Ontario Court of Appeal Provides Measure of Damages When Landlords Are Forced to Sell
Jun 27, 2018 | Blawg
A recent decision by the Ontario Court of Appeal has clarified the allowable measure of damages that a landlord can claim when it is forced to sell a leased property.
In Saramia Crescent General Partner Inc. v Delco Wire and Cable Limited, 2018 ONCA 519, a Landlord could not sustain the costs of a leased property following the tenant’s repudiation of its lease. The Landlord had no choice but to sell the Property as a result. When determining the amount of allowable damages claimed by the Landlord, the court held that the sale price of the property is the proper amount for the damage calculation, rather than future value. The court explained that lost capital appreciation is too remote to be used as a measure for damages resulting from breach of contract.
In 2013, IEWC Canada Corp. (the “Tenant”) notified Saramia Crescent General Partner Inc. (the “Landlord”) that it would be repudiating its lease (the “Lease”). The Landlord was consequently forced to sell the property because it could not afford to carry it without a tenant. The Landlord sold the property for a price it set, and as a single purpose entity incorporated only to hold this property, distributed the proceeds of sale to its shareholders. As a result of the sale, the Landlord incurred a mortgage break fee. Following the sale, the Landlord commenced an action against the Tenant for damages resulting from the Tenant’s repudiation of the Lease, including lost capital appreciation, lost rental income, the mortgage break fee and interest.
The Tenant argued that the Landlord did not suffer any loss as a result of its repudiation of the Lease, because the Landlord sold the property at fair market value, which fully mitigated its loss and made the Landlord whole again. The Tenant argued in the alternative, that if the property was not sold at fair market value, the Landlord’s loss is limited to the difference between the actual sale price and the fair market value.
The trial judge disagreed with both of the Tenant’s arguments. It was held that the property was not sold at fair market value, as the Landlord was not a willing seller, but was forced to sell. Further, the court held that the difference between the actual sale price and the fair market value did not capture the Landlord’s losses because it did not account for the capital appreciation of the property lost due to the early sale.
The court held that a discounted cash flow (“DCF”) analysis was the appropriate means of determining the Landlord’s losses, as it would reflect the difference between the scenario where the Lease was not repudiated, and the scenario where the proceeds of the sale are hypothetically re-invested to mitigate the Landlord’s losses. The hypothetical mitigation of the losses had to be included in the DCF analysis because the Landlord could not actually mitigate, as the proceeds of sale were distributed to the Landlord’s shareholders upon the sale, yet the Landlord still had a duty to mitigate its losses.
After assessing the different DCF analyses proposed by experts for the Landlord and Tenant, the court found that a DCF analysis employing an appraised value of the property two years later, rather than the 2013 sale price of the property, would be most appropriate. According to the court, the appraised 2015 property value, rather than the 2013 sale price, better quantified the effect of the Tenant’s repudiation of the Lease on the Landlord’s reasonable expectation of capital appreciation.
With regards to the mortgage break fee, the court held that it should be incorporated into the DCF analysis as a deduction from the amount available for re-investment. The court also awarded the Landlord contractual interest under the Lease. In the end, the court provided the formula for calculating damages, but left the precise calculation to the parties.
The court of appeal reversed the trial judge’s decision regarding the amount of damages owed to the Landlord by the Tenant. The court of appeal found that the trial judge erred in including capital appreciation as a loss to the Landlord. Citing Hadley v Baxendale (1854), 156 ER 145 (UK Ex Ct), the court of appeal held that damages from breach of contract will not be awarded if they are too remote. According to Hadley, to be recoverable, damages from breach of contract must either (1) arise fairly, reasonably, and naturally as a result of the breach of contract in the “usual course of things” or (2) have been within the reasonable contemplation of the parties at the time of the contract.
Lost capital appreciation could not satisfy either branch of the Hadley test, and was therefore not recoverable for remoteness. Specifically, lost capital appreciation does not arise “fairly, reasonably and naturally” from the breach of a commercial lease, as it is not considered in the bargain of a commercial lease. Lost capital appreciation was also not contemplated by either party when the Lease was entered into, as it was not shown by any evidence.
The court of appeal also held that the trial judge erred in finding that the property was not sold at fair market value. In Musqueam Indian Band v Glass, 2000 SCC 52, the Supreme Court of Canada defined fair market value as “what a seller is willing to accept and a buyer is willing to pay on the open market in an arm’s length transaction”. The trial judge’s decision that the property was not sold at fair market value hinged on her decision that the Landlord was not a willing seller, because it was forced to sell by the Tenant’s repudiation of the Lease. However, the court of appeal held that the trial judge misinterpreted the definition of fair market value – “willing” in the definition does not refer to the seller’s willingness to sell, but at what price the seller is willing to sell. Despite the court of appeal finding that the sale was at fair market value, it held that the Landlord’s damages were not fully mitigated, as the sale did not compensate the Landlord for the lost rental income.
The court of appeal therefore upheld the trial judge’s decision to use a DCF analysis to measure the damages experienced by the Landlord. However, it reversed the trial judge’s decision to use the 2015 property value in the analysis, finding it to be arbitrary, unsupported by law, and reflective of the lost capital appreciation, which the court of appeal held not to be recoverable by the Landlord.
In the end, it was decided that the proper method of calculating damages when a landlord is forced to sell is by using a DCF analysis that incorporates the sale price of the property, and not a future appraised value, as lost capital appreciation is not a recoverable damage.