The authors of this article gratefully acknowledge the assistance of Alexis Bowie, student-at-law.
The majority decision of the Supreme Court of Canada in Southcott Estates v. Toronto Catholic District School Board1, written by recent appointee Madame Justice Karakatsanis, explores the responsibilities of a single-purpose corporation purchaser of land to mitigate its loses when seeking specific performance and reaffirms the difficulty in obtaining this remedy from the courts.
The Facts
The Plaintiff ("Southcott"), a part of the Ballantry Group of Companies, was a single purpose company incorporated solely to purchase a parcel of surplus land from the Defendant ("School Board") and develop it. The parties entered into an agreement of purchase and sale (the "Agreement") for $3.44 million, and Southcott paid a 10 percent deposit. The Agreement was conditional on the School Board obtaining a severance from the Committee of Adjustment on or before closing. The closing date was extended once, and after the severance application was dismissed as premature because it was not accompanied by a development plan, the School Board declined to accept a further extension. The School Board terminated the Agreement and returned the deposit.
Southcott commenced an action for specific performance or, in the alternative, for damages. Southcott did not attempt to mitigate its losses by attempting to purchase another property. Southcott argued that the company's sole purpose was to purchase this particular parcel of land and that it would be unable to mitigate its losses without capital investment from the parent company or a corporate mandate to do so. It claimed that "it would be reasonably foreseeable to those contracting with a single-purpose corporation that such an entity would have finite resources and a confined corporate mandate".
The Initial Decision
At trial, the Court refused to order specific performance on the basis that the property was not unique, and awarded damages in the amount of $1,935,500.00. The Court of Appeal upheld the trial court's decision, but reduced the damages to a nominal $1.00 finding that Southcott had unreasonably failed to take available steps to mitigate its losses. The key issue on the appeal to the Supreme Court was whether a plaintiff must mitigate losses where the plaintiff has made a claim for specific performance.
The Decision of the Supreme Court of Canada
The Supreme Court held that it was not reasonable for the plaintiff to refuse to mitigate despite the fact that purchasing that specific land was its sole purpose. Karakatsanis J. wrote, "not requiring single-purpose corporations to mitigate would expose defendants contracting with such corporations to higher damage awards than those reasonably claimed by other plaintiffs, based solely upon their limited assets." While the single- purpose corporation is entitled to the benefits of limited liability, Karakatsanis J. points out that it is also "saddled with the responsibilities that all legal entities have. The requirement to take steps to mitigate losses is one such responsibility".
Karakatsanis J. goes on to state that the land's "unique qualities related solely to the profitability of the development for which damages were an adequate remedy" and that "a 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 he can show that money is not a complete remedy because the land has a 'peculiar and special value' to him". The Court held that Southcott could not make that claim.
McLachlin C.J.C. wrote a dissent in this case, finding it difficult to conclude that the Plaintiff acted unreasonably under the circumstances. She found that "the act of filing a claim for specific performance is inconsistent with the act of acquiring a substitute property. A plaintiff, acting reasonably, cannot pursue specific performance and mitigate its loss at the same time. It makes no sense for a reasonable plaintiff seeking specific performance to effectively concede defeat and buy a substitute property. The plaintiff could end up with two properties – one it wanted and one it did not". She goes on to note that since specific performance is an equitable and discretionary remedy, "demanding that losses be mitigated unless success in obtaining specific performance is assured would deter valid claims for specific performance and hold plaintiffs to an impossible standard".
Conclusion
It is common for real estate developers to create single-purpose corporations for the sole purpose of purchasing and developing a specific property for profit. After Southcott, it will be difficult for a purchaser of commercial real estate to make a successful claim to specific performance without clear evidence that the property in question has a unique characteristic. A single-purpose corporation will have to demonstrate that it has taken available steps to mitigate its losses by making efforts to purchase another property before it can successfully make a claim for specific performance or damages for breach of contract.
Footnotes
1.nbsp;2012 SCC 51
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