Lost Profits or Market Value? A Look at Damages in Failed Real Estate Deals

Alberta and Ontario – two of Canada’s major commercial real estate jurisdictions – have both signalled a strong alignment in limiting the recovery of expansive economic and business losses arising from breaches of contract in failed real estate transactions.

The 2023 Rosseau decision by the Ontario Court of Appeal and a recent decision by the Alberta Court of Appeal in Remington underscore judicial commitment to predictability and uniformity in awarding compensatory damages, establishing a high bar for departing from market-based assessments of damages (or “normal measure of damages”) to consider more expansive economic losses related to planned and/or future uses of the property by the purchaser.

The “normal measure of damages” in a commercial real estate breach of contract case is the difference between the contract price and the market value of the property at the date of breach or closing.

Lost Business Opportunities

Courts have held that this provides a predictable, objective, and commercially certain method for assessing damages by assuming the market value reflects the property’s full value, including current and potential uses (such as development potential known to the market).

In the real world, however, real estate developers often make decisions, obtain financing, attract investors, and incur expenses based on future or planned uses of a property. From the point of view of a disappointed developer, losses can include lost profits, loss of business opportunities, additional costs incurred to mitigate a breach, and wasted expenditures.

At the trial level in both Rosseau and Remington, the trial judges awarded damages based on anticipated profits and/or value related to planned (or in the case of Remington, likely) future uses of the property by the disappointed developers. In Rosseau, the trial judge awarded $11 million to the plaintiff developer.

‘Pie In the Sky’

In Remington, the trial judge awarded over $165 million in lost development profits plus over $45 million in interest, based on expert evidence about a hypothetical multi-building development called Rail Town.

Remington had no specific development plan when the 2002 contract was formed. Its president described only vague ideas or “pie-in-the-sky” concepts. Despite this, the trial judge found it foreseeable that Remington would develop the lands in the most profitable way possible under market conditions and awarded damages accordingly.

In Rosseau, the Ontario Court of Appeal reversed the trial judge’s assessment of damages based on anticipated development profits and ordered damages to be assessed based on the difference between the contract price and the fair market value at the time of the breach.

The Alberta Court of Appeal in Remington ordered a new trial liability. However, it provided extensive guidance on how damages should be assessed, adopting with approval the principles laid out in Rosseau.

Normal Measure of Damages

The Alberta Court of Appeal emphasized that for failed real estate transactions, the normal measure of damages is the difference between the contract price and the market value at the date of breach, reflecting the land’s value including its development potential known within the marketplace. Departing from this measure requires proof that market value does not adequately compensate for the type of loss suffered, for example where the property has a unique special value not reflected in market appraisals.

Alignment with Rosseau

It cited Rosseau in holding that lost profits from hypothetical developments are not normally recoverable unless the innocent party can show that the normal market-based measure is inadequate. Like in Rosseau, the Alberta appeal court reiterated that market value generally captures a property’s current and potential uses, including development opportunities.

Remoteness of Damages

It reviewed Hadley v. Baxendale principles, emphasizing that recoverable damages must arise naturally or be reasonably foreseeable as contemplated by both parties at contract formation. The justices went back to basics on the two branches of Hadley:

1. First branch: Losses that arise naturally in the ordinary course.
2. Second branch: Losses arising from special circumstances known to both parties at contracting.

The trial judge had found that lost development profits fell under the first branch of Hadley, despite Remington not having communicated any specific plans to the vendor, CP Rail. The appeals court disagreed, noting that general awareness of future development intentions is insufficient to justify speculative profit awards. It found the trial judge erred by treating broad hypothetical lost profits as arising “naturally” under the first branch of Hadley.

It found that the trial judge failed to use the normal measure of damages as the presumption and conduct an analysis of whether the presumption was rebutted.

From a policy perspective, the appeals court agreed with submissions by the appellants that awarding extraordinary damages based on speculative future profits risks unfairly burdening the breaching parties and undermines commercial certainty. The trial judge had made the appellant vendor an unwitting guarantor of $165 million in speculative profits on a $7.7 million land transaction.

Rebutting ‘Special Value’

Remington had argued the normal measure was inadequate because it owned adjacent lands, enabling unique development synergies. The Alberta appeals court noted Rosseau’s footnote suggesting such situations might rebut the normal measure of damages and allow for more expansive economic losses. However, the Court found no analysis at trial of whether market appraisals already captured this potential. Evidence from a 2006 appraisal valued the lands in combination with Remington’s adjoining properties, indicating market value may have reflected such synergies.

Key Takeaway

Both appeal courts have now reaffirmed that compensatory damages for breach of a real estate contract are presumptively based on the difference between market value and contract price. Lost profits from hypothetical developments are not recoverable unless there is clear evidence of a specific, crystallized development plan contemplated by both parties at the time of contracting, and only where market value does not already reflect that special value. This approach enhances commercial certainty by avoiding speculative and disproportionate awards.

Mara Mallory is a lawyer with Lawson Creamer. Her practice includes civil litigation and administrative law. She can be reached at mmallory@lawsoncreamer.com.