Member Article

The Supreme Court of Canada released its decision today in Southcott Estates Inc. v. Toronto Catholic District School Board, 2012 SCC 51 which addressed a number of thorny issues relevant to commercial real estate disputes including whether a Plaintiff must mitigate its damages where it has made a claim for specific performance of a real estate contract.  The decision has wide-ranging implications for Commercial Real Estate developers.

The Plaintiff was a single-purpose corporation which was part of the Ballantry Group of associated companies, a developer that acquires and develops land in the Greater Toronto Area.  As such, the Plaintiff had no assets and was created for the sole purpose of developing property that was the subject of the action.  The Defendant Vendor failed to satisfy a condition and refused to extend the closing date and therefore the Plaintiff sought specific performance of the contract.  The Plaintiff did not attempt to purchase any other property to mitigate any damages it may have sustained – it simply wanted the Vendor to abide by the contract.  The trial judge had refused to order specific performance because the property was not “unique” and damages were an adequate remedy but he did award damages for loss of chance of profit in the amount of just under $2 million.  The Ontario Court of Appeal concluded that the Plaintiff had unreasonably failed to take steps to mitigate its loss and reduced the damage award to a nominal amount.  The appeal to the Supreme Court of Canada raised three issues: 

1. Whether a single purpose company should mitigate its losses;
2. To what extent must a Plaintiff mitigate where the Plaintiff has made a claim for specific performance; and
3. Did the trial judge err in concluding there was no evidence of comparable properties available for mitigation?

In a 6 to 1 decision, the Supreme Court of Canada dismissed the appeal.  In the decision, the Court considered the nature of single-purpose corporations created within a larger group of companies which is a common practice with commercial real estate developers.  The Court commented that these single-purpose corporations cannot avoid mitigating their damages simply because they have no assets because that would be an unfair advantage over those conducting businesses without the use of single-purpose corporations.  The Court concluded that the Plaintiff could not reasonably refuse to mitigate.  There were clear findings of fact that the land was nothing more unique to Southcott than a singularly good investment and it was not a case in which damages were too speculative or uncertain to be a satisfactory remedy.  Unique qualities of the property related solely to the profitability of the development for which damages were an adequate remedy and thus mitigation principles were engaged.  The Court went on to state that the Plaintiff deprived of an investment property does not have a “fair, real and substantial justification” or a “substantial and legitimate interest” in specific performance unless it can show that money is not a complete remedy because the land has a peculiar and special value to it.  As the Court found that the Plaintiff was engaged in a commercial transaction for the purpose of making a profit, the Plaintiff could not make such a claim in this case.  As such, it could not justify its inaction and was required to mitigate its damages.  In that respect, a Defendant must establish not only that the Plaintiff failed to take reasonable efforts to find a substitute but also that a reasonable profitable substitute could be found.  Other suitable development lands were available and therefore a decision by the Ballantry Group to not purchase them in the Plaintiff’s name was based on other considerations.  As a result, the Plaintiff could have reasonably avoided its loss and it was not able to claim the damages as awarded by the trial judge.

This decision is significant in that, among other things, many Commercial Real Estate developers utilize single-purpose corporations for various legitimate reasons while developing properties.  However, the use of these single-purpose corporations may have an impact upon a claim for specific performance and/or damages with the corresponding duty to mitigate should the transaction fail to complete due to a breach by a Vendor.  Given the number of collapsing real estate transactions we have seen over the last several years in British Columbia due, in part, to the state of the real estate market generally, Commercial Real Estate developers will need to carefully consider the impact of this decision as it will inform steps they ought to take in response to a real estate deal that does not close.