Court File and Parties

COURT FILE NO.: CV-20-83019 DATE: 2023/01/16 COURT OF ONTARIO, SUPERIOR COURT OF JUSTICE

In the matter of the Partition Act, R.S.O. 1990, c. P.4 as amended

RE: DANTE RUSSO, Applicant AND: ELIZABETH ANN BARRETT and ADAM MILLER KELLY PROFESSIONAL CORPORATION, Respondents

BEFORE: Regional Senior Justice Calum MacLeod

COUNSEL: Miriam Vale Peters, for the Applicant Ryan Garrett, for the Respondent Barrett Lila M. Kelly, for the Respondent corporation.

HEARD: June 17, 2021, July 2, 2021 & September 21, 2022

Decision and Reasons

[1] The applicant originally brought this application seeking an order permitting him to purchase jointly owned property at 626 Tweedsmuir Avenue in Ottawa as well as other relief.

[2] Although the application was styled as an application under the Partition Act, it became apparent that it was, in reality, an application for specific performance of an agreement between the parties. Sale under the Act was an alternative position if the court did not compel the Respondent to sell the property to the Applicant.

[3] I say it was an application for specific performance because the Partition Act contains no provision under which the court may force one joint owner to buy out another. The options are partition or sale but the contract between the parties did contain a buy out right and a right of first refusal. The Applicant sought sale, but the Respondent sought to buy the property.

[4] Following argument, I determined that specific performance would not be ordered because on the evidence before the court, damages would be an adequate remedy. The purpose of owning the property was always to profit from the investment either through price inflation over time or by redevelopment and subsequent sale. According to the Applicant’s affidavit, his goal “has always been to redevelop Tweedsmuir and to maximize potential profits in this lucrative neighbourhood.”

[5] The real dispute revolves around the purported exercise of the right of first refusal and the consequence in the event that the Respondent failed to honour it. If the Applicant had the right to purchase the property at a particular price at a particular point in time, then he has a valid claim to the net income and profits earned after that date. If, on the other hand, the property remained jointly owned then the parties should share the profits (and expenses) equally.

[6] As a consequence, I ordered a sale of the property and reserved on the merits of the claim. There was some prospect that the parties might be able to negotiate a resolution to the financial issues once the property was sold.

[7] Due to the pandemic and other factors, some time elapsed before the property was sold. Once the sale was completed, I had a conference with counsel in order to update the facts and determine the issues remaining to be adjudicated. Both counsel agree that it is now necessary to rule on the breach of contract question. If it is determined that there was no right to purchase the property, certain damage claims will not be viable and all that is left is an accounting exercise plus the question of costs.

[8] These reasons contain my decision on the merits of the application, but do not deal with calculation of damages. In the event that damages cannot be negotiated, they will be determined on a reference.

Background

[9] The parties were in a romantic relationship and co-habited for a number of years. They were also business partners and purchased investment properties in and around Ottawa. Three of those properties were the subject of a written agreement dated February 26, 2016. The agreement dealt with the Tweedsmuir property that had been acquired in 2011 and was held in joint title. It also dealt with two properties in Kanata which had been purchased in the fall of 2014. The agreement specified that the properties were jointly owned and dealt with the sharing of expenses and profits. It is the Tweedsmuir property which is the focus of this dispute.

[10] The agreement contained a term that if either party wished to sell one of the properties, the other party would have a right of first refusal to purchase the property at fair market value. The exact wording was as follows:

3.3 In the event that one Party wishes to terminate or sell his/her interest in the Property, that Party shall so notify the other Party in writing and give a 60-day right of first refusal to the other Party to purchase the terminating Party's interest in the Property at fair market value, before the Property is offered to an arm's-length buyer. If the right of first refusal is not exercised within the said 60 days, the Property shall be listed forthwith with a real estate broker at a price as agreed between the Parties or, failing agreement, at fair market value which shall be determined as set out in paragraph 3.4 hereinafter.

3.4 For the purposes of this Agreement, fair market value shall be as the Parties may agree or, failing agreement, as determined by obtaining an estimate of fair market value from three independent real estate agents or certified appraisers and taking the average of the three estimates.

[11] It should be noted that this paragraph was situated in an agreement which recognized that the parties were joint title holders of the “Tweedsmuir Property”, that they had contributed equally to its acquisition and were to share equally in the income, expenses and profit.

[12] This particular property is a bungalow in Westboro. Sadly, for the bungalow, its highest and best use is to tear it down and replace it with two semi-detached homes. That is to say that potential purchasers would likely be purchasing it for its development potential. The property ultimately sold and there remains the net sum of $638,758.36 in trust.

[13] The question is whether the right of first refusal was enforceable, whether it was validly triggered and whether the Applicant is entitled to treat the property as if it had been acquired by him at fair market value as of that date.

[14] In my view he is not. There was clearly a right of first refusal in the agreement but the evidence does not allow me to conclude that it was properly exercised. On that basis, the parties remained joint owners until the point of sale and should be jointly liable for the expenses, jointly entitled to the income from the property and subject to adjustment for those factors, jointly entitled to the net proceeds of sale.

Analysis

[15] The agreement itself is clear. It provides for a situation in which one party wishes to sell the property and the other does not. In that case the party who wishes to sell is to advise the other party who then has the right to purchase the seller’s half interest for “Fair Market Value”. Obviously, since each party held a half interest in the property, this actually means one half of Fair Market Value.

[16] The agreement is less clear about the mechanism for determining the price. It states that the parties may agree on FMV or it will be determined by the average of three independent valuations by certified appraisers or real estate agents. The agreement does not deal with how the appraisers will be selected. It does not deal with what will happen if the appraisers cannot complete their work within the 60-day period or whether the purchasing party must be able to close within that time. There is a dispute resolution provision. If there is a disagreement between the parties, it is supposed to be resolved by mediation.

[17] Ideally of course the parties would jointly select the appraisers. Alternatively, I suppose if one of the parties was recalcitrant, the other party could obtain three appraisals unilaterally, but the agreement does not say what should happen if the other party disagrees or if each party obtains three appraisals and they do not match. In my view it is implicit in the agreement that the parties will agree on the appraisers and if they cannot do so, they should have attempted mediation. Neither of these things occurred.

[18] What did occur is that the parties spent a great deal of time arguing about the appropriate price. There was some confusion as to whether the Applicant was seeking to purchase the property and whether or not the Respondent was willing to sell. At one point the Respondent denied that there was an agreement with a right of first refusal and then insisted that the FMV of the property was $800,000. She went on to say she would not agree to the Applicant buying her out because he was trying to “bully” her. For his part, the Applicant attempted to “lowball” the value and failed to disclose one of the appraisals he had obtained. Subsequently there were a series of failed negotiations before this application was launched and the property was ultimately sold.

[19] In November of 2018, the Respondent advised the Applicant that she wanted to sell Tweedsmuir. In response, the Applicant states that he told the Respondent he wished to buy the property. In June of 2019, the Applicant proposed that the parties each obtain a valuation from a certified bank appraiser. This did not occur and in August of 2019, there was an exchange of emails which seemed to suggest that the parties were in agreement to list the property for sale.

[20] The Respondent never disclosed any written appraisal or valuation supporting her view that the property was worth $800,000 and in cross examination she conceded that this was her own best guess although she also stated that it was a negotiating position. There is certainly no evidence that the Respondent obtained a written appraisal in 2019. At the end of August and beginning of September 2019, the Applicant obtained his own valuations.

[21] Mr. Russo obtained three appraisals of the property. Two of those appraisals came in at $720,000 and $725,000. On September 20, 2019, his then lawyer wrote to the Respondent to offer to purchase the property based on a value of $722,500. The Applicant and his lawyer did not disclose the third appraisal for $750,000 for the property.

[22] This third appraisal was not included in the letter from the Applicant’s (former) lawyer and was not factored into the price Mr. Russo offered to pay. There is no way that obtaining three appraisals and disclosing only two can be interpreted as complying with the agreement or the right of first refusal. The average of the three appraisals would have been $730,833.

[23] On February 14, 2020, Ms. Barrett wrote to Ms. Vale Peters (who was by that time acting for the Applicant) to advise that the Respondent was triggering the 60 day right of first refusal and would sell the property to the Applicant based on a Fair Market Value of $775,000. Ms. Vale Peters advised that the Applicant accepted the right of first refusal and was prepared to purchase the property based upon the “formula set out at paragraph 3.4”. It is worth noting that the Respondent claimed to have an offer from a third party to purchase the property for $775,000, but if it was a real offer, it was not reduced to writing. It is also worth noting that as of July 13, 2020, there was still $279,114.87 owing on the mortgage.

[24] There was no follow up to the correspondence advising that the Applicant accepted the offer to sell “using the formula”. The Applicant did not obtain three new up to date appraisals within the 60-day period. Instead, the Applicant started this court application on March 2nd, 2020.

[25] In my view the exchange of emails set the clock running anew on a right of first refusal. I agree with the Applicant that any purported exercise of the right in June had not expired because the Respondent did not recognize the right and the parties did not take the steps necessary to obtain appraisals. The problem, however, is that the Applicant did not take the steps that should have been taken in in February of 2020 in a rising market to comply with the right that the Respondent had now belatedly recognized.

[26] The Respondent, of course, had no right to unilaterally select the price, but the Applicant (through counsel) stated that he accepted the triggering of the 60-day period and would comply with the formula. He did not seek agreement on appraisers and he did not update the appraisals he had previously obtained. Instead, he launched this application based on the argument that he had been entitled to purchase the property in 2019. The documents show that the application had been prepared on February 26, 2020, and was issued on March 2.

[27] It does not appear to me that either party acted in complete good faith. It is certainly not the case that either party attempted to comply with the steps required by the buy out provision in any precise manner.[^1] It is tragic that they have proceeded with litigation instead of simply agreeing on a price because they were at most $50,000 apart on the FMV and so at worst they were $25,000 away from resolution. On the positive side, the property ultimately sold for $950,000.

[28] It follows from my analysis that the parties remained joint owners until the property was ultimately sold. They are therefore jointly liable for the expenses during that period of time, jointly entitled to the revenue and subject to adjustment for those matters, they are entitled to share equally in the net proceeds of sale.

Conclusion and Order

[29] As outlined above, the purpose of these reasons is to state my conclusion concerning the purported exercise of the right of first refusal and not to complete the calculations. There were certain claims originally made that have been resolved, but the Applicant did claim that he had overpaid the expenses for the property by $3,447.09 at the time he launched the application.

[30] What is left is an accounting exercise which is best resolved between counsel, but otherwise may be the subject of a reference.

[31] Pursuant to the Partition Act, there will be a declaration that the parties remained equal owners of the Tweedsmuir property until the date of sale and a reference to determine the accounting if the parties cannot agree.

[32] Counsel should arrange a further case conference with me to itemize the matters that remain in issue and to settle the terms of the reference.

Costs

[33] It also remains to deal with the costs of the application. Again, I invite counsel to agree on the disposition of the costs, but if they cannot do so then I will provide further direction at the case conference.

Justice C. MacLeod Date: January 16, 2023

[^1]: This is unlike the case of 2056668 Ontario Inc. v. Fernbrook Homes (Majormac North) Limited cited by the applicant.