In my previous post I discussed the remedy of specific performance, which is available to a purchaser when a vendor refuses to close a real estate transaction. In this post, I discuss the purchaser’s alternative entitlement to an award of damages for the vendor’s breach of the agreement of purchase and sale and more specifically, how such damages are quantified.
It is a basic principle of contract law that where a party breaches one of its contractual obligations, the innocent party is entitled to commence an action to recover the damages it sustained as a result of that breach. In the context of a failed real estate transaction, this basic principle entitles an innocent purchaser to seek damages against a vendor who has refused to close. Determining whether the purchaser is entitled to damages may be a straightforward exercise in contract interpretation. However, determining the amount of damages that should be awarded as a result of that breach is rarely as straightforward.
In an action for damages based on a vendor’s breach of the agreement of purchase and sale, the purpose of an award of damages is to put the plaintiff into the position that he or she would have been in had the transaction been carried out. The starting point in quantifying the purchaser’s damages in this regard involves a determination of the difference between the value of the subject property on the date of the vendor’s breach, and the value of the property at the time the action is heard. Because an action can, and often does take years to proceed from the initial stages through to trial, this price differential can be substantial. Further, the purchaser always has a duty to mitigate his or her damages. In the context of a failed purchase of an investment property, the Court in Mutual Apartments Inc. v. Lam recently held that the innocent purchaser could satisfy this duty by “returning to the marketplace to find a substitute” for the subject property. In that case, the Court held that 12 months was a reasonable period of time for the plaintiff to do so. The Court went on to say that “where the plaintiff mitigates his or her losses, then the plaintiff must give credit for the recovery”, such that the plaintiff should not receive a windfall for the vendor’s breach.
Therefore, where a purchaser seeks damages for a vendor’s failure to close a transaction, the plaintiff’s damages will be calculated in accordance with the price differential noted above, and reduced to the extent by which the purchaser mitigated, or should have mitigated its damages. As a final note, a purchaser will normally be entitled to an award of damages for the incidental costs it incurred in relation to the failed closing, such as additional storage fees, increased borrowing costs (if there has been an increase in mortgage rates), and other costs ordinarily incurred in closing a real estate transaction.
It is a basic principle of contract law that where a party breaches one of its contractual obligations, the innocent party is entitled to commence an action to recover the damages it sustained as a result of that breach. In the context of a failed real estate transaction, this basic principle entitles an innocent purchaser to seek damages against a vendor who has refused to close. Determining whether the purchaser is entitled to damages may be a straightforward exercise in contract interpretation. However, determining the amount of damages that should be awarded as a result of that breach is rarely as straightforward.
In an action for damages based on a vendor’s breach of the agreement of purchase and sale, the purpose of an award of damages is to put the plaintiff into the position that he or she would have been in had the transaction been carried out. The starting point in quantifying the purchaser’s damages in this regard involves a determination of the difference between the value of the subject property on the date of the vendor’s breach, and the value of the property at the time the action is heard. Because an action can, and often does take years to proceed from the initial stages through to trial, this price differential can be substantial. Further, the purchaser always has a duty to mitigate his or her damages. In the context of a failed purchase of an investment property, the Court in Mutual Apartments Inc. v. Lam recently held that the innocent purchaser could satisfy this duty by “returning to the marketplace to find a substitute” for the subject property. In that case, the Court held that 12 months was a reasonable period of time for the plaintiff to do so. The Court went on to say that “where the plaintiff mitigates his or her losses, then the plaintiff must give credit for the recovery”, such that the plaintiff should not receive a windfall for the vendor’s breach.
Therefore, where a purchaser seeks damages for a vendor’s failure to close a transaction, the plaintiff’s damages will be calculated in accordance with the price differential noted above, and reduced to the extent by which the purchaser mitigated, or should have mitigated its damages. As a final note, a purchaser will normally be entitled to an award of damages for the incidental costs it incurred in relation to the failed closing, such as additional storage fees, increased borrowing costs (if there has been an increase in mortgage rates), and other costs ordinarily incurred in closing a real estate transaction.
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