Saramia Crescent General Partner Inc. v. Delco Wire and Cable Limited et al.

Citation: 2017 ONSC 961 Court File No.: CV-14-497838 Date: 2017-05-02 Ontario Superior Court of Justice

Between: Saramia Crescent General Partner Inc. (Plaintiff) – and – Delco Wire and Cable Limited and IEWC Canada Corp. (Defendants)

Counsel: Luisa J. Ritacca and Fredrick Schumann, for the Plaintiff Patrick Duffy and Khrystina McMillan, for the Defendants

Heard: December 5-9, 2016, January 23, 2017 Before: Akbarali, J.

Overview

[1] The plaintiff, Saramia Crescent General Partner Inc. (“Saramia”), was the owner and landlord of an industrial property leased by the defendant IEWC Canada Corp. IEWC repudiated its lease. Saramia brings this action for damages, alleging it lost both the steady stream of lease income it was entitled to over the eight years that remained in the lease term, and the appreciation in value of the leased property which it was forced to sell on the repudiation. The defendants admit liability but argue the breach was an efficient breach that caused Saramia no damages. They argue Saramia sold the property for fair market value, and by doing so, was made whole.

Background

The Investment in the Property

[2] Saramia is a single-purpose corporate vehicle, incorporated to purchase an industrial property known as 1 Saramia Crescent in Vaughan, Ontario. Saramia owned the property on behalf of Saramia Crescent Limited Partnership (“Saramia LP”). Saramia has two limited partners: Scarborough Cawthra Limited and Diversified Saramia Crescent Limited Partnership.

[3] The property was identified by Agellan Capital Partners, an asset manager, as a suitable investment property. In 2011, Agellan entered into an agreement of purchase and sale for the property through a shell corporation and then assigned that agreement to Saramia. The purchase price was $2.575 million, or about $94 per square foot, a price Agellan considered below replacement cost. The cap rate for the property, a figure which represents net rent divided by purchase price, was 7.04%.

[4] Saramia was looking for a long-term income-generating investment that would provide it with capital appreciation and lease income. The property fit the bill. It was wholly occupied by a single tenant, the defendant Delco Wire and Cable Limited, under a lease that was due to expire on August 31, 2015. The lease was at above-market rates. Saramia negotiated a six-year extension of the lease to August 30, 2021 in exchange for a waiver of certain additional rent expenses that Delco owed under the terms of the lease. Saramia would not have bought the property had it not been able to negotiate the lease extension.

[5] On November 15, 2011, Saramia’s purchase of the property closing. At the same time, it acquired the rights and responsibilities of the previous owner under the terms of the lease and entered into a Lease Extension and Amending Agreement with Delco. Saramia engaged Agellan as the asset manager of the property pursuant to an asset management agreement.

The Assignment of the Lease to IEWC and IEWC’s Subsequent Repudiation

[6] Delco sold its assets to the defendant IEWC in December 2012. At that time, with Saramia’s consent, IEWC took over the lease of the property, although the assignment provided that Delco also remained liable, along with IEWC, for the obligations under the lease.

[7] Shortly after the purchase, IEWC began efforts to try to sublet the property. It retained CBRE Limited, a commercial real estate services firm, to assist in finding a tenant. By the end of the first quarter of 2013, Saramia learned that IEWC was attempting to sublet the property. Around this time, IEWC moved its operations from the property to consolidate them at another of its facilities but it continued to occupy the property in that it stored some materials there.

[8] IEWC’s efforts to find a subtenant were not successful. The property had certain features that were not attractive to many potential tenants. IEWC asked Saramia whether it would consider selling the property.

[9] Saramia would have been happy to continue to hold the property with a long-term tenant but in the circumstances, Saramia was prepared to consider the sale of the property together with a lease buy-out.

[10] IEWC’s broker brought three potential purchasers to Saramia beginning in the spring of 2013. I infer that IEWC was aware of the status of the efforts to first sublet, and then sell, the property through the involvement of its broker.

[11] Each potential purchaser entered into an agreement of purchase and sale for the property in the amount of $3.45 million, a price Saramia set for the property before the repudiation on the understanding that it would also receive a lease buy-out from IEWC. Each agreement of purchase and sale included a condition precedent that Saramia satisfy itself that it could deliver vacant possession of the property on closing. If it could not, Saramia could walk away from the deal. Each of the three potential purchasers sought to occupy the premises themselves; they were not investors, but owner-occupiers.

[12] Terra Attard, the vice-president and secretary of Saramia, and an executive at Agellan, gave evidence at trial. Ms. Attard holds an indirect ownership interest in one of Saramia’s limited partners. She is experienced in real estate, but she did not testify as an expert. I find her to be a knowledgeable and credible witness. Ms. Attard testified that she thought the purchase price for the property was market for what could be achieved in view of the vacant possession condition. Potential buyers would have to spend money on due diligence without knowing for certain that Saramia could deliver vacant possession. No analysis was done as to the fair market value of the property, either with or without the condition. No appraisal was performed.

[13] The buyers named in the first two agreements of purchase and sale did not proceed. The third agreement of purchase and sale was entered into on September 12, 2013. By October 2013, IEWC had mostly vacated the property.

[14] In late October 2013, Saramia attempted to negotiate a lease buy-out with IEWC. Negotiations were short and unsuccessful.

[15] Frank Camenzuli, an executive at Agellan who also holds an indirect ownership interest in one of the limited partners of Saramia, gave evidence at trial. He too was knowledgeable and credible. Like Ms. Attard, he did not testify as an expert. Mr. Camenzuli gave evidence that a standard industry lease buy-out would be in the range of 20-25% of the remaining lease obligation, or about two years of the remaining lease term in this case. IEWC made only a paltry offer of two months’ rent, not enough to cover Saramia’s costs. IEWC sought a copy of the Agreement of Purchase and Sale, which Saramia could not provide because it contained a confidentiality clause.

[16] On November 1, 2013, IEWC’s counsel advised Saramia that IEWC would pay November’s rent but would make no rent payments thereafter. On November 14, 2013, Saramia accepted IEWC’s repudiation. The next day, IEWC’s counsel wrote to Saramia’s counsel advising that Saramia should proceed to sell the property to mitigate its loss.

[17] Saramia had no real option but to proceed with the sale of the property. Without the income stream from the lease, Saramia could not afford the ongoing maintenance and mortgage expense of the property.

[18] There was no reasonable hope of finding a tenant for the property in a reasonable amount of time, given IEWC’s failed attempts and the features of the property that made it unsuitable for many tenants. That IEWC’s own broker gave up its attempts to sublet the property and instead began searching for purchasers is evidence that it did not think a tenant could be found. Ms. Attard testified that finding a new tenant would have required Saramia to offer a prohibitively high inducement payment. I conclude that efforts to look for another tenant would have been futile.

[19] Moreover, because of IEWC’s repudiation, Saramia was able to deliver vacant possession of the property to the purchaser. Had Saramia not proceeded with the sale, it would have exposed itself to a claim by the purchaser. I thus conclude that Saramia had to proceed to sell the property[^1].

[20] The property closed on December 10, 2013. After paying closing costs, a break fee to Saramia’s mortgagee, and an incentive fee owing to Agellan, the proceeds of sale were distributed to Saramia’s partners as required by the asset management agreement. Saramia itself could not reinvest the proceeds. By the terms of the agreement, Saramia was a single-purpose entity incorporated only to hold the property until disposition.

[21] The value of the property appreciated significantly in the two years that Saramia owned it. The internal rate of return on the investment was 25.62%. After deducting the incentive fee Saramia paid to Agellan, the internal rate of return was 20.98%. None of this capital appreciation had anything to do with the defendants.

Issues

[22] The question before me is what, if any, damages Saramia suffered by reason of IEWC’s repudiation of the lease. This requires an analysis of the following issues:

a. Are Saramia’s losses properly calculated by having regard to the sale price of the property? To answer this, I must consider the following questions:

i. Was the property was sold at fair market value?

ii. If so, was Saramia made whole by the sale? If not, are Saramia’s losses quantified by the difference between the sale price and the fair market value of the property at the time of sale?

b. Alternatively, are Saramia’s losses better calculated using a discounted cash flow analysis, and if so, which assumptions are appropriate to quantify its losses on that basis? The discounted cash flow analysis calculates Saramia’s loss by quantifying the difference between (i) a “but for” scenario, where the lease is not breached, Saramia receives lease income and pays related expenses, and then sells the property at the end of the lease, and (ii) an “actual” scenario, where the lease is breached, Saramia sells the property and invests the proceeds in an alternative investment to mitigate its losses. The critical assumptions in the discounted cash flow analysis are:

i. which value should be used for the property in the analysis - the actual sale value in 2013 or the fair market value in December 2015 (an amount that reflects the two years of lost capital appreciation to which Saramia has limited its claim), and

ii. which alternative investment should be used in the analysis?

c. Is the break fee Saramia paid to its mortgagee (for breaking its mortgage early so it could sell the property) a loss arising from the repudiation of the lease?

The Experts

[23] The resolution of the issues raised in this action requires an assessment of the evidence given by the expert witnesses who testified at trial. In support of its claim for lost capital appreciation, Saramia called an appraiser, Paul Stewart of Avison Young, to give evidence as to the fair market value of the property. Mr. Stewart’s report provided an assessment of the fair market value in December 2015. Although on Saramia’s theory of loss, it could claim lost capital appreciation over the eight years remaining in the lease term, it limits its claim to two years of lost capital appreciation and relies on Mr. Stewart’s evidence to establish quantum.

[24] Saramia also called Peter Armstrong of KPMG, a forensic accountant. The defendants called Prem Lobo of Cohen Hamilton Steger, also a forensic accountant.

[25] The parties consented to the qualification of each of these witnesses as an expert. I review the evidence of each of them in the context of my analysis of the issues, below.

Are Saramia’s losses properly calculated by having regard to the sale price of the property?

[26] The defendants’ expert, Mr. Lobo, testified that the fair market value of a property is the present value of the future economic benefits associated with the property. If fair market value was obtained, Mr. Lobo testified that there was no loss to Saramia because it would have received the present value of the future economic benefits of 1 Saramia Crescent. Mr. Lobo concluded the property had been sold in 2013 for fair market value. His view was that this determination ended the enquiry into Saramia’s loss.

[27] The defendants also argue that if the sale was not at fair market value, Saramia’s loss is limited to the difference between the actual sale price and the fair market value of the property. They argue that Saramia had to prove that it did not sell at fair market value, or prove the difference between the sale price and fair market value, and that it has failed to do so. As a result, they claim Saramia is entitled to only nominal damages.

[28] Saramia’s expert, Mr. Armstrong, rejected Mr. Lobo’s theory. In his view, it unreasonably assumes immediate, perfect and cost-free mitigation. He concluded that Saramia’s losses are better captured using a discounted cash flow analysis (which I discuss later in these reasons). Mr. Armstrong also considered whether Saramia received a reduced price on the sale of the property in 2013. Based on his analysis he assumed that the price received approximated fair market value. Mr. Armstrong testified that this was an assumption only; Saramia may have received less than fair market value, but he could not quantify the impact the vacant possession condition may have had on the sale price.

[29] Saramia argues that a sale at fair market value would not compensate it for its losses, and in any event, the property was not sold at fair market value.

Was the property sold at fair market value?

[30] I find on the evidence that the property was not sold at fair market value.

[31] First, Mr. Lobo testified that fair market value is the price negotiated between a willing buyer and a willing seller. He made it clear that his theory that a fair market value sale makes a landlord whole after a tenant’s breach of lease does not assume that a landlord is forced to sell the property; rather, it assumes that the landlord has chosen to sell the property as a business decision.

[32] I have found that Saramia was not a willing seller; it was forced into the sale of the property by IEWC. Accordingly, and in reliance on Mr. Lobo’s evidence on this point, I find that the property was not sold at fair market value.

[33] Second, there is no evidence before me that supports the argument that the property was sold at fair market value.

[34] No one put a retrospective appraisal of the property as of the date of sale before me, although either party could have done so. Mr. Stewart was not asked about the fair market value of the property in 2013. The parties chose to leave a gap in the expert evidence.

[35] The evidence before me establishes that the property was exposed to the market for a reasonable period of time, but Saramia raised concerns that it was exposed through only one broker. There was no evidence before me about whether exposure through a single broker was adequate. Saramia also raised concerns about the fact that the property was unlisted, which may have depressed the sale price. Ms. Attard and Mr. Camenzuli testified about their belief that the property’s value was negatively affected by the vacant possession condition.

[36] Ms. Attard also testified that the property was not appraised in 2013 and no analysis was done at that time of market rates.

[37] Mr. Armstrong testified that he was unable to draw a conclusion on whether the sale price represented the fair market value of the property absent the condition.

[38] Mr. Lobo testified that the property was sold for fair market value. He indicated this was Mr. Armstrong’s conclusion when clearly it was not.

[39] Mr. Lobo relied on evidence from Ms. Attard that the property was sold at “market”. In fact, Ms. Attard’s evidence at trial was that it was sold in the range of market for a property with the condition attached, but that she believes the condition negatively affected the value of the property. I do not accept that Ms. Attard’s evidence establishes that the property was sold at fair market value. Ms. Attard did not give evidence as an expert or an appraiser.

[40] Mr. Lobo also relied on the sale price of $3.45 million, which was substantially higher than the price at which Saramia purchased the property two years earlier. He also pointed to the fact that the property’s value in 2015 rose from 2013 on a similar trajectory as it did between 2011 and 2013. The fact that the property appreciated in value over that time says nothing about whether the price obtained for the property in 2013 was fair market value; it only indicates that the property rose in value between 2011 and 2013, and then again between 2013 and 2015. I reject Mr. Lobo’s evidence that the appreciation in price establishes that $3.45 million was fair market value for the property in 2013.

[41] Moreover, Mr. Stewart’s evidence, which was largely unchallenged, was that by 2015, the property was worth substantially more than Saramia sold it for in 2013. Had IEWC not breached the lease, and had Saramia sold in 2015, Saramia would have enjoyed further capital appreciation and two more years of lease income. Mr. Lobo produced no calculations comparing the economic benefits of the property at the time of the 2015 appraisal to the 2013 sale price. If the 2013 sale price was the fair market value, one might expect (on Mr. Lobo’s theory) that it would equal the present value of the future economic benefits of the property as of the 2015 appraisal. Mr. Lobo gave no such evidence.

Are Saramia’s losses calculated by quantifying the difference between the sale price and the fair market value at the time of sale?

[42] Since I have found that the property was not sold at fair market value, on the defendants’ theory, the sale did not make Saramia whole. I now consider whether, since the property was not sold at fair market value, Saramia’s loss is limited to the difference between the fair market value of the property at the time of sale and the actual sale price.

[43] This argument requires an analysis of the legal approach to damages for breach of lease. The starting point for this analysis is Highway Properties Ltd. v. Kelly, Douglas & Co., 1971 123 (SCC), [1971] S.C.R 562 at para. 14, where Laskin J. held:

The developed case law has recognized three mutually exclusive courses that a landlord may take where a tenant is in fundamental breach of the lease or has repudiated it entirely, as was the case here. He may do nothing to alter the relationship of landlord and tenant, but simply insist on performance of the terms and sue for rent or damages on the footing that the lease remains in force. Second, he may elect to terminate the lease, retaining of course the right to sue for the rent accrued due, or for damages to the date of termination for previous breaches of covenant. Third, he may advise the tenant that he proposes to re-let the property on the tenant’s account and enter into possession on that basis. Counsel for the appellant, in effect, suggests a fourth alternative, namely, that 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 of cl. 9 [a clause in the lease that required the tenant in that case to carry on its business in the premises continually because the tenant was an anchor tenant].

[44] Laskin J. concluded that damages for breach of lease were available on the footing of a present recovery of damages for losing the benefit of the lease over its unexpired term. He held that it was not sensible to pretend that a lease is not also a contract. The remedies ordinarily available to redress repudiation of covenants are available to landlords where a lease has been repudiated: see paras. 25-27.

[45] With respect to the damages relating to the repudiation of the clause in the lease requiring the tenant to carry on its business, Laskin J. noted that the parties had some agreement so he did not address it further. However, he did not suggest that damages for breach of lease would be restricted to present recovery of damages for losing the benefit of the lease over its unexpired term when circumstances demonstrated additional losses, such as those flowing from the breach of the clause requiring the anchor tenant to remain in business in the space.

[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. As I have noted, additional damages may be appropriate depending on the circumstances, such as damages flowing from breaches of other covenants contained in the lease.

[47] However, this measure assumes that the rental premises are available for re-letting. Here, the premises have been sold. The question then becomes how the sale affects the calculation of damages. As I have noted, the defendants argue that the fair market value of a property is the present value of its future economic benefits; therefore a sale at fair market value makes the plaintiff whole. They argue that, where the sale is not at fair market value, damages are limited to the difference between the sale price and the fair market value.

[48] The defendants point to two cases they urge support this conclusion. In 365 Bay New Holdings Ltd. v. McQuillan Life Insurance Agencies Ltd., (2007) 155 A.C.W.D. (3d) 683, Perell J. considered a situation where a landlord and tenant signed an Offer to Lease space in a multi-tenant building, but the tenant never took possession. The premises were re-let almost a year later. About a year after that, the premises were sold. Having found that the Offer to Lease constituted a binding agreement, Perell J. had to determine the correct approach to damages.

[49] He first assessed damages as if there had been no sale, using the approach identified by Laskin J. in Highway Properties, calculating 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. He concluded that the re-letting in that case was mitigation and calculated the loss accordingly.

[50] Perell J. then went on to consider the effect of the sale on the landlord’s losses. He noted that one perspective is to “view the landlord’s position as the owner of a capital asset…that reflects the value of the aggregate of its net income streams”. In other words, the value of the property may reflect the valuation of its tenancies. Perell J. did not have the evidence before him to determine whether the sale of the property was a loss, or whether the landlord profited, in which case he found the sale of the property would be mitigatory and credit would have to be given for the reduction of the landlord’s damages. Perell J. thus ordered a reference on the issue of damages.

[51] The parties then sought clarification; the plaintiff wanted to be able to argue that the sale increased its damages. Perell J. disagreed, finding that the landlord’s loss was the loss of the income stream. In the result, the sale could only mitigate, or reduce, the loss: see 365 New Bay Holdings Limited v. McQuillan Life Insurance Agencies Ltd., 2007 CarswellOnt 1923 at paras. 11-12.

[52] On appeal to the Court of Appeal, Perell J.’s conclusion on liability was overturned. The Court of Appeal noted that both parties challenged Perell J.’s approach to the calculation of damages, including the effect of the sale of the property by the landlord during the currency of the lease term. The Court of Appeal found that the issues were moot given its conclusion on liability, and declined to address the damages issues. However, it cautioned that it should not be taken as affirming the approach to damages that Perell J. employed.

[53] The defendants also rely on Canadian Medical Laboratories Ltd. v. Stabile, 1997 CarswellOnt 352 (C.A.); aff’g 1992 CarswellOnt 593 (Gen. Div.). In this case, the parties signed an offer to lease but no formal lease was executed. The tenant began paying rent in December 1987 but did not occupy the space. In April 1988 the landlord entered into an agreement of purchase and sale for $5.8 million that was conditional on the execution of a lease by the tenant. The tenant expressed concern about a zoning issue and declined to sign the lease. The deal to sell the property fell apart. A few months later, the landlord sold 50% of its interest in the property based on an overall valuation of $5.7 million without the lease. The Court of Appeal noted that, based on these facts, “one could conclude that the market saw the value of the lease at $100,000.”

[54] Although the Court of Appeal concluded that this established a loss of $50,000 for a particular period of the unexpired term of the lease, it found that “events proved that the losses were greater than was reflected by the sale price” and considered those subsequent events. At para. 34, the court held 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. If an owner cannot afford to the hold the building without a tenant, a sale may be the only alternative and the sale may reflect the loss when compared to a valuation assuming a tenancy…. However, where the basis for the assessment of damages put forward by the owners is the loss of rentals, there can be no pretense of mitigation of rental loss if efforts were not directed to seeking tenants.

[55] However, the court also found that a failure to seek tenants may be of no account if any amount of effort would have been fruitless: see para. 25. In this case, I have concluded that efforts to re-let the premises would have been fruitless.

[56] I do not disagree with the holdings in these cases. However, I find that the holdings do not go so far as to support the proposition the defendants claim – that a sale at fair market value is necessarily a mitigatory measure that makes the landlord whole. Rather, these cases establish that a sale may (or may not) be in mitigation of a landlord’s losses and may (or may not) reduce the landlord’s loss.

[57] The forced sale of 1 Saramia Crescent distinguishes this case from 365 New Bay Holdings and Stabile, where the landlords’ decision to sell was independent of the tenants’ actions. In this case, IEWC made efforts, through its broker, to find a purchaser for the property. These efforts produced the agreement of purchase and sale. IEWC subsequently refused to meaningfully negotiate the lease buy-out that Saramia expected. IEWC then repudiated the lease. Its actions had the effect of binding Saramia to the agreement of purchase and sale at the price to which Saramia agreed when reasonably expecting a lease buy-out. IEWC thus forced Saramia into the sale of the property.

[58] In these circumstances, Mr. Lobo’s theory that Saramia’s loss should be measured by calculating the difference between the fair market value at the time of sale and the sale price does not adequately account for Saramia’s loss. 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. I find that the sale of the property did not put Saramia in the position in which it would have been but for IEWC’s breach.

[59] In addition, I accept Mr. Armstrong’s evidence that Mr. Lobo’s theory that a fair market value sale makes a landlord whole (or that damages are limited to the difference between the fair market value and the sale price) assumes immediate, perfect and cost-free mitigation. In other words, the theory assumes that immediately on the sale of the property, Saramia was able to invest in an identical property, with an identical lease.

[60] But the evidence discloses no such property was available. Mr. Stewart identified a number of properties that were comparable to 1 Saramia Crescent for the purposes of appraising its value – for example, they were industrial properties in the same geographic area, with features similar to 1 Saramia Crescent. However, these properties were not comparable investments. The cap rates of the properties Mr. Stewart identified were in the 4-5% range, well below the 7.04% cap rate that applied to 1 Saramia Crescent when Saramia bought it in 2011. The price per square foot of the comparable properties ranged between $162 and $211. When Saramia purchased 1 Saramia Crescent, it did so at a price per square foot of about $94.

[61] Moreover, although Saramia could not reinvest the proceeds of sale in another property, Agellan continues to search for suitable investment properties for all its clients. Agellan views approximately 1500 listings of properties per week. Despite its constant and active searching, Agellan has not purchased any other property in Canada since 1 Saramia Crescent, although it has made some unsuccessful bids. While comparable properties have been on the market, they have not been comparable from an investment standpoint, that is, they are not comparable having regard to yield, risk management and price per square foot. The purchase price for similar properties has risen, and is no longer below replacement cost. At 4-5%, the cap rates for similar properties are much lower than the 7-7.5% that Agellan targets.

[62] I thus reject the defendants’ argument that Saramia’s damages are necessarily limited to the difference between the actual sale price and the fair market value. That may be an appropriate measure of damages in some cases, but it not an appropriate measure of damages here, for the reasons set out above.

[63] I also reject the defendants’ argument that having not quantified its losses having regard to the sale price of the property, Saramia is entitled only to nominal damages. This is not a case where the plaintiff has adduced no evidence of loss. The plaintiff has adduced significant evidence of its loss, quantified on a different measure than that for which the defendants contend. Saramia’s damages may be, by their inherent nature, hard to assess, but in such circumstances, the court will do the best that it can: see Martin v. Goldfarb, 1998 4150 (ON CA), 1998 CarswellOnt 3319 (C.A.) at para. 75. I now turn to whether the discounted cash flow analysis is an appropriate method by which to quantify Saramia’s loss.

Are Saramia’s losses better calculated using a discounted cash flow analysis, and if so, which assumptions are appropriate to quantify its losses on that basis?

[64] Mr. Armstrong considered how a discounted cash flow analysis would quantify Saramia’s loss[^2]. The discounted cash flow analysis reflects the difference between two scenarios that were referred to before me as (i) the but for scenario, and (ii) the actual scenario.

[65] In the but for scenario, we assume that the lease is not repudiated, IEWC meets its obligations and at the end of the lease period in 2021, Saramia sells the property. Simply put, this scenario calculates the value of Saramia’s investment at the end of 2021 by adding the lease income, less expenses, to the sale price of the property in 2021. As I explain further below, the 2021 sale price is calculated by using either the 2013 sale price, or by using the 2015 fair market value that Mr. Stewart determined. In both cases, these amounts are held steady in real terms because the experts have first applied an inflationary rate of growth to the value of the property to 2021, and then discounted that value by the same rate to reach a present value for the property. The “but for” calculation in effect tells us what position Saramia would have been in at the end of the lease term had the lease not been repudiated. It either provides for no recovery for lost capital appreciation in the property (by using the sale price in 2013 in the calculation) or it limits the recoverable capital appreciation to two years (by using the 2015 fair market value in the calculation). Although on Saramia’s theory it could claim lost capital appreciation to 2021, it has limited its claim to lost capital appreciation to 2015 – an amount that it has been able to prove through Mr. Stewart’s evidence, which I review below.

[66] The actual scenario assumes that Saramia took the proceeds of sale it received from the property and invested it into an alternative investment. It assumes income from the investment, and deducts costs associated with the alternative investment. It calculates the growth and income from the investment over the lease term, and arrives at a figure representing what Saramia would have in 2021 had it invested the proceeds of sale (calculated either at the 2013 sale price or the 2015 fair market value, depending on the assumption employed). The actual scenario is not really an actual scenario – as I have noted, Saramia could not reinvest the proceeds of sale. The actual scenario represents a scenario in which Saramia reasonably mitigates its loss, as it is required to do.

[67] On the discounted cash flow analysis, the difference between the but for scenario and the actual scenario quantifies Saramia’s loss resulting from the repudiation of the lease.

[68] Mr. Armstrong produced four calculations of loss under the discounted cash flow analysis which varied in two key assumptions. The first key assumption was the value of the property. In two calculations Mr. Armstrong used the 2013 sale price, and in the other two, he used Mr. Stewart’s calculation of the property’s fair market value in 2015. The second key assumption was the alternative investment. In two calculations Mr. Armstrong used a basket of Canadian REIT indexes, and in the other two, he used a group of REITs focused on Canadian industrial, commercial and retail assets.

[69] Mr. Lobo also performed a discounted cash flow analysis as an alternative measure of assessing Saramia’s loss[^3]. He produced four calculations that differed in the same key assumptions, that is, the value of the property and the alternative investment. Like Mr. Armstrong, Mr. Lobo did two calculations using the sale price of the property in 2013 and two using Mr. Stewart’s calculation of the property’s fair market value in December 2015. His alternative investments, however, were very different than those chosen by Mr. Armstrong.

[70] In choosing the alternative investments for his calculations, Mr. Lobo first assumed that Saramia would place the property’s proceeds into Government of Canada bonds for two years until it could locate a suitable alternative investment. Mr. Lobo then had regard to Saramia’s dealings with Agellan and its experiences with the property to make assumptions about the hypothetical suitable alternative investment.

[71] First, Mr. Lobo considered that under the asset management agreement by which Agellan was retained as asset manager for the property, Agellan’s compensation was to include an incentive fee, calculated as of the disposition of the property, based on the internal rate of return on the investment. The agreement provided three “hurdle rates” – 10% to 14.999%; 15% to 19.999% and 20% and over. For any incentive fee to be payable, the internal rate of return had to be at least 10%. The incentive fee payable increased as each hurdle rate was met. It was a live issue at trial whether the “hurdle rate” for an incentive payment was the same as, or corresponded to, Saramia’s target rate for the investment, that is, the return Saramia sought on the investment. Ms. Attard testified that a target rate and a hurdle rate are different concepts at Agellan. I accept this evidence. The hurdle rate is a goal for the asset manager; it is not the same as the target rate, which is the hope or expectation of the investor.

[72] In two of his calculations, Mr. Lobo assumed that Saramia would find a property that, for six years, would yield a rate of return of 9.99%, just below the lowest hurdle rate in the asset management agreement.

[73] In the other two calculations, Mr. Lobo assumed that Saramia would find a property that, for six years, would yield the same internal rate of return as 1 Saramia Crescent did in 2011-2013 after deducting for Agellan’s incentive fee, that is, 20.98%.

[74] There was no evidence before me that either of Mr. Lobo’s proposed alternative investments actually exists. They are hypothetical alternative investments only.

[75] Based on these alternative investments, Mr. Lobo’s calculations show that Saramia is much better off in the actual scenario than it would have been had IEWC not repudiated the lease – by as much as $2.288 million. However, Mr. Lobo testified that his conclusion was not that Saramia gained by the breach, but only that it suffered no loss.

[76] Mr. Lobo’s calculation of the discounted cash flow analysis also differed from Mr. Armstrong’s with respect to other assumptions, some of which I address in my analysis below.

[77] The defendants argue that the discounted cash flow analysis is not an appropriate measure of Saramia’s loss because, without evidence as to what the partners of Saramia actually did with the return of their investment funds, I cannot measure its loss. I disagree. Saramia was a single-purpose vehicle incorporated for the purpose of holding the investment. It is the legal entity that suffered the loss. It is obligated to mitigate notwithstanding that it is a single-purpose entity: see Southcott Estates Inc. v. Toronto Catholic District School Board, 2012 SCC 51, [2012] S.C.R. 675. But Saramia was also contractually obligated to return the sale proceeds to its investors. Thus, the only way in which one can assess Saramia’s loss is by assuming it reasonably mitigated its loss.

[78] Mitigation prevents the plaintiff from recovering loss that it avoided, or that it could have avoided, by taking reasonable steps: see Southcott at paras. 23-24; Asamera Oil Corporation Ltd. v. Sea Oil & General Corporation, 1978 16 (SCC), [1979] 1 S.C.R. 633 at p. 661. Normally in breach of lease cases, mitigation is accounted for by deducting the actual rental value of the premises during the future unexpired term of the lease from the landlord’s losses. The usual measure of mitigation does not work in this case, because the property has been sold. Mitigation must thus be accounted for in another way.

[79] I have already noted the case of Stabile, where the Court of Appeal found that where damages are claimed on the basis of the loss of rentals, there can be no mitigation of rental loss if efforts were not devoted to seeking tenants. However, the court also found that a failure to seek tenants may be of no account if any amount of effort would have been fruitless. I have found that to be the case on the facts here. As a result, the fact that Saramia did not mitigate by trying to re-let the premises does not prevent it from seeking damages on the discounted cash flow analysis which includes the lost stream of lease income. However, as Southcott makes clear, it is still under an obligation to mitigate.

[80] The defendants argue that, on Saramia’s evidence, it would have taken about two years to find a new tenant for the property. They argue that the discounted cash flow analysis thus extends too far out into the future, and at most, should calculate Saramia’s losses over that two years period, by which time Saramia could have fully mitigated its losses. I disagree. As I have already found, IEWC’s breach forced Saramia into a sale of the property. Damages and mitigation cannot be assessed based on a hypothetical different breach, where Saramia was not forced to sell but could hold the property empty until it could re-let the premises.

[81] I conclude that the discounted cash flow analysis is an appropriate method of quantifying Saramia’s losses. That is, Saramia’s loss can be quantified as the difference between the but for scenario (where the lease was not repudiated) and the actual scenario (where the proceeds of sale are hypothetically re-invested to mitigate Saramia’s losses). This method allows me to put Saramia in the position it would have been in had the lease not been breached. It also accounts for Saramia’s obligation to mitigate its losses and thus ensures that Saramia is not over-compensated. The analysis remains subject to the normal limiting principles of damages awards.

[82] I now consider the experts’ key assumptions to determine which should be adopted to calculate Saramia’s loss.

Which value should be used for the property in the analysis - the actual sale value in 2013 or the fair market value in 2015?

[83] The first key assumption that differs between the experts’ approaches is whether to calculate Saramia’s loss using the actual sale price in 2013 or using the appraised fair market value of the property in 2015. In effect, the choice between these methods of valuing the property dictates whether Saramia will recover for the capital appreciation the property enjoyed between 2013 and 2015 and of which Saramia could not take advantage because it was forced to sell the property.

[84] Mr. Stewart gave evidence about the fair market value of the property as of December 2015. He took two approaches to valuing the property: (i) the direct comparison approach which requires the identification of properties for which the price per square foot is known, and then makes adjustments for differences between those properties and the subject property to determine a price per square foot for the property that is the subject of the assessment, and (ii) the income approach which tries to ascertain a rent and a cap rate for the property and uses those to calculate price[^4].

[85] Mr. Stewart’s opinion was not challenged in cross-examination in any significant way. Mr. Stewart determined, using the income approach, that the value of the property in December 2015 was $4.180 million. Using the direct comparison approach, Mr. Stewart calculated the value of the property in December 2015 at $4.465 million. He accorded the most weight to the direct comparison approach, concluding that the income approach is more appropriately used as a secondary valuation method because properties like 1 Saramia Crescent are typically bought for owner occupancy. I accept his evidence that the property’s fair market value in December 2015 was $4.465 million. $4.465 million was the 2015 fair market value that Mr. Stewart and Mr. Lobo used in their discounted cash flow analyses.

[86] Mr. Stewart also explained that there is a lack of supply of investment products in Ontario. Pension funds are the largest purchaser of investment real estate and are willing to acquire it at prices higher than those that Ms. Attard and Mr. Camenzuli testified that Agellan is willing to pay. Mr. Stewart testified that commercial mortgage rates are at an historic low, which also drives demand, and prices, up. In addition, purchasers who seek to occupy the premises are prepared to pay more. In the Greater Toronto Area, there is a lack of available industrial property for development. As a result, owner-occupiers are willing to pay more for properties that are already developed in order to operate their businesses closer to their markets. These conditions have contributed to rising prices for real estate and lower cap rates. Given these conditions, it is not surprising that the property rose in value significantly from 2011-2013, and again from 2013-2015.

[87] In the discounted cash flow analysis, the choice of whether to use the 2013 sale price or the 2015 fair market value affects both the but for and the actual scenarios. As I have noted, the but for scenario employs either the 2013 sale price or 2015 fair market value and then holds the value of the property constant over the lease term, so that the 2021 value is, in effect, either the 2013 sale price or the 2015 fair market value depending on which assumption is employed.

[88] At the same time, the assumption affects the actual scenario because it changes the amount of money available to invest in the alternative investment. The experts either apply the 2013 sale price to both scenarios or the 2015 fair market value to both scenarios, for consistency.

[89] I have concluded that the 2015 fair market value assessment better quantifies the effect that the breach of lease had on Saramia’s reasonable expectations. I reach this conclusion for several reasons.

[90] First, while I accept that the statement at para. 69 in Stabile, where the court held that loss of capital appreciation of property does not arise naturally from a tenant’s repudiation of a lease, will normally be true in a multi-tenant property like the kind that was at issue in that case, I find that on the unique facts of this case, the loss of capital appreciation is not too remote to be recoverable. In Keneric Tractor Sales Ltd. v. Langille, 1987 CarswellNS 390 (S.C.C.) at para. 29, the Supreme Court of Canada reiterated the principle that the damages that are recoverable on a 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.

[91] In these circumstances, the loss of the capital appreciation was foreseeable and arose naturally from the breach of contract. Moreover, 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. It was foreseeable that the property would continue to appreciate, having regard to, for example, the lack of industrial land available for development in the Greater Toronto Area. 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 at the price to which it had agreed in the expectation it would also receive a lease buy-out.

[92] Second, I note that employing the 2015 fair market value appraisal in the discounted cash flow analysis does not require me to assess damages in 2015. Rather, it is an assessment of damages as at the date of the breach, because the lost capital appreciation was foreseeable on that day. As is often the case in litigation, subsequent events yield clarity as to the quantification of the damages, but the loss itself was foreseeable at the time of IEWC’s breach.

[93] Third, I do not agree that Saramia’s claim for damages for lost capital appreciation in the property results in requiring the defendants to guarantee the future appreciation of Saramia’s capital asset. Saramia had to prove its loss of capital appreciation. The evidence before me establishes that the value of the property rose significantly between 2013 and 2015, just as it rose significantly between 2011 and 2013. Saramia claims only this two year increase in value. This is not speculative – it is the actual increase in value in the property that has been proven on the evidence. Saramia claims no increase in value between 2015 and the end of the lease term in 2021, instead holding the real value of the property steady from 2015 in Mr. Armstrong’s calculation by applying a 2% inflationary increase and then a 2% discount rate.

[94] Mr. Lobo testified that Mr. Armstrong’s assumption of a 2% discount rate assumes that the value of the property in 2015 is guaranteed over time. Mr. Lobo suggested that the discount rate was thus too low, and relied on an article he wrote to support his conclusion. I disagree that the 2% discount rate is an unreasonable assumption. Although everyone, including Mr. Armstrong, 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, I conclude that holding the real value of the property steady over the lease term is a reasonable assumption in view of Mr. Stewart’s evidence about the conditions that contributed to the property’s rise in value.

[95] Mr. Armstrong testified that his approach (of first applying an inflationary increase to the 2015 property value and then applying a present value discount of 2% to hold the real value steady) is conservative. I accept his evidence. It is consistent with Mr. Stewart’s evidence that there is little if any land available to be developed for industrial purposes around the Greater Toronto Area. I conclude that demand for properties like 1 Saramia Crescent is more likely than not to remain strong. Mr. Armstrong’s evidence is also supported by the rise in value of the property between 2011 and 2013, and between 2013 and 2015. In other words, there is significant upside potential for the property, such that Mr. Armstrong’s risk-neutral discount rate is conservative.

[96] Fourth, I disagree with the defendants that the decision in Ossory Canada Inc. v. Wendy’s Restaurants of Canada Inc., 1997 2212 (ON CA), [1997] O.J. No. 5168 (C.A.) has application here. In Ossory, the landlord sought to charge the tenant who had breached the lease with the expense of constructing an entirely new building than the one that was going to be constructed for the tenant had the lease not been breached. The Court of Appeal held that the tenant did not have to pay for the cost of the landlord putting his property to a completely different use. In my view, this holding has no application here, where Saramia does not seek to put its property to another use. Rather, the question about whether Saramia can recover for its lost capital appreciation is really a question of foreseeability. I have already concluded that in this case, with its particular and unusual facts, the loss was foreseeable.

[97] Fundamentally, IEWC’s breach of the lease, and the manner in which it breached the lease, caused Saramia to have to sell the property at the time and price that it did. This caused Saramia’s loss of capital appreciation in the property, which was a foreseeable loss in these unique circumstances.

[98] If I am wrong about Saramia’s entitlement to recover for the loss of capital appreciation, I would have accepted Mr. Armstrong’s discounted cash flow analysis based on the 2013 sale price of the property.

Which alternative investment should be used in the discounted cash flow analysis?

[99] The alternative investment is the reasonable mitigation that the discounted cash flow analysis assumes Saramia undertook. When assessing which of the different assumptions made by Mr. Armstrong and Mr. Lobo should be employed, I have kept in mind that the law does not require a plaintiff to take all possible steps to reduce its loss. A plaintiff need only act reasonably. A plaintiff will not be disentitled because the party in breach of contract can suggest other measures less burdensome. The standard for reasonableness is relatively low: see Davy Estate v. CIBC World Markets Inc., 2009 ONCA 76, 97 O.R. (3d) 40 at para. 25.

[100] The plaintiff whose rights have been violated is not required to undertake burdensome or risky measures to mitigate its loss; it need not put its money to an unreasonable risk, including a risk not present in the initial transaction; it need not do anything other than in the ordinary course of business: see Davy Estate at paras. 25-26; Asamera Oil, supra at p. 649.

[101] Where a defendant in breach of contract alleges that the plaintiff acted unreasonably in failing to take advantage of an opportunity that existed to mitigate the loss, the defendant bears the burden of proof on a balance of probabilities. If the party in breach alleges that the plaintiff failed to take reasonable efforts to find a substitute, it must also prove that a reasonable profitable substitute could be found: see Southcott at paras. 24, 45, 65, and 73.

[102] Mr. Armstrong and Mr. Lobo differed on the appropriate alternative investment to use in the actual scenario in the discounted cash flow analysis. As I have noted, Mr. Armstrong chose two REITs, one of which was a group of Canadian REIT indexes, and the other, a group of REITs focused on Canadian industrial, commercial and retail assets. Mr. Lobo chose two hypothetical investments, one with a 20.98% return, equivalent to the actual return on Saramia’s investment between 2011 and 2013, and the other with a 9.99% rate of return, just below Agellan’s first hurdle rate in its asset management agreement.

[103] Mr. Lobo’s choice of alternative investment gave me great concern. Even while he chose very aggressive, high-performing, hypothetical alternative investments in his actual scenarios, he did not apply the same aggressive rate of return to his but for scenarios. Rather, when considering what the Saramia property would have yielded had the lease obligations been met, Mr. Lobo applied Mr. Armstrong’s conservative 2% inflationary rate of growth. In effect, as I have noted, this rate of growth held the real value of the Saramia property static because the property was also discounted to present value by a factor of 2%. Thus, by adopting Mr. Armstrong’s approach, Mr. Lobo’s approach to the but for scenario was very conservative. At the same time, for his actual scenarios, Mr. Lobo used a hypothetical investment with a very high rate of return over a much longer period[^5] that was based on the actual rate of return of the Saramia property over a two year period, or based on the lowest hurdle rate in the asset management agreement.

[104] Mr. Lobo explained the inconsistency by saying that he wanted to minimize the differences between his calculation and Mr. Armstrong’s calculation as much as possible. I reject this explanation. Mr. Lobo was qualified as an expert, and his duty was to ensure that his calculations were internally consistent. His abdication of responsibility for the assumptions on the but for sections of his discounted cash flow analysis are inconsistent with his expert’s duty to the court. I find that the inconsistency between Mr. Lobo’s but for and actual approaches undermines his entire discounted cash flow analysis.

[105] I am also troubled by the fact that, at times, Mr. Lobo acted more like an advocate than an expert. He was often unwilling to make appropriate concessions or did so only after lengthy and difficult exchanges with counsel. These factors caused me to doubt the credibility of his evidence.

[106] I do not accept that either alternative investment employed by Mr. Lobo is appropriate for the purposes of a discounted cash flow analysis. There is no evidence before me that an investment with either return was available. I cannot infer that one was available based on the hurdle rates – which are not target rates – in the asset management agreement. I cannot infer that another investment with the potential for the type of growth Saramia enjoyed in the property between 2011 and 2013 was available – the evidence of Ms. Attard, Mr. Camenzuli and Mr. Stewart, which I accept, indicates that no such comparable investment was available. Even if Mr. Lobo’s alternative investments were available, I could not conclude, based on Mr. Lobo’s analysis, that Saramia had suffered no loss, when Mr. Lobo’s analysis was internally inconsistent.

[107] I find that Mr. Armstrong’s assumed mitigation through Saramia’s hypothetical investment in a REIT basket focused on Canadian industrial, commercial and retail assets is appropriate. This REIT better approximates the type of investment Saramia sought in the property.

[108] The defendants argue that, if a REIT is an appropriate alternative investment, I should assume that Saramia would have invested in Agellan Commercial REIT, a relatively new REIT managed by Mr. Camenzuli. This REIT yielded a return of 7.75% between 2013-2015, while the REIT focused on Canadian industrial, commercial and retail assets that Mr. Armstrong chose for his analysis yielded a return of 6.0%. I do not agree that the Agellan Commercial REIT is a more appropriate alternative investment.

[109] First, the Agellan Commercial REIT is not a related party to Saramia, notwithstanding Mr. Camenzuli’s involvement with both. Saramia and the REIT investors do not share the same investment objectives. For example, Agellan Commercial REIT has been focusing on multi-tenanted properties in the United States. Saramia invested in a single-tenanted property in Canada.

[110] Second, Mr. Camenzuli explained that Agellan Commercial REIT is a relatively new REIT, and he expects its return will decrease over time. Accordingly, it is not appropriate to assume a 7.75% return over the unexpired term of the lease. In contrast, the REIT basket proposed by Mr. Armstrong is comprised of more established REITs and it is more likely that the future performance of this basket will be more stable, because risk is managed by the diversity of the basket.

[111] Moreover, if I were to find that the Agellan Commercial REIT were the appropriate alternative investment, I would need evidence about the appropriate discount rate to apply to its higher yield. The risk is higher with Agellan Commercial REIT because it is a single REIT, not a diversified basket of REITs. As a result, the discount rate should be higher to reflect the higher risk. I have no evidence before me as to what an appropriate discount rate for the Agellan Commercial REIT would be, or whether, given that it would have to be a higher discount rate, it would make a difference in the end calculation.

[112] I also reject the defendants’ argument that alternative properties were available for investment as demonstrated by Agellan Commercial REIT’s acquisition of properties in the United States. Agellan Commercial REIT, as I have noted, is pursuing a different investment strategy than that pursued by Saramia. I accept the evidence of Mr. Camenzuli that Agellan continues to look for suitable investments and has found very few that are comparable from an investment standpoint to Saramia, and has been outbid even on those.

[113] Accordingly, I conclude that the appropriate alternative investment is the REIT basket focused on Canadian industrial, commercial and retail assets identified by Mr. Armstrong.

Other Differences in the Experts’ Discounted Cash Flow Analyses

[114] In addition to the two key assumptions I review above, the expert accountants differed in their approaches to certain other assumptions. These are assumptions that have minor impact only on the discounted cash flow analysis and I need not review them all. A few examples will suffice to demonstrate why I prefer Mr. Armstrong’s assumptions to Mr. Lobo’s.

[115] One issue that arose was the treatment of the inducement Saramia provided to Delco to entice it to enter into the lease extension – the waiver of additional rent. The additional rent was charged to Delco under the lease by the prior landlord in respect of certain improvements the landlord had undertaken and paid for. The lease required Delco to pay a certain amount each month in additional rent towards these improvements. This additional rent was on top of Delco’s obligation to pay base rent under the lease.

[116] Mr. Lobo deducted the additional rent amount in his but for scenario, but he failed to include the additional rent receivable. The effect of this deduction was that it operated, not as a waiver of additional rent owing (which it, in fact, was) but as a deduction from the base rent owing. Mr. Lobo thus understated the lease revenue by the amount of the additional rent. I accept Mr. Armstrong’s evidence that this was an error in Mr. Lobo’s calculations. Mr. Armstrong neither included the additional rent that was owing nor deducted the additional rent that been waived, an approach that more accurately reflects the agreement between Saramia and Delco. I prefer Mr. Armstrong’s approach.

[117] Another area of disagreement between Mr. Lobo and Mr. Armstrong related to the treatment of capital expenditures in a report referred to before me as the Pinchin report. The Pinchin report identified expenditures that the property would require over time. To the extent these costs were capital costs, they could be amortized by Saramia and collected over time as additional rent. To the extent they were maintenance costs, they could be passed on to the tenant because the lease was a care-free lease. Originally Mr. Lobo calculated that all the expenses identified in the Pinchin report - about $200,000 - were capital costs. Mr. Armstrong calculated about $25,000 of the expenditures were capital costs. After hearing the plaintiff’s evidence, Mr. Lobo agreed with Mr. Armstrong’s approach. This was an appropriate concession. However, it indicates that Mr. Armstrong’s discounted cash flow analysis used the right figure for capital expenditures, while Mr. Lobo’s did not.

[118] Mr. Lobo and Mr. Armstrong also differed in their approach to operating expenses. Mr. Lobo deducted operating expenses, being mostly banking and professional expenses, from his but for scenario, but did not deduct any such expenses from his actual scenario. In Mr. Lobo’s view, Mr. Armstrong should have deducted expenses from his but for scenario but not from his actual scenario, because, according to Mr. Lobo, there would be no operational expenses associated with investing in a REIT. Eventually he agreed that Saramia would still have some operating expenses even if invested in a REIT, such as banking fees. Mr. Armstrong made no deductions for operating expenses in either scenario. I prefer Mr. Armstrong’s approach which recognizes that Saramia would have had operating expenses in either scenario which would cancel each other out.

[119] Accordingly, I accept Mr. Armstrong’s discounted cash flow analysis using the 2015 fair market value appraisal and the alternative investment of the basket of Canadian industrial, commercial and retail REITs. This would lead to a damages calculation of $1,124,000, except that this amount is affected by my conclusion with respect to the third head of loss claimed, the mortgage break fee, to which I now turn.

Is the break fee Saramia paid to its mortgagee (for breaking its mortgage early so it could sell the property) a loss arising from the repudiation of the lease?

[120] Saramia also claims damages in respect of the break fee that Saramia had to pay to its mortgagee. Mr. Armstrong calculated this loss as a separate item because in his discounted cash flow analysis, when calculating the actual scenario, he added the break fee back into the proceeds of sale to increase the amount hypothetically available for investment into the REIT.

[121] In contrast, Mr. Lobo testified that Saramia suffered no loss with respect to the break fee it had to pay its mortgagee. In his view, the break fee is the present value of future interest payments that would be owing under the mortgage, so was a cost Saramia would have had to incur in any event. No calculations comparing the amount of the break fee to the present value of the interest expense over the remaining lease term were provided to me.

[122] In my view, Saramia’s loss is better represented if the break fee is not a separate head of damages, but is taken into account in the discounted cash flow analysis by deducting the amount of the break fee from the amount available for investment in the actual scenario. By doing so, the proceeds for investment in the actual scenario will represent what Saramia actually had to invest (if it could have done so) following the sale of the property.

[123] This approach is also more consistent with the fact that the break fee is a cost to break the mortgage in the actual scenario, just as the mortgage interest payments are a cost of the mortgage financing in the but for scenario.

[124] Accordingly, I conclude that rather than awarding any separate amount for loss related to the break fee, Mr. Armstrong’s discounted cash flow analysis should be adjusted to remove the break fee from the amount available for investment in the actual scenario. This should be a simple matter of math. However, if the parties disagree on how to address this, I may be spoken to.

Interest

[125] Saramia seeks prejudgment interest on 37.5% of the damages awarded at the rate of 24% per annum based on clause 15.00 of the lease. This clause provides for interest at this rate “if the tenant shall fail to pay, when the same is due and payable, any rent or additional rent or any other amounts or charges” described in the lease.

[126] The rationale for Saramia’s claim is that part of the damages sought are on account of rent that would have accrued but for the breach of lease between November 1, 2013 and the date of judgment. Saramia calculates this at about 3/8 of the remaining lease term, or 37.5% of the time between the breach of the lease and the end of the lease term. The calculations are approximate only. Moreover, as counsel agreed during oral submissions, to the extent any amount of damages relates to lost capital appreciation, the 24% interest rate is not appropriate because it is not justified by the terms of the lease.

[127] The defendants argue that if damages are awarded on the basis of the discounted cash flow analysis, the analysis already assumes a rate of return, on top of which interest should not be awarded.

[128] I disagree with the defendants. To the extent that the damages in this case represent the present value of the lease payments over the unexpired term of the lease, reduced by Saramia’s hypothetical reasonable mitigatory efforts, the discounted cash flow analysis does not account for any interest on this difference. Accordingly, interest is payable.

[129] Although Saramia’s calculations are imprecise, I see no reason not to award interest in accordance with the lease: see s. 128(4)(g) of the Courts of Justice Act, R.S.O. 1990, c. C.43.

[130] Using the 2013 sale value of the property and the Canadian industrial, commercial and retail REIT basket, Mr. Armstrong calculates Saramia’s loss on a discounted cash flow analysis to be $357,000. However, this calculation also adds back the break fee to the amount available for investment in the actual scenario. Mr. Armstrong’s calculation should be adjusted to remove the break fee from that amount. The figure it yields will be Saramia’s damages relating to the lost lease income, after mitigation. Again, this should be a simple matter of math, but if there are issues arising out of this calculation, I may be spoken to.

[131] I find that 3/8 of this revised amount reasonably approximates the damages relating to the stream of lease income owing as of the date of judgment.

[132] Accordingly, I order pre-judgment interest on that amount at 24% per annum and interest on the remaining amount at the rate in the Courts of Justice Act.

[133] I order post-judgment interest at the rate provided for in s. 129 of the Courts of Justice Act.

Delco’s Liability

[134] Delco’s liability herein is founded upon its contractual obligations to Saramia, including its agreement under the assignment of lease that it remained liable, along with IEWC, to Saramia for the obligations under the lease.

[135] Delco and IEWC jointly retained counsel. At no time during the trial did Delco raise an argument that its liability to Saramia was not co-extensive with that of IEWC.

[136] Accordingly, I conclude that Delco is jointly and severally liable with IEWC for Saramia’s losses.

Costs

[137] If the parties cannot agree on costs, Saramia may deliver written costs submissions not to exceed three pages plus any relevant attachments within two weeks of the date of these reasons. The defendants’ response, not exceeding three pages plus any relevant attachments, should be delivered within two weeks thereafter. Saramia may deliver reply submissions, not exceeding two pages within a week thereafter. Submissions should be delivered to my attention at Judges’ Administration, 361 University Avenue.

Conclusion

[138] Saramia has suffered damages in an amount to be calculated on the basis of Mr. Armstrong’s discounted cash flow analysis using the 2015 fair market value for the property and an assumed alternate investment into the Canadian industrial, commercial and retail REIT basket he identified, but his actual scenario calculation should be adjusted by deducting the break fee from the proceeds available for investment on the sale of the property. This will result in a new net loss number which the defendants owe to Saramia. If there is any dispute about this calculation, I may be spoken to.

[139] Pre-judgment interest will accrue pursuant to the lease on the amount of damages referable to the lost lease income between the date of breach and the date of judgment. Calculating this amount requires first adjusting Mr. Armstrong’s discounted cash flow analysis that assumes the 2013 sale price of the property and the Canadian industrial, commercial and retail REIT basket to remove the break fee from the amount available for investment in the actual scenario. This will yield a new net loss number. Pre-judgment interest will accrue at the rate of 24% per annum on 3/8 of this new net loss number. The remainder of Saramia’s losses will accrue pre-judgment interest at the rate provided for in the Courts of Justice Act. Post-judgment interest will accrue at the rate provided for under the Courts of Justice Act.

[140] I thank counsel for their submissions, which were both able and helpful.

Madam Justice J. T. Akbarali

Released: May 02, 2017.

[^1]: Saramia also argued that it had to proceed with the sale because without a tenant, it was concerned its mortgagee would call its loan. While I accept that Saramia had to proceed with the sale, I do not rely on Saramia’s concern about its loan being called in reaching my conclusion. [^2]: Mr. Armstrong’s calculation identified three potential baskets of loss. The first basket of loss related to the sale price of the property. I have already noted that he assumed that the price received approximated fair market value. The second basket is the discounted cash flow analysis. The third basket, which I discuss later in these reasons, relates to the mortgage break fee. Mr. Armstrong explained that the baskets were not stand-alone loss figures, but had to be considered as a whole. Calculations of loss under one basket could affect calculations of loss under another basket. [^3]: Mr. Lobo preferred to calculate damages based on the difference between the sale price and the fair market value of the property because, in his view, it involved fewer assumptions. However, he produced a discounted cash flow analysis to respond to Mr. Armstrong’s calculations. [^4]: Mr. Stewart also noted the cost approach, which he concluded did not provide additional insight and, as a result, he did not develop it in his report. While Mr. Stewart did not consider the cost approach helpful in assessing the fair market value of the property, Ms. Attard’s evidence was that Agellan considered the replacement cost when considering whether a property was a suitable investment. The relative value that Agellan and Mr. Stewart place on the cost approach is not relevant to my analysis. [^5]: Mr. Lobo, as noted, assumed the proceeds of investment would be placed into government bonds for a two year period until a suitable alternative investment could be located, and then for the following six years of the unexpired lease term, assumed either a 9.99% rate of growth or a 20.98% rate of growth.