Overview
In De Rita v. 1266078 Ontario Inc., the Court of Appeal for Ontario (“ONCA”) upheld an award of damages for loss of business opportunity flowing from a failed real estate transactions, presenting new opportunities for recovery and risks of increased liability for parties involved in commercial real estate. The ONCA determined that if a breach of contract by one party foreseeably prevents another from completing a deal for a separate property, a ‘secondary transaction’, the affected party may be entitled to compensation for this lost opportunity if certain evidentiary requirements are met.
Background
The dispute arose from a real estate transaction between Mr. Michael De Rita and Mr. Anton Trojansek (Mr. Trojansek). In 2015, Mr. De Rita, who buys and manages commercial properties in Windsor, purchased a property on Ouellette Avenue from Mr. Trojansek. An issue arose when Mr. Trojansek failed to close and Mr. De Rita sued for specific performance. Ultimately, the parties settled these issues, agreed on a $450,000 vendor take-back mortgage, and closed the sale (the “Settlement”).
In July 2019, Mr. De Rita sought to discharge, or pay off, the outstanding balance of the mortgage, approximately $350,000, in order to use his equity in the property to secure financing for the purchase of two other properties. This included a property on Bruce Avenue that Mr. De Rita had an agreement to purchase for $70,000, far below market value, due to the vendor’s position of distress. Despite Mr. De Rita’s need and repeated requests, Mr. Trojansek failed and eventually refused to discharge the mortgage, owing to a disagreement over the Settlement.
In response, Mr. De Rita turned to the courts. In October 2019, his application was granted. The court determined the amount owing and ordered Mr. De Rita to pay it into the court, thereby discharging the mortgage. A hearing date was also set to address damages. Unfortunately, by the time the court resolved the matter, the closing date for the Bruce Avenue deal had passed and Mr. De Rita missed out on the lucrative Bruce Avenue opportunity.
The Application for Damages is Endorsed
At the subsequent damages hearing, Mr. De Rita sought damages for Mr. Trojansek’s breach of contract, specifically for the lost Bruce Avenue opportunity. Justice Cook found that Mr. Trojansek’s delay in discharging the mortgage constituted a breach of contract and bad faith in the performance of his obligations under the terms of the mortgage. The agreement required Mr. Trojansek to discharge the mortgage in a reasonable time after payment in full; this was determined to be roughly within 7-10 days after a request to do so from Mr. De Rita. Instead, Mr. Trojansek made an “informed and strategic choice” not to discharge the mortgage.
In assessing damages, Justice Cook found that this breach caused a loss of opportunity; Mr. Trojansek’s refusal was the only reason Mr. De Rita could not complete the Bruce Avenue purchase. Given this, a proper damage award should put Mr. De Rita in the same position as if the contract had been performed and he had purchased the property at the discounted price. Before awarding damages, Justice Cook had to consider whether Mr. De Rita’s losses were foreseeable to Mr. Trojansek and if Mr. De Rita could have mitigated them.
On foreseeability, she found that “A party registering a charge against title to property of another must foresee the consequences of continuing to encumber title once the charge is spent”. In other words, Mr. Trojansek should have known that his refusal to discharge the mortgage would impair Mr. De Rita’s ability to access the equity in the Ouellette Avenue property and that this could have negative consequences. This principle was particularly relevant as both parties are experienced real estate investors. This meant that Mr. Trojansek should have been particularly aware of the fact that Mr. De Rita might have used the Ouellette Avenue property to facilitate a secondary transaction. Mr. Trojansek was in a position to foresee that refusing to discharge the mortgage could cost Mr. De Rita such an opportunity.
On mitigation, Justice Cook accepted evidence that most of Mr. De Rita’s funds were tied up in the Ouellette Avenue property and that applying to the court to have the mortgage discharged was a reasonable effort to permit him to purchase the Bruce Avenue property. Justice Cook awarded Mr. De Rita approximately $150,000 in damages, the difference between what he agreed to pay for the Bruce Avenue property and what it eventually sold for on the open market.
The Court of Appeal Upholds the Damages Award
Mr. Trojansek appealed. He raised four issues with the lower court ruling: causation, remoteness/foreseeability, mitigation, and the date of assessment. On the issue of remoteness/foreseeability, the court upheld Justice Cook’s reasons, adding additional guidance on recoverability of damages flowing from failed real estate transactions.
Mr. Trojansek argued that Justice Cook erred in light of the case of Kienzle v. Stringer (1981), 35 O.R. (2d) 85 (C.A.), which states that losses from a secondary transaction are unrecoverable. The ONCA disagreed, distinguishing this case from Kienzle because, in Kienzle, the party that retained an interest in the property was unaware of any secondary transaction. Unlike Mr. Trojansek, the selling party in Kienzle had no reason to believe that the property would be used to facilitate a secondary transaction. If that party was aware that this was a possibility, they would have assumed additional risks related to the secondary transaction. Consequently, the selling party would have better understood necessity of discharging their remaining interest in the property to facilitate the secondary transaction and the risk of liability if they failed to do so.
In this case, Mr. Trojansek was well aware of Mr. De Rita’s business in commercial real estate when the contract was agreed and that the Ouellette property was clearly a part of this business. Given this, Mr. Trojansek assumed the additional risks contemplated in Kienzle; he should have been aware of the necessity in discharging the mortgage and was therefore liable when his failure to do so cost Mr. De Rita the secondary transaction. Mr. Trojansek knew the risk of his action and was liable when it came to pass.
Notably, the ONCA also observed that while this loss was foreseeable at the time of contracting, notice delivered by Mr. De Rita in 2019 also could have made this loss foreseeable at a later point. In August 2019, after Mr. Trojansek’s initial refusal, Mr. De Rita provided notice of the necessity of discharging the mortgage and the consequences of failing to do so. This also would have made the risk of loss and liability foreseeable to Mr. Trojansek at a point when he still had a reasonable amount of time to act and prevent it.
Implications of De Rita
Damages related to secondary transactions are now recoverable under certain circumstances. This gives parties a new avenue to recoup their losses when they have suffered due to another party’s breach of contract. Conversely, this opens a new area of liability for parties selling property or holding mortgages. To recover these damages, or to be liable for them, it must be shown that a party knew, either at the time of contracting or a reasonable time before the loss, that the mortgaged property might be used to facilitate a secondary transaction. This evidentiary standard should guide parties involved in real estate transactions going forward.
De Rita confirms that keeping appraised of other parties’ intentions and broadcasting your own intentions are both important factors in the recoverability of damages should the transaction fail. Vendors must ensure that they are aware of whether or not a purchaser may seek to use the property to facilitate a secondary transaction in order to understand the urgency of its contractual obligations and the risk of liability related to a breach. Conversely, a party purchasing a property that they may later use to facilitate a secondary transaction must be sure that they broadcast their intentions. Taking steps to ensure that a vendor understands a buyer’s intentions and the liability they assume by retaining a mortgage can help to safeguard the buyer from losses if they find themselves in the unfortunate position of Mr. De Rita. For prudent parties, these should not represent drastic changes, yet in the wake of this decision they are vital to guard against losses and liability.
