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Irvin Schein blogged, "The Latest on Specific Performance and the Duty to Mitigate"

Nov 02, 2012

Written by: Irvin Schein

The Supreme Court of Canada rarely hears appeals in commercial disputes anymore, but when it does, one can usually expect that a new direction is about to be taken.  Such was the case in Southcott Estates Inc. v. Toronto Catholic District School Board, a decision just released by the Supreme Court of Canada on appeal from the Ontario Court of Appeal in a dispute involving a land purchase. 

In this case, a developer, Southcott, incorporated a company purely to sign an agreement to purchase a particular piece of land for development (which is a common way of going about these transactions).  The company’s only asset was the deposit given to it by the developer that owned it to submit with its offer. 

Mitigation of damages is always a fundamental aspect of a damage claim.

The Defendant was a school board that agreed to sell the property.  As a condition in the sale agreement, the school board agreed that it would obtain a severance from the local committee of adjustments before closing. 

The board did apply for a severance but ran into procedural problems.  The committee of adjustment indicated to the board that it would have submit a development plan.  It was clear that it would be impossible to close the transaction by the scheduled closing date given the time it would take for a development plan to be prepared and submitted.  Southcott suggested that the closing date be put off into the future to allow for this to take place.  The board refused, declared the deal to be at an end, and returned Southcott’s deposit. 

Southcott felt that the board had breached the sale agreement by taking this step.  It sued the board for specific performance of the sale agreement.  In other words, Southcott asked the court to order the board to complete the transaction. 

Ordinarily, where a real estate sale agreement has been breached, the innocent party has an option.  The innocent party can sue for damages.  Alternatively, in appropriate circumstances, the innocent party can sue for an order requiring the party in breach to complete the deal. 

At one time, specific performance was a very viable option in real estate litigation.  In order to obtain it, the innocent party had to demonstrate that the land had some unique qualities to it, so that damages would not necessarily be an adequate remedy. 

This approach is no longer popular because it is no longer particularly viable.  In 1996, the Supreme Court of Canada stated that “while at one time the common law regarded every piece of real estate to be unique, with the progress of modern real estate development, this is no longer the case”.  The court determined that there had to be some “peculiar and special value” of the land to the Plaintiff. 

Since it is never an easy task to determine, at the outset of a dispute, whether a court will agree that piece of land (and particularly development land) possesses that quality, the decision as to whether or not to request specific performance is not easy either.  As a result, it is common practice to sue in the alternative.  In other words, the Plaintiff asks the court for specific performance.  However, specific performance cannot or will not be granted for any reason, the Plaintiff asks to be awarded damages instead. 

All of this is quite straightforward except that it leaves unanswered one critical question.  That question involves the extent of the Plaintiff’s obligation to mitigate its damages. 

Mitigation of damages is always a fundamental aspect of a damage claim.  While a Plaintiff is entitled to compensation for its losses following a breach of a contract, it also has a duty to take all reasonable steps to minimize those damages if that is possible to do.  If the court ultimately determines that the Plaintiff could have done something to reduce the damages suffered but failed to do it, the Plaintiff will be penalized accordingly. 

The problem that arises in specific performance cases is that the Plaintiff does not want to mitigate damages.  In fact, the Plaintiff would prefer not to be awarded damages.  The Plaintiff would prefer to have the property.  Where a Plaintiff wants the court to order a Defendant to convey the property, why would the Plaintiff take any steps to find similar properties somewhere else?  After all, the whole point of a specific performance action is that the property is unique and there is no substitute property readily available. 

Having said that, if the court ultimately finds that the property is not unique and only awards damages, the question of mitigation is going to be placed squarely on the table. 

In the Southcott case, which went through trial, appeal, and further appeal to the Supreme Court of Canada, all of the judges at all three levels agreed that the board had breached the contract. 

In this case, Southcott did not mitigate damages by trying to find a comparable property to purchase and develop.  It concentrated on its efforts to persuade the court to order the board to close the deal.

At trial, the judge found that specific performance was not an appropriate remedy because the land was not unique.  However, the trial rejected the board’s argument that Southcott had failed to mitigate its damages.  He felt that there were no comparable properties available for sale and awarded Southcott almost $2 million in damages.

The Court of Appeal agreed that the board had breached the contract but had a different view of the mitigation issue.  The Court of Appeal noted that the developer behind Southcott had been able to acquire other development lands during the relevant period of time, through a different corporate entity, and concluded that Southcott could have mitigated its damages completely by buying a comparable property.  The Court of Appeal determined that Southcott could have avoided all of its damages in this manner had it done so.  The fact that Southcott was a single-purpose corporation with no assets other than the money provided to it by its owner was not an answer.  If the owner was prepared to fund Southcott to the extent necessary to purchase the board’s property, the same could have been done for the purchase of a comparable property.  The Court of Appeal then reduced the damage award to $1.00.

The panel of seven Supreme Court of Canada judges heard the appeal from the Court of Appeal’s decision.  This decision was split 6 to 1.  The Chief Justice was the dissenting judge. 

The majority sided with the Court of Appeal, and agreed that Southcott had been required to mitigate its damages notwithstanding its claim for specific performance.  The overriding issue, according to the Supreme Court of Canada, was whether Southcott’s failure to find an alternate property was reasonable.  Southcott had taken the position that the property was uniquely well situated and that this gave it the unique character required to constitute a fair justification for specific performance.  The majority at the Supreme Court of Canada disagreed and felt that the land was not unique but rather simply a particularly good investment.  This was not a case in which damages were too speculative or uncertain to be a satisfactory remedy.  The only thing unique about the property had to do with its potential profitability and damages were certainly an adequate remedy to address profitability. 

The majority went on to make an even broader statement about developers purchasing properties.  In order to avoid the duty to mitigate in a specific performance case, a Plaintiff must have a “fair, real and substantial justification” for failing to mitigate or a “substantial and legitimate” interest in specific performance.  To the majority at the Supreme Court of Canada, a developer buying an investment property will never meet that test.  Since developers buy properties because of the potential for profit, it appears that specific performance is simply not going to be available to them.  As a result, developers simply have to make reasonable efforts to mitigate their losses by looking for properties elsewhere.  The fact that the plaintiff/purchase is a single-purpose corporation, without funds in its bank account to use to buy another property, is not going to matter. 

For some time now, the availability of specific performance on anything other the theoretical level has become increasingly questionable.  In my view, this case closes the door completely as far as real estate developers are concerned.  Whether or not it sounds the death knell for specific performance as an effective remedy for anybody else remains to be seen.  In the meantime, however, anyone suing for specific performance, either alone or with damages claimed as an alternative, had better think long and hard before making a decision not to at least try to mitigate damages.