Law Times

Page 10 FOCUS January 14, 2013 Law Times • SCC creates stir with real estate ruling BY MARG. BRUINEMAN For Law Times A Supreme Court of Canada decision on the responsibilities of a purchaser in proposed land transactions is resonating in the legal, real estate, and development communities. The court upheld a lower court decision centering on purchasers' responsibilities to mitigate their losses in an aborted real estate transaction. The ruling also focused on the role of single-purpose companies. The ruling, according to observers, puts the responsibility on purchasers and could affect how they approach a sale. In Southcott Estates Inc. v. Toronto Catholic District School Board, the Supreme Court upheld an Ontario Court of Appeal finding that the school board was liable but awarded only nominal damages because of the development company's failure to mitigate its losses. When a deal falls through, a single-purpose company making a purchase must mitigate its losses by shopping for other property before suing the seller for breach of contract, the court determined. "The real significance is that it confirms that single-purpose corporations . . . must mitigate," says Sandy Robinson of Miller Thomson LLP, counsel for the Toronto Catholic District School Board. "The case also confirms that it will be very difficult for developers to obtain specific performance where the only unique thing about the land in question is the profits it can generate." Jenna Anne de Jong, an associate at Norton Rose Canada LLP, suggests the decision confirms that litigators need to take a very proactive approach with clients. "Liability is only half the battle; plaintiffs also have to prove their damages," she says. The majority finding on mitigation, she adds, is relevant on a broad spectrum and could affect other areas of law such as construction and employment. Southcott Estates began as a division of the Ballantry Group with the sole purpose of buying a parcel of land from the Toronto Catholic District School Board in 2004 for a residential development. Ballantry had advanced Southcott's inaction was reasonable, and Southcott enough money for a 10-perif not, whether it could have reasonably cent deposit on the $3.44-million purmitigated if it had tried to do so," the Suchase. Southcott had no other assets. preme Court stated, ultimately finding The closing day of the sale was exSouthcott couldn't justify its inaction. tended to allow the school board to seek a "Finding that losses cannot be reaseverance. When the school board wasn't sonably avoided, simply because it is able to obtain a severance by that date, it a single-purpose corporation within a refused to extend the closing further, relarger group of companies, would give turned the deposit, and killed the deal. an unfair advantage to those conductWhen Southcott sued in a case seeking business through single-purpose ing specific performance of the contract, corporations," the court found. the trial judge awarded it $1.9 million in According to Southcott lawyer Tom damages. While the Court of Appeal Curry of Lenczner Slaght Royce Smith found the board had breached its contractual obligations, it found Southcott The case reaffirms that it will be difficult for Griffin LLP, the decision changes how failed to mitigate its losses and reduced developers to obtain specific performance, the real estate community has typically approached land purchases. "It is an imthe award to $1. The Supreme Court says Sandy Robinson. portant decision about mitigation in two upheld the appeal court's findings. "The main issue is whether S [Southcott], a single- contexts," he says, pointing to the issues of whether a spepurpose corporation, was excused from mitigating its cial-purpose company has different responsibilities and losses when the vendor breached the agreement of pur- the decision's impact on its claim for specific performance. chase and sale, and particularly when it had promptly "It's created quite a stir. There's been a lot of discussion." Not long after its release, the decision became the subbrought an action for specific performance," wrote Justice Andromache Karakatsanis for the majority in a deci- ject of an hour-long professional development session hosted by the Canadian Bar Association and featuring sion released in October. Southcott, as a separate legal entity, had to mitigate counsel from both sides. Lawyer John O'Sullivan chaired its losses by looking for another piece of property on the panel. From his perspective, the decision sends a mesthe basis that it couldn't claim for losses it could have sage that anyone purchasing land for profit should think avoided, the court determined. The trial judge, Karakat- carefully before gambling on a specific performance. "The safer course is try to find a replacement property sanis wrote, erred in finding there were no comparable opportunities for mitigation. In dissenting, Chief Justice and sue for damages. Our courts are clearly not inclined Beverley McLachlin found the board had failed to estab- to let the purchaser cross their arms and insist on the lish at trial that there were other comparable properties property they bought if there are reasonable alternative properties around. There may be ways of improving the available for Southcott to mitigate its losses. Southcott argued it was limited as a single-purpose odds. Perhaps acknowledgment of uniqueness and the company when it came to mitigating its contractual loss availability of specific performance can be negotiated as a as it was impecunious. But the court found its claims term of the purchase agreement. Perhaps determination were based on accessing capital to complete the purchase. of the availability of specific performance early in the "A plaintiff cannot recover losses that could reasonably proceedings is possible. Bottom line: insisting on specific LT have been avoided. The overriding issue here is whether performance is risky." Recruiting? Post your position on Great rates. Great reach. Great results. Contact Sandy Shutt at sandra.shutt@thomsonreuters.com for details. www.lawtimesnews.com JobsInLaw 1/2 pg 5X.indd 1 2/9/11 9:58:11 AM

• Cover