Ontario Court Of Appeal Upholds Damages Award For Loss Of Projected Development Profits In Failed Real Estate Transaction

Introduction

Damages for breach of contract are meant to put the innocent party into the financial position it would have been in had the contract been fulfilled. In Rousseau Group Inc. v 2528061 Ontario Inc.,¹ the Ontario Court of Appeal overturned a trial decision assessing damages based on lost profits anticipated over a period of time. The Court of Appeal re-affirmed that where a contract for the purchase of real property is breached, damages are normally quantified by the difference between the contract price and the market value of the land on the closing date.² Market value generally represents the financial equivalent of the asset. It takes into account the opportunity to profit off the land as it is “the price at which knowledgeable arms’ length parties are prepared to transact given their assessment of the opportunity the property provides and the chance of realizing on it successfully”.³  Where the subject property has appreciated in value between signing and closing, the difference between the contract price and the market value thus serves as a useful proxy for damages.

The tendering of expert appraisal evidence of market value or advancing evidence of an actual sale price following a commercially reasonable sales process are not, however, the only means of quantifying damages in a failed real estate transaction. In the recent Ontario Court of Appeal decision Block Developments Inc. v Brewers Retail Inc., the Court of Appeal upheld a damages award that departed from the normal measure. The Court awarded $15.5 million based on projected development profits contemplated by the parties when they entered into the Agreements of Purchase and Sale, rather than relying on the resale price of the properties and in the absence of any traditional appraisal evidence.

Summary of Facts

In February 2015, Brewers Retail Inc. (“Brewers”) listed ten Ontario properties for sale, marketing them as excellent development opportunities on a lease-back basis. Under this arrangement, the purchaser would grant Brewers the right to continue using each property until it was demolished for redevelopment and, following redevelopment, the right to occupy a specified amount of retail space on the ground floor of the redeveloped project.⁴

In June 2015, Block Developments Inc. (“Block”) and Brewers executed two Agreements of Purchase and Sale (each, an “APS”) for the purchase of 1200 Dundas St. W. (the “Dundas Property”) and 28 River St. (the “River Property”, together the “Properties”). Block agreed to purchase the Dundas Property for $6.9 million and the River Property for $4.9 million, with a closing date in December 2015. Each APS contained conditions, including a Buyer’s Diligence Condition and a Mutual Lease Condition requiring the parties to agree on the form and content of an Interim Agreement to Lease (under which Brewers would lease a portion of the Property until redevelopment) and a Long Term Agreement to Lease (under which Brewers would lease a portion of the Property after redevelopment).⁵

In September 2015, the parties executed amended agreements whereby: (a) the price for the Dundas Property was reduced to $6.15 million and the River Property to $4.15 million; (b) Block waived the Buyer’s Diligence Condition; and (c) the deadline for the Mutual Lease Condition was extended to the end of October 2015. Due to a misrepresentation by Brewers’ representative, Tom, the Mutual Lease Condition was not fulfilled or waived by the deadline. However, Block believed that discussions would continue and that the lease dates would be backdated once the terms were agreed upon.⁶

Prior to end of October 2015, Tom approached another party, Rosewater, who had previously expressed interest in the Properties but had been outbid. The principal of Rosewater was Tom’s friend and business associate. When Rosewater indicated continuing interest, Tom obtained Board approval to sell the Properties to Rosewater.⁷

At the beginning of November 2015, Brewers terminated both APSs, relying on the alleged non-fulfillment of the Mutual Lease Condition. Days later, Rosewater submitted agreements to purchase the Dundas Property for $5.45 million and the River Property for $4.5 million – a combined total of $350,000 less than Block had agreed to pay. The sales to Rosewater closed in December 2015.⁸

The Ontario Superior Court’s Damages Analysis

At trial, the Ontario Superior Court awarded Block $15.5 million in damages. The trial judge found that the normal means of measuring damages would not appropriately or fairly assess Block’s loss. The trial judge preferred a lost-development-profits approach, which had been adopted by both parties’ economic loss experts.⁹ Both experts used the same methodology: each assessed damages at the date of breach having regard to future revenues generated by the anticipated development net of costs, and applied the same discount rate of 10% to account for the risk of negative contingencies and to present-value the calculated profit as of the APSs’ closing date.¹⁰

Block’s expert estimated the loss at $15.5 million, while Brewers’ expert estimated it between $7.6 million and $10.2 million. The primary point of divergence was their disagreement on the estimated construction costs and the appropriate construction period. The trial judge found Block’s expert’s analysis to be more reliable and preferable and awarded the full $15.5 million.¹¹

The Court of Appeal’s Analysis and Distinction from Rousseau

On appeal, Brewers argued that the trial judge committed the same reversible error committed by the trial court in Rousseau, namely, awarding development profits instead of the difference between the contract price and the market value of the Properties on the date of the breach. Brewers argued that the market value of the Properties ought to be the price it obtained on resale to Rosewater and that, accordingly, Block suffered no damages.¹²

The Court of Appeal did not find that the trial judge committed the same error. In coming to this decision, the Court of Appeal identified three factors distinguishing this case from Rousseau:

• The trial judge used the date of the breach (the closing date) as the assessment date, unlike the trial judge in Rousseau who used a time period of 6 years without justification;
• The damages calculation took into account the time required to realize the cash flows and the risks involved in achieving those cash flows, through the application of a discount rate to the estimated profits. In contrast, the development consultant in Rousseau, who determined the quantum of lost profits, did not apply any such discount;
• The discount rate was formulated to answer what a reasonable party would pay at the date of breach for the future stream of cash flows, accounting for risk and time value of money. In Rousseau, no consideration was given to what someone would pay at a particular point in time for projected profits.¹³

Based on the record, the Court of Appeal found that it was open to the trial judge to account for the loss of a specific development opportunity because that opportunity had a significant degree of specificity known to the parties at the time of contracting, and could therefore be treated as a recoverable type of loss.¹⁴

With reference to the distinguishing factors above, the Court determined there was no error in applying the lost-development-profit approach adopted by the parties’ experts. The Court noted that “the discount rate formulated by the parties’ experts and their use of it addresses a profoundly similar question with a profoundly similar focus as the normal measure”, as both experts formulated and applied their discount rate “to assess what a reasonable party would pay or accept at a certain point in time [the date of breach] in exchange for a future stream of cash flows, based on the risk of achieving such cash flows and the time value of money”.¹⁵  Accordingly, the trial judge’s assessment of damages reflected compensation for the difference between Block’s financial position on the date of the breach, and the position Block would have been in had Brewers satisfied its obligations under the APS.

Conclusion & Key Takeaways

Block v Brewers confirms that the normal measure of damages for failed real estate transactions remains the presumptive standard. However, courts may depart from it where the normal measure may not address the type of loss actually suffered by the innocent party.  An expert opinion that utilizes a present-value lost-development-profits approach may be sufficiently aligned with the normal measure so as not to constitute a reversible error if it uses the date of the breach as the assessment date and applies a discount rate to account for risk and time value of money.

Moreover, a vendor’s resale price is not automatically determinative of market value, particularly where the circumstances of the sale suggest it was not an arm’s length transaction reflecting the property’s full developmental potential.

Footnotes

1 Rousseau Group Inc. v 2528061 Ontario Inc., 2023 ONCA 814 [Rousseau].

2 Rousseau at para 62; Block Developments Inc. v Brewers Retail Inc., 2026 ONCA 431 at para 8 [Block (ONCA)].

3 Rousseau at para 88.

4 Block (ONCA) at para 18.

5 Block (ONCA) at paras 19-20.

6 Block (ONCA) at paras 21-22.

7 Block (ONCA) at para 23.

8 Block (ONCA) at paras 24-25.

9 Block Developments Inc. v Brewers Retail Inc., 2024 ONSC 1401 [Block (ONSC)] at paras 264-265.

10 Block (ONSC) at para 290.

11 Block (ONSC) at paras 258, 292, 296 and 299-300.

12 Block ONCA) at para 5.

13 Block (ONCA) at paras 61-64; Rousseau at paras 85-88.

14 Block (ONCA) at paras 69-70.

15 Block (ONCA) at para 75.

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2025