Introduction
In two recent cases, the Ontario Superior Court of Justice (Court) endorsed a shift away from the view of specific performance as an “extraordinary” remedy in the context of commercial real estate disputes. In such disputes, courts typically utilize the remedy of damages to award the successful party an amount of money that is the financial equivalent of the performance of the contract, whereas the remedy of specific performance requires the unsuccessful party to actually perform the act outlined in a contract or agreement. However, in both recent cases, the Court granted specific performance to the plaintiffs in the context of commercial real estate transactions, ordering the transfer of land and the granting of possession of leasehold premises, respectively. Typically, specific performance is a remedy reserved for extraordinary circumstances and is considered very difficult to obtain. However, these two recent cases may signal a shift towards specific performance being a more commonly available remedy in commercial real estate disputes, at least where the facts support the remedy.
Despite very different facts, the Court granted the same remedy in both recent cases. 2730453 Ont Inc. v. 2380673 Ont Inc. (2730453 Ont Inc.) deals with a dispute involving a purchase and sale agreement that the vendor, the owner of the property in question, breached by refusing to close without a lawful excuse. In Bellwoods Brewery Inc. v. 1896841 Ontario Limited (Bellwoods), the landlord breached a lease agreement by refusing to vacate the premises leased to the tenant. Notably, Justice Robert Centa heard both cases and offered similar reasoning for granting specific performance in both cases.
These cases concerning the availability and applicability of the remedy of specific performance will have an impact on whether the right to pursue such remedy is explicitly included or excluded in commercial real estate agreements.
Background
2730453 Ont Inc. v 2380673 Ont Inc., 2022 ONSC 6660
2730453 Ont Inc. dealt with an oral agreement for the purchase and sale of land. The plaintiff corporation (Purchaser) was a project-specific company incorporated to purchase the disputed property (Property). The Purchaser purchased a 32-acre lot located in Milton, Ontario owned by the defendant corporation (Vendor), 2380673 Ontario Inc. The principal of the Vendor was also the principal of Rivanera Holdings Inc. (Rivanera), a corporation that owned an 81-acre lot located immediately west of the Property.
The highlighted portion of the image above illustrates the property in dispute and the property owned by Rivanera.
From 2018 to 2019, the Purchaser’s real estate broker and the Vendor’s real estate broker engaged in negotiations for the purchase and sale of the Property, but could not reach an agreement. In September 2019, the Purchaser’s broker and Vendor’s broker exchanged emails and phone calls agreeing to a C$4.1-million purchase price with C$200,000 as commission to both brokers, split evenly. Both the Purchaser and Vendor retained lawyers, but the parties did not enter into a formal agreement of purchase and sale for the Property at that time.
The existence of an easement on the Property (Easement) became an issue between the parties. In December 2019, the Purchaser’s lawyer sent a list of requisitions to the Vendor’s lawyer that included requiring the Easement’s removal before closing. The Vendor’s lawyer responded that the Easement would not be removed, and the Vendor would cancel the transaction over the Easement and the Purchaser’s related requisition. The Purchaser’s lawyer then sent the Vendor’s lawyer an executed agreement of purchase and sale that contemplated the discharge of all liens and encumbrances on the Property that would have included the Easement. The Vendor’s principal sent an email to the Vendor’s broker stating, “No closing.” The Vendor’s broker subsequently sent a new draft of the agreement of purchase and sale to the Purchaser’s lawyer that contemplated the Easement remaining in place on the Property. Within eight minutes of receiving such draft, the Purchaser’s lawyer responded, agreeing to the amendments. The Purchaser’s lawyer subsequently sent a number of messages to the Vendor’s lawyer from January 7, 2019 to January 8, 2019 and received no response. The Vendor’s lawyer responded to the final message stating the owner refused to close with no explanation.
The Purchaser brought an action against the Vendor for breaching the purchase and sale agreement, which included a claim for specific performance.
Bellwoods Brewery Inc. v. 1896841 Ontario Limited, 2023 ONSC 2845
Bellwoods dealt with breaches to a commercial lease agreement. Bellwoods Brewery Inc. (Lessee) wanted to open a second location of its brewery business and hired Lennard Commercial Realty in November 2013 to help with leasing or purchasing a new location. At the same time, the principal of the defendant corporation (Lessor) retained a real estate agent to lease a portion of a building it owned (Leased Premises), located at 950 Dupont Street, Toronto, Ontario. The Court described the Leased Premises as an “extraordinary building,” which included an 11,000-square-foot glass box with approximately 40-foot ceilings.
In May 2015, the Lessor and Lessee signed a 20-year lease agreement for the Leased Premises (Lease). The agreement outlined that the Lessee would rent the glass box and part of the brick building to use as a brewery, restaurant and bar, public event space, retail beer store and office space.
Despite the Lease, the Lessee was never able to occupy the Leased Premises because the Lessor never vacated the Leased Premises. The Lessor permitted an existing tenant to continue its operations and failed to clear out the space as agreed in the Lease. On several occasions, the Lessee followed up with the Lessor, requesting that it abide by the Lease and provide vacant possession of the Leased Premises to the Lessee, but the Lessor and the Lessor’s real estate lawyer did not respond. The Lessor also rented the Leased Premises to third parties to host public events at the Leased Premises without the Lessee’s consent. The first event was promoted online as an “epic party” in a warehouse. When the Lessee expressed disapproval, the Lessor told the Lessee that it had cancelled the party but did not in fact do so. The Lessor also rented the Leased Premises for a two-week event to a clothing company, Vans, that included a skateboard park in the glass box and live music performances. The Lessor’s principal later conceded to the Court that this event was permitted because the Leased Premises was empty and the Lessor’s principal wanted “to make a little bit of money.” With the Lessor failing to vacate the Leased Premises for 18 months from June 2015 to January 2017, the Lessee was unable to start important preparatory work for its future operations and brand expansion.
The Lessee brought an action against the Lessor for repeatedly breaching the Lease, claiming for damages caused to its business and for entitlement to specific performance. The Lessor took the position that it did not breach the Lease because the Lease did not require the Lessor to vacate the premises and the rentals to third parties and did not interfere with construction.
Decisions
Somewhat surprisingly, in both cases, the Court awarded the plaintiffs specific performance. Citing Dhatt v. Beer, Justice Centa stated in both 2730453 Ont Inc. and Bellwoods that “it is inaccurate to describe specific performance as an extraordinary remedy.” These judgments may signal a shift away from the usual remedy in commercial real estate disputes, which is damages for the amount that will provide the non-breaching party with the financial equivalent if the breaching party had performed its obligations under the applicable underlying contract.
For specific performance to be granted, damages must be shown to be inadequate to compensate for the loss of the property. In determining whether to grant specific performance, the “fundamental question is whether the plaintiff has shown that the land rather than its monetary equivalent better serves justice between the parties.” Notably, the Court relied on the same specific performance precedents in real estate disputes for both cases in deciding to grant such remedy: Erie Sand & Gravel Ltd. v. Seres’ Farms Ltd., Semelhago v. Paramadevan, and Di Millo v. 2099232 Ontario Inc.
Lucas Three-Prong Test
In both cases, Justice Centa relied on the three-prong test for specific performance set out in Lucas v. 1858793 Ontario Inc. (Howard Park) (Lucas). The Court will look at: (i) the nature of the property involved, (ii) the related question of the adequacy of damages as a remedy; and (iii) the behaviour of the parties, having regard to the equitable nature of remedy.
Nature of the Property
The first prong in Lucas was considered most thoroughly by the Court in both cases. The court will look to the uniqueness of the property and ask whether its substitute is readily available. Land is “unique” when there is “no readily available substitute property…[as it] cannot be readily duplicated.”
In 2730453 Ont Inc., the Court described three characteristics to illustrate the Property’s uniqueness:
The location of the Property and its proximity to major highways being “desirable for the intended development purposes.”
The Purchaser’s relative ease to develop the land if the Purchaser group owned a “larger parcel of land, unbroken by other owners.”
None of the other parcels of land adjoining the Purchaser group’s existing property had recently been or were then available for purchase.
In holding that the Property was unique, the “most important feature” was that other readily available properties did not share a property line with the Purchaser group’s existing property.
In Bellwoods, several factors illustrated the uniqueness of the Leased Premises including:
The size and structure of the glass box.
The space for a patio with capacity for 300 people and a second patio with capacity for 70 people, and the fact that under the Lease, the Lessee did not have to pay for approximately 7,000 square feet of patio space.
The Leased Premises being close enough to the Lessee’s original location “without cannibalizing its [existing] consumer base.”
The Leased Premises having “sufficient space and versatility” to be used as a brewery, restaurant and bar, bottle shop, and event space.
Interestingly, both cases used expert witnesses to help assess and identify the uniqueness of the properties. The expert witness called by the Purchaser in 2730453 Ont Inc. was a land use planner who spoke to the uniqueness of the Property from a land development perspective when considered in conjunction with the Purchaser group’s existing property. The expert witness drew on characteristics such as the “extensive visibility and exposure from Highway 407,” the proximity to major expressways like the ON-403, and its location in an employment hub. In Bellwoods, the Lessee’s expert witness was an event planner, who described the uniqueness of the Leased Premises as an event venue, including its “authentic, hip, and cool warehouse aesthetic,” proximity to public transit and to Toronto’s downtown core, capacity and lack of noise pollution constraints. While the Lessee did not call an expert to assess and identify comparable properties, the Lessor introduced evidence of 30 available properties located downtown. However, the Lessee pointed out that the “least worst” comparable property did not have patio space, high ceilings, sufficient space for a restaurant or event space, and may not have had a long-term lease available.
Damages as an Inadequate Remedy
The second prong in Lucas assesses whether damages would be an adequate remedy. The “fundamental question” is whether the plaintiff has demonstrated that the “property, rather than its monetary equivalent, better serves justice between the parties.”
In 2730453 Ont Inc., the Court held that damages were insufficient because the Purchaser had plans “to fold [the Property] into other land that it owns for ongoing commercial and developmental purposes.” Similarly, in Bellwoods, the Court held that damages were insufficient because the Lessee entered the lease for its “ongoing commercial purposes” and as an “opportunity to enhance its brand.”
Behaviour of the Parties
The Court briefly considered the third prong in Lucas in each case, finding no facts to deny the applicable plaintiff equitable relief. The Court in Bellwoods, in awarding such relief, emphasized the Lessee’s repeated attempts to “accommodate the [Lessor’s] failure to comply with its obligations under the [Lease],” providing “many chances to find a reasonable solution.”
Other Factors Considered by the Court
The Court in 2730453 Ont Inc. assessed the credibility of the witnesses called by both parties before establishing whether specific performance was the appropriate remedy. The Vendor’s principal was found less credible than the other parties on examination due to several inconsistent statements and the use of deliberately vague language, as well as his demeanour and response when challenged on the use of such statements and language. The Court also refused to accept the “idiosyncratic subjective meaning urged by [the Vendor’s principal]” and was “very troubled” by the “willingness to say things under oath…[with] no foundation for those statements.”
The Possibility of Further Damages
In Bellwoods, the Court awarded further damages to the Lessee in addition to the remedy of specific performance. The Court awarded damages of C$1.59-million for the breach of the Lease and C$4.52-million for the delay in operating its business that should have begun on August 1, 2016. The damages were calculated from the business lost from August 1, 2016 to June 1, 2024 (the projected opening date) based on the revenue from the Lessee’s original location.
Conclusion
While damages will not be replaced as the most commonly granted remedy in commercial real estate disputes, specific performance may be an increasingly available remedy in such disputes and is a remedy worthy of consideration for real estate practitioners and market participants when negotiating commercial real estate transaction agreements.
In addition to considering how the three-prong test for granting specific performance in Lucas was applied in each case, lawyers representing clients in commercial real estate disputes should consider whether a court could find either party to a dispute to have been acting unreasonably or irrationally. In both recent cases, the Court considered the unsuccessful party to have not acted in a reasonable and rational manner, and such a finding in a future dispute could make the court more likely to provide the successful party with the remedy of specific performance.
These cases serve to emphasize the importance of a property’s uniqueness and the characteristic’s possible impact during negotiations of a purchase and sale agreement or a lease. Both cases had facts extremely favourable to the Court finding that the applicable properties were unique, and therefore the Court was able to grant specific performance as the appropriate remedy. If negotiations include whether to include or exclude the remedy of specific performance, it is the uniqueness of the property that should inform one party, or the other choosing to argue whether or not this remedy should be included or excluded in the agreement or lease.
For more information, please contact: