch. 850; Southcott Estates Inc. v. Toronto Catholic District School Board, 2012 SCC 51, affg. 2010 ONCA 310, revg. [2010] O.J. No. 1772 (S.C.J.); British Columbia v. Canadian Forest Products Ltd., 2004 SCC 38 at para. 176; Red Deer College v. Michaels, [1976] 2 S.C.R. 32; and (3) the damages must be proved with some certainty: Penvidic Contr. Co. v. Int. Nickel Co. of Canada (1975), 53 D.L.R. (3d) 748 (S.C.C.); T.T.C. v. Aqua Taxi Ltd. (1957), 6 D.L.R. 721 (Ont. H.C.J.); Haauk v. Martin, [1927] S.C.R. 413; Chaplin v. Hicks [1911] 2 K.B. 786 (K.B.).
49The normal measure of damages at common law for the failure to complete a purchase of land is the difference between the contract price and the market value of the land. That difference is the benefit of the bargain to the vendor.
50In 100 Main Street Ltd. v. W.B. Sullivan Construction (1978), 20 O.R. (2d) 401 (C.A.), the leading case in Ontario about the calculation of a vendor’s claim for damages, Justice Morden stated that, subject to the duty of the vendor to mitigate, the proper date for taking the market value should be the time fixed for closing. Justice Morden stated at pp. 415-16:
Accepting that the basic principle of damages is that the plaintiff should be put in the position it would have been if the contract had been performed, it appears to me that even in the case of an anticipatory repudiation, the proper date for taking the market value should be as of the time fixed by the contract for completion, subject to the duty of the vendor to mitigate following acceptance of the repudiation. The approach which I adopt is set forth in the earlier part of [McGregor on Damages], supra, at p. 149:
Where a party to a contract repudiates it, the other party has an option to accept or not to accept the repudiation. If he does not accept it, there is still no breach of contract, and the contract subsists for the benefit of both parties and no need to mitigate arises. On the other hand, if the repudiation is accepted this results in an anticipatory breach of contract in respect of which suit can be brought at once for damages, and, although the measure of damages is still prima facie assessed as from the date when the defendant ought to have performed the contract, this amount is subject to being cut down if the plaintiff fails to mitigate after his acceptance of the repudiation.
See also 642947 Ontario Ltd. v. Fleischer (2002), 56 O.R. (3d) 417 (C.A.).
51In most abortive real estate transactions, the breach takes place on or about the closing date, and if the innocent party treats the breach as ending the contract, that is, accepts the repudiation, the damages, if any, will be assessed as about that date. It was Justice Morden’s view that if there was an anticipatory breach, that is, a repudiation before closing, and the anticipatory breach is treated as ending the contract, then the date set for closing is still used as the date to measure damages but subject to the principle of mitigation. In 100 Main Street Ltd., Justice Morden explained that unless the date of assessment was adjusted to accommodate the effort to mitigate, the assessment of the damages would not correspond with the goal of an award of damages. He stated at p. 420:
If the law casts a burden upon a plaintiff to take reasonable steps to mitigate his loss, because he is not entitled to recover for avoidable loss, it would appear to be inconsistent with this to calculate his damages “as of” a date upon which, because of the nature of the property and the market therefor, he could not reasonably be expected to have effected a mitigating resale. In a case of a falling market where the plaintiff has taken reasonable steps to avoid his loss such an approach would fail to cover his loss.
52In 642947 Ontario Ltd. v. Fleischer, supra, the Court of Appeal stated that the date of assessment is determined by what is fair in the circumstances of each case. The Court also stated that where the vendor retains the property to speculate on the market, damages will be assessed at the date of closing.
53The selection of the date of assessment is subject to adjustment because of the duty to mitigate. If the guilty party can show that the innocent party unreasonably missed an opportunity to reduce damages, that is, that the innocent party ought to have mitigated before the closing date, then the date for the assessment for damages will be adjusted. Conversely, the innocent party may show that it is not appropriate to use the closing date for the assessment of damages, and a later date should be selected because he or she should be allowed a reasonable opportunity to mitigate.
54The date of assessment is a variable. Justice Morden stated that the principle relating to the plaintiff’s duty to take reasonable steps to mitigate its loss is itself a factor in determining the measure of its loss; the essential object of the court’s inquiry is always to determine the plaintiff’s true loss having regard to the legal policy that avoidable losses are not recoverable.
55It is worth noting that there is, in fact, no positive duty or obligation to mitigate, apart from the duty of self-interest; rather, it is a principle of the calculation of damages that the innocent party is denied recovery for avoidable loss. A person mitigates for the sensible reason that he or she would not otherwise recover for the growing losses because, for the purposes of calculating compensatory damages, the innocent party is treated as if he or she mitigated. Talisman Homes Ltd. v. Endicott (2002), 2 R.P.R. (4th) 109 (Alta. Q.B.) is an example where damages were reduced because of the vendor’s failure to mitigate.
56In 100 Main Street Ltd. v. W.B. Sullivan Construction, supra, in his reasons, in addition to outlining the general principles, Justice Morden noted that the onus is on the defendant to prove a failure to mitigate but that this onus did not relieve the plaintiff from proving the elements of the damages claim. The proper course was for the plaintiff to adduce evidence of the contract price and of the market value or resale price relied upon to establish the loss of value. Generally, this will require expert evidence; that is, appraisal evidence. The price of any resale, if it occurred after the date of assessment, could be resorted to only as evidence of the market value on the relevant assessment date. Justice Morden stated at p. 423:
As I have said, with respect to the issue of mitigation, the onus is on the defendant. However, the onus on the defendant to prove failure to mitigate does not relieve the plaintiff from proving an obvious element in the calculation of his damages. McGregor on Damages, supra, in para. 212, p. 149, puts the matter this way:
The onus of proof on the issue of mitigation is on the defendant. If he fails to show that the plaintiff ought reasonably to have taken certain mitigating steps, then the normal measure will apply.
4. Analysis
57In the case at bar, the Mund Group misconceives the formula for the measure of damages and conflates, more than once, the general principles. One error is that the Mund Group equates the contract price with the value of the land. It submits that the value of the property must be determined having regard to the specific bargain reached by the parties and that the fair market value of the land is determined by the parties’ particular bargain. This is just wrong.
58The fair market value is what the land is worth in the competitive marketplace, not what the immediate parties believe or hope that the land is worth. The fair market value of the land is objective not subjective. The fair market value of land is its exchange value; i.e., what a willing buyer would pay for the land in the open market and is based upon what a seller and buyer, each knowledgeable and willing, would pay and would accept as payment respectively for the land on the open market: Revenue Properties Co. v. Victoria University, [1993] O.J. No. 843 (Div. Ct.); Musqueam Indian Band v. Glass, 2000 SCC 52 at para. 9.
59If the value of the land were equal to the contract price then obviously there would never be a difference between them and the measure of damages would always be nil. The Mund Group’s erroneous notion of the value of the land as being determined by the parties’ bargaining aspirations underlies the Mund Group’s fallacious argument that there are no damages in the immediate case.
60As the Mund Group would have it, the market value of the land in the immediate case is to be determined by the application of a capitalization rate to the NOI. Thus, as the Mund Group would have it, the market value of the land at 5 Coish Place is to be determined by a representation about the expenses of operating the building and the purchaser’s subjective aspirations as to how profitable that operation should be after deducting the expenses from the fixed rental income. That calculation may explain why the Mund Group offered to pay $5.3 million, but it reveals nothing about the objective fair market value of the land.
61From the appraisal evidence of Mr. Hurley, the fair market value of 5 Coish Place at the time of closing was $4.5 million. In other words, it was a bad bargain for the Mund Group when it agreed to pay $5.3 million and an excellent bargain for the vendor because the Mund Group was paying $800,000 more than the objective fair market value of the land.
62The Mund Group knew it was paying too much for the land, but it thought it could enforce a warranty, which would warrant the value of the income stream - not the value of the land. The warranty, however, did not and does not determine the objective market value of the land, which is something determined by the marketplace. And the warranty does not change what was the purchase price that the Mund Group agreed, but failed, to pay; i.e., $5.3 million.
63I appreciate that the warranty explains why the Mund Group was prepared to pay more than the land was actually worth in the marketplace, but the fact remains that the fair market value of the land was $4.5 million in June 2013 and the Mund Group had agreed to pay but failed to pay the purchase price of $5.3 million.
64By August of 2014, the land value had declined to $4.27 million with the result that using August 2014 as the date of assessment and giving credit for the forfeited deposit, DHMK lost the benefit of the bargain of selling land worth $4.27 million for $5.3 million.
65The Mund Group’s argument that there was no loss of the benefit of the bargain for DHMK is sophistry. Its argument perverts both parts of the formula of the measure for damages. Instead of the value of the purchase price, which plainly and expressly is $5.3 million, the Mund Group substitutes its subjective valuation of the investment return it anticipated. Instead of the fair market value of the land, it substitutes the fair market value of the land if, and only if, the property were being sold subject to a vendor’s warranty respecting NOI being at least $441,925. The fair market value of land, however, is an objective measure of what the land is worth in the marketplace.
66The calculation of DHMK’s damages is in accord with the normal principles of measuring the benefit of the bargain, and it has proven its loss in accordance with the normal principles of contract damage assessment. The warranty changes nothing.
67A simple example can make the point. Assume that instead of warranting the net income stream, DHMK had warranted that the HVAC system in the building was in good working condition but a pre-closing inspection revealed that the system was not working and required $100,000 of repair work. In those circumstances, if the Mund Group repudiated the agreement and refused to close, then in accordance with normal contract law principles, DHMK would be discharged from its unperformed contract promises and it would be entitled to sue for its benefit of the bargain without abatement for its discharged unperformed promises.
68This example illustrates what happened in the immediate case, and explains why Justice B.P. O’Marra quite correctly concluded that the Mund Group ought to have either walked away from the agreement of purchase and sale if it was unhappy with the net income stream, or it could have closed and sued DHMK, in which case DHMK would not have been discharged of its unperformed promises and the warranty could have been enforced. But the Mund Group breached the agreement, and DHMK was discharged from its unperformed promises, including the warranty, and it was entitled to be put in the same economic position that it would have been in had the Mund Group performed its promises, which is to say that it should have received $5.2 million (it had the $100,000 deposit) from the Mund Group.
69This brings me to the Mund Group’s fallacious argument that DHMK must account for the income it has been receiving from the property and set it off against its claim for damages. The Mund Group says that DHMK is double counting because it had the land which was earning rental income. There, however, is no double counting. DHMK was entitled to use the land until it was paid for it. DHMK is not making a claim for interest on the unpaid purchase moneys, which would be an example of double counting.
70Finally, I shall address the Mund Group’s fallacious argument that DHMK failed to mitigate. The general principles of mitigation were summarized by the Supreme Court of Canada in Southcott Estates Inc. v. Toronto Catholic District School Board, supra, at paras. 23-25:
- This Court in Asamera Oil Corp. v. Seal Oil & General Corp., [1979] 1 S.C.R. 633, cited (at pp. 660-61) with approval the statement of Viscount Haldane L.C. in British Westinghouse Electric and Manufacturing Co. v. Underground Electric Railways Company of London, Ltd., [1912] A.C. 673, at p. 689:
The fundamental basis is thus compensation for pecuniary loss naturally flowing from the breach; but this first principle is qualified by a second, which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps.
In British Columbia v. Canadian Forest Products Ltd., 2004 SCC 38, [2004] 2 S.C.R. 74, at para. 176, this Court explained that "[l]osses that could reasonably have been avoided are, in effect, caused by the plaintiff's inaction, rather than the defendant's wrong." As a general rule, a plaintiff will not be able to recover for those losses which he could have avoided by taking reasonable steps. Where it is alleged that the plaintiff has failed to mitigate, the burden of proof is on the defendant, who needs to prove both that the plaintiff has failed to make reasonable efforts to mitigate and that mitigation was possible (Red Deer College v. Michaels, [1976] 2 S.C.R. 324; Asamera; Evans v. Teamsters Local Union No. 31, 2008 SCC 20, [2008] 1 S.C.R. 661, at para. 30).
On the other hand, a plaintiff who does take reasonable steps to mitigate loss may recover, as damages, the costs and expenses incurred in taking those reasonable steps, provided that the costs and expenses are reasonable and were truly incurred in mitigation of damages (see P. Bates, "Mitigation of Damages: A Matter of Commercial Common Sense" (1991), 13 Advocates' Q. 273). The valuation of damages is therefore a balancing process: as the Federal Court of Appeal stated in Redpath Industries Ltd. v. Cisco (The), [1994] 2 F.C. 279, at p. 302: "The Court must make sure that the victim is compensated for his loss; but it must at the same time make sure that the wrongdoer is not abused." Mitigation is a doctrine based on fairness and common sense, which seeks to do justice between the parties in the particular circumstances of the case.
71A wronged plaintiff is entitled to recover damages for the losses he or she has suffered but the extent of those losses may depend on whether he or she has taken reasonable steps to avoid their unreasonable accumulation: Banco De Portugal v. Waterlow & Sons, Ltd., [1932] AC 452 (H.L.); Karas v. Rowlett, [1944] S.C.R. 1; Red Deer College v. Michaels, [1976] 2 S.C.R. 324 at p. 331.
72The onus of proving that the innocent party failed to mitigate rests upon the guilty party: 100 Main Street Ltd. v. W.B. Sullivan; supra; Dobson v. Winton & Robbins Ltd., [1959] S.C.R. 755.
73In assessing the innocent party’s efforts at mitigation, the courts are tolerant, and the innocent party need only be reasonable, not perfect; in deciding what is a reasonable way to mitigate the effects of a breach of contract, the innocent party is not to be held to too nice a standard; it need only act reasonably, using what it knows then, without hindsight, and it need not do anything risky: Banco De Portugal v. Waterlow & Sons, Ltd., supra; Janiak v. Ippolito, [1985] 1 S.C.R. 146 at para. 28; Syncrude Canada v. Canadian Bechtel Ltd., [1997] A.J. No. 503 (C.A.) at para. 41.
74The innocent party is only obligated to act reasonably. He or she need not destroy or sacrifice rights or property of his or her own in mitigation: Elliott Steam Tug Co. v. Shipping Controller, [1922] 1 K.B. 127 (C.A.) at pp. 140-141; Cellular Baby Cell Phones Accessories Specialist Ltd. v. Fido Solutions Inc., 2017 BCCA 50.
75In the immediate case, it was eminently reasonable for DHMK to decline to accept the Mund Group’s offer to reinstate and complete the transaction that the Mund Group had breached, which was manifestly just an invitation to be sued for an alleged breach of warranty, of which DHMK had been discharged from performing, precisely because the Mund Group had wrongfully refused to close.
D. Conclusion
76I grant DHMK judgment for $930,000.
77If the parties cannot agree about the matter of costs, they may make submissions in writing beginning with DHMK’s submissions within 20 days of the release of these Reasons for Decision followed by the Mund Group’s submissions within a further 20 days. There shall be no reply submissions.
Perell, J.
Released: April 20, 2017
