Executive Summary: Key Legal and Evidentiary Issues

• Dispute centres on a conditional commercial real estate purchase for Parcel 6, contingent on municipal approval of a condominium conversion within two years.
• Core contractual issue is whether the vendor breached the duty of honest performance and any implied obligation to take reasonable steps to obtain condominium approval.
• Appellate court finds palpable and overriding errors in the motion judge’s conclusion that the vendor knew the condominium plan was futile and failed to act in good faith.
• Reliance on unjust enrichment is held to be legally improper because a detailed contract governed deposits, rent, improvements, and remedies if approval was not obtained.
• Motion judge’s reasons are found inadequate for failing to address the vendor’s counterclaim for fair market rent after expiry of the two-year term.
• Appeal is allowed, the $285,000 damages award is set aside, a limited new trial is ordered, and the appellants obtain $15,000 in costs of the appeal while all other monetary outcomes remain undetermined.

Background and contractual framework

In 2016, Volundur “Wally” Thorbjornsson acquired land in Carleton Place, Ontario, known as the “Post Yard”, in trust for Icetrading Inc., intending to develop a condominium industrial park. The respondents, Vasil Trayanov and Olia Stantcheva, operated a granite business and wished to acquire an unsevered portion of that property, referred to as Parcel 6, from which to run their operations. Before the Post Yard acquisition closed, the parties entered into a written agreement of purchase and sale. The purchase price for Parcel 6 was set at $275,000, but the agreement was expressly conditional on Icetrading obtaining municipal approval to convert the larger Post Yard into a commercial condominium within two years of closing. The contract obliged Icetrading to “proceed expeditiously with an application to convert” the Post Yard. The structure of the deal reflected the risk that municipal approval might not be forthcoming and allocated benefits and remedies accordingly. The respondents paid $75,000 up front, described as a “deposit”, which the contract stipulated would be used to help Icetrading purchase the Post Yard. The agreement provided that if condominium conversion was not achieved within the two-year period, the purchasers could elect to demand repayment of that $75,000. In that event, they were required to vacate Parcel 6 within 30 days and accept that they would receive no further compensation beyond the return of the deposit, as set out in clause 6.

Key payment terms and clause 6

In addition to the $75,000 deposit, the agreement required monthly payments of $1,333.33. The contract distinguished between different periods: during the first year, these payments were “deemed to be rent for the use and occupation” of Parcel 6; after the first year, if the condominium conversion and transfer occurred, the payments would be credited toward the $275,000 purchase price. Critically, the contract also provided what would happen if conversion did not occur. Clause 6 stated that if the purchasers made a demand for repayment of the $75,000, they would receive no further compensation for any costs or improvements to Parcel 6, nor any refund of rent payments, and they were obliged to vacate within 30 days. The agreement also dealt with interest on the $75,000 once a demand for repayment was made. There was, however, no contractual right to recover the cost of improvements or any relocation expenses if the project did not proceed. These provisions became central when the Court of Appeal later assessed whether equitable remedies such as unjust enrichment could be used to override the contractual allocation of risk.

Municipal approvals and efforts to convert

Following acquisition of the Post Yard, Wally, on behalf of Icetrading, moved promptly to pursue condominium conversion. Within approximately two weeks, on October 11, 2016, he appeared before the municipal planning committee to present the condominium proposal. Municipal officials identified multiple zoning deficiencies and recommended that he pursue an industrial plan of subdivision instead of a condominium, explaining that this was a more complex and expensive process. The record before the courts showed that Wally returned to municipal staff and council with various options, including a further appearance on April 9, 2018, still within the two-year contractual window. Despite these efforts, the necessary condominium approval was not obtained by September 30, 2018, the date marking the end of the second year after closing. The contractually defined condition for the Parcel 6 sale was therefore not satisfied within the agreed timeframe.

Events after the two-year period expired

When the two-year period elapsed, the respondents did not serve a demand for repayment of the $75,000, nor did they vacate Parcel 6 as clause 6 anticipated in that scenario. Instead, they continued to occupy the land and operate their business there. On September 19, 2018, they registered a Notice of Option to Purchase against the title. On November 1, 2018, they commenced an action against Icetrading and the estate representative. They claimed an equitable lien over Parcel 6 to secure the $75,000 deposit and the monthly payments made after the first year that were to be credited to the purchase price, which together totalled roughly $92,000 at that time. In the alternative, they sought damages for breach of contract, claiming, among other things, repayment of the $75,000, the post-first-year payments, and about $140,000 for improvements made to Parcel 6. They continued to make the monthly $1,333 payments. Meanwhile, Wally continued to pursue the condominium conversion proposal even after the contractual deadline. In September 2019, the appellants were noted in default, but this default was later set aside by the Court of Appeal in an earlier decision (Trayanov v. Icetrading Inc., 2023 ONCA 322). In July 2020, the appellants delivered a statement of defence and counterclaim. Their counterclaim alleged damages for breach of contract and unjust enrichment, and in particular sought fair market rent of $4,000 per month for the respondents’ ongoing occupation of Parcel 6 after the two-year term ended. The respondents later registered a Certificate of Pending Litigation on October 30, 2019. On February 10, 2020, they obtained an order that the monthly $1,333 payments be paid into court, which they continued to do until after the motion judge released his decision.

Summary judgment motion and first-instance ruling

On March 8, 2024, the appellants moved for summary judgment on both the respondents’ claim and their own counterclaim. The motion was heard on September 25, 2024. The respondents opposed summary judgment, asserting that genuine issues for trial remained, but in the alternative sought specific performance or damages for breach of contract and/or unjust enrichment. The motion judge concluded that summary judgment was appropriate. He accepted that Wally had initially “did what he said he would do” by proposing the conversion, but nonetheless found that the appellants breached what he described as a “duty to act in good faith and take all reasonable steps to complete the sale.” In his view, this duty stemmed from the promise to “proceed expeditiously with an application to convert” and was supported by older authorities implying obligations where one party promises to bring about a particular state of affairs. He held that the appellants breached this duty in two main ways. First, he found that Wally failed to notify the respondents in a timely manner that the contemplated condominium proposal would never receive municipal approval and that an appeal to the Ontario Land Tribunal would be futile. Second, he faulted Wally for not doing more, in particular for not at least conducting a cost-benefit analysis of the municipality’s suggestion to pursue an industrial plan of subdivision. On this basis, he concluded that Wally knowingly allowed the respondents to incur significant improvement costs while being unable to complete the transfer of ownership. Having made this finding, the motion judge shifted from contract analysis to equitable considerations. He accepted that the respondents’ improvements enhanced the value of Parcel 6 and then applied the test for unjust enrichment. He held that it would be inequitable for Icetrading and the estate to retain the benefit of those improvements without fair compensation and noted that relocation would be “life-altering” for the respondents. He ordered the appellants to pay $285,000 in damages, inclusive of all claims. That figure was broken down as repayment of the $75,000 deposit, $193,500 for out-of-pocket improvements, plus $40,000 for relocation costs, less a 10% discount. He further ordered that the funds paid into court be released to the appellants and required the respondents to deliver vacant possession of Parcel 6 within 60 days after the judgment was satisfied. He refused specific performance and did not address the appellants’ counterclaim for fair market rent. After the decision, the respondents, who remained in possession, stopped paying the monthly sums into court or to the appellants.

Good faith, honest performance, and appellate errors

On appeal, Icetrading and the estate argued that the motion judge erred in finding a breach of any duty of good faith or obligation to take reasonable steps to complete the sale, misapplied unjust enrichment, failed to address their counterclaim, and erred in assessing damages. The Court of Appeal focused first on the good-faith analysis. It noted that since the Supreme Court of Canada’s decision in Bhasin v. Hrynew, good faith in contract law is understood as an organizing principle rather than a free-standing duty, and that courts must identify specific legal rules that flow from that principle, such as the general duty of honest performance. The appellate court interpreted the motion judge’s reasoning as effectively concluding that the appellants breached the duty of honest performance by not making timely disclosure that the condominium conversion was futile. The Court held that this conclusion was not supported by the record and that the motion judge committed palpable and overriding errors. For a finding of dishonesty, it was necessary to find that Wally actually knew the condominium proposal was futile. That inference was difficult to reconcile with evidence of his lack of sophistication and the “amateurish” nature of his initial proposal, as well as his continued efforts to obtain approval long after the two-year period expired. Those efforts were significant enough that the respondents themselves had argued that continued pursuit of conversion effectively extended the contractual timeframe. The motion judge did not explain how, in the face of that evidence and the respondents’ own earlier position, he concluded that Wally knew he could not honour the commitment to transfer ownership. The Court also emphasized that any inferences drawn from Wally’s activities after September 30, 2018 were irrelevant to whether he honestly performed the contract, because his contractual obligation to seek condominium conversion ended when the two-year period ended. Information or developments arising after that date could not establish dishonesty in the performance of obligations that had already expired. Finally, the Court rejected the notion that Wally’s failure to conduct a cost-benefit analysis of an industrial plan of subdivision could constitute a breach. The agreement contemplated a condominium conversion, not a subdivision scheme, and the motion judge himself described the subdivision option as a much more complicated and expensive undertaking that was qualitatively different from what the parties had agreed. He acknowledged that forcing the appellants to pursue that route would amount to rewriting the contract. Against that backdrop, it was an error to treat the failure to analyze or pursue the subdivision option as a breach of contractual duty. Collectively, these reasoning errors undermined the foundation of the motion judge’s finding that the appellants breached any good-faith obligation, and the Court of Appeal allowed this ground of appeal.

Unjust enrichment and the primacy of the contract

The Court of Appeal next examined the motion judge’s use of unjust enrichment. Although he began by asking whether the appellants breached the contract, his reasons ultimately became “animated by considerations of equity” and he treated unjust enrichment as the basis for relief, effectively displacing the detailed contractual scheme governing deposits, rent, improvements, and what would happen if municipal approval was not obtained. The Court pointed out two major problems. First, even if there had been a breach of contract, the default approach to damages would be expectation damages: putting the wronged party in the position they would have been in had the contract been performed. Restitutionary remedies—measured by the defendant’s gain rather than the plaintiff’s loss—are exceptional and typically reserved for circumstances where expectation damages are inadequate. The motion judge did not justify switching to a restitutionary or unjust-enrichment analysis in this case. Second, and more fundamentally, unjust enrichment is not available where there is a “juristic reason” for the enrichment and corresponding deprivation, and a contract governing the parties’ dealings is a recognized juristic reason. Here, the contract expressly dealt with what would occur if condominium approval was not secured: the respondents could elect to demand repayment of the $75,000 deposit with interest as provided, but clause 6 barred any reimbursement for improvements or rent, and the contract contained no entitlement to relocation costs. Because the agreement comprehensively allocated rights and obligations in this scenario, unjust enrichment could not be invoked as a separate cause of action or as a back-door route to compensation the contract denied. On either view—whether unjust enrichment was used to measure damages for an alleged breach of good faith, or treated as a standalone equitable claim—the motion judge erred in awarding $285,000 to the respondents on that basis.

Counterclaim for rent and adequacy of reasons

The Court of Appeal also addressed the appellants’ complaint that their counterclaim had effectively been ignored. The counterclaim asked, among other things, for payment of fair market rent (said to be $4,000 per month) for the respondents’ occupation of Parcel 6 after the two-year term expired. This had previously been recognized by the Court of Appeal as an “arguable” claim. In the summary judgment reasons, however, the motion judge did not engage with that counterclaim. He made limited orders favourable to the appellants—releasing funds held in court and ordering vacant possession—but did not explain why he rejected or limited the rent claim. The respondents argued on appeal that the counterclaim had been implicitly resolved, either by treating the contract as still in force (thus limiting rent to $1,333) or through the unjust-enrichment analysis. The Court rejected those arguments. It observed that by ordering the respondents to vacate Parcel 6, the motion judge necessarily treated the contract as having come to an end; otherwise, there would have been no basis to require vacant possession. There was no apparent reasoning as to why only $1,333 per month would be recoverable after expiry of the contract, nor any explicit ruling on the fair-market-rent theory. Because the reasons did not meaningfully address this core issue, they were inadequate under the standard that requires reasons to permit effective appellate review. This inadequacy constituted a further error warranting intervention.

Final disposition, successful party, and monetary outcome

In its disposition, the Court of Appeal allowed the appeal and made several changes to the order below. It set aside the $285,000 damages award in favour of the respondents. It varied the vacant possession order so that the respondents must deliver possession of Parcel 6 within 60 days of the release of the appellate decision, rather than within 60 days of payment of damages, reflecting the fact that no damages are now payable under that order. It also set aside the motion-level cost order and the direction that the judgment attract no prejudgment interest, but otherwise left the remaining terms in place. The Court ordered a new trial, but on a narrowed basis. On the respondents’ side, the only live issue is their contractual claim relating to the $75,000 deposit and any prejudgment interest under the agreement; they are barred from re-litigating other heads of claim because, on the pleadings and applicable causes of action, those cannot succeed. On the appellants’ side, the counterclaims are to be fully retried, with leave to seek amendment to include compensation for the respondents’ continued occupation of Parcel 6 after the summary judgment decision, if they so choose. The respondents’ cross-appeal on costs from the motion judge’s decision is dismissed as abandoned. As between the parties on appeal, the Court orders that the respondents pay the appellants their costs of the appeal in the agreed amount of $15,000, inclusive of taxes and disbursements. Beyond that fixed costs award, no final damages, rent, or other monetary relief is determined at the appellate level; those matters are expressly left to the new trial, and the total amount that may ultimately be awarded in favour of the successful party in the litigation as a whole cannot yet be determined. At this appellate stage, the successful party is Icetrading Inc. and the estate’s representative, and the only quantified sum ordered in their favour is $15,000 in costs of the appeal, with all other financial outcomes to be resolved later.