Executive Summary: Key Legal and Evidentiary Issues

• Brewers Retail Inc. unilaterally terminated two agreements of purchase and sale in November 2015, breaching its contractual obligations and its duty of good faith and fair dealing toward Block Developments Inc.
• Actionable misrepresentations by Brewers' Director of Real Estate and Construction, Tom Lucas, induced Block not to waive the Mutual Lease Condition, ultimately enabling Brewers to terminate the agreements.
• Central to the appeal was whether the trial judge erred by awarding damages based on a lost development profits approach rather than the normal measure — the difference between the contract price and the market value of the properties at the date of breach.
• Disputed was whether the Rosewater Development sale price, which was $350,000 less than Block had agreed to pay, constituted market value for the purposes of the damages assessment.
• Mitigation was contested on appeal, with Brewers arguing for the first time that Block failed to independently mitigate by not acquiring, in its own name, development properties purchased by its corporate affiliates after the breach.
• Both grounds of appeal were dismissed, as the Court of Appeal found no reversible error in the trial judge's damages methodology or mitigation analysis.

Facts of the case

In February 2015, Brewers Retail Inc. ("Brewers"), an Ontario corporation operating as The Beer Store, listed ten Ontario properties for sale, including two in Toronto: 1200 Dundas St. W. (the "Dundas Property") and 28 River St. (the "River Property") (together, the "Properties"). Both were marketed as excellent development opportunities offered on a lease-back basis, meaning the purchaser would grant Brewers the right to use each property until demolition for redevelopment and to occupy a specified retail space on the ground floor of the redeveloped project.

Block Developments Inc. ("Block"), an Ontario real estate development company operating as part of a larger corporate group pursuing aggressive growth with strong financial backing, entered into two agreements of purchase and sale ("APSs") with Brewers on June 23, 2015. Under those agreements, Block would purchase the Dundas Property for $6.9 million and the River Property for $4.9 million, with closing set for December 15, 2015. Following a 15-day extension exercised by Block on August 4, 2015, and further agreed extensions, the parties executed amended agreements on September 25, 2015, reducing the purchase price to $6.15 million for the Dundas Property and $4.15 million for the River Property, with Block waiving the Buyer's Diligence Condition and the deadline for the Mutual Lease Condition extended to October 29, 2015.

The trial judge found that prior to October 29, 2015, Mr. Lucas had approached Rosewater Development ("Rosewater") — a competing developer whose principal, Mr. Bottero, was a friend and business associate of Mr. Lucas — and obtained instructions from Brewers' Board of Directors to sell the Properties to Rosewater, based on what the trial judge characterized as numerous significant misrepresentations. On October 29, 2015, it was an agreed fact at trial that Mr. Lucas told Block that Brewers would waive the Mutual Lease Condition if Block did so as well; however, the trial judge found that he made misrepresentations that led Block not to waive the condition that day. On November 5, 2015, Brewers terminated both APSs, relying on the alleged non-fulfillment of the Mutual Lease Condition. On November 9, 2015, Rosewater submitted agreements to purchase the Dundas Property for $5.45 million and the River Property for $4.5 million — a total of $350,000 less than Block had agreed to pay — and Brewers closed those sales on December 15, 2015, the same date the sales to Block were to have been completed.

Contractual clauses at issue

Each APS contained two key conditions. The Buyer's Diligence Condition made each agreement conditional on Block being satisfied with the physical and environmental condition of the property and the economic feasibility of Block's intended use and development. The Mutual Lease Condition made each agreement conditional on Block and Brewers agreeing on the form and content of both an Interim Agreement to Lease — under which Brewers would lease a portion of the property from Block to operate a retail store until redevelopment — and a Long Term Agreement to Lease — under which Brewers would lease a portion of the property for a retail store after redevelopment — incorporating terms set out in each APS. The conditional period was 45 days from acceptance of the APS, extendable by an additional 15 days under certain circumstances. Block ultimately waived the Buyer's Diligence Condition as part of the September 25, 2015 amendments; it was the Mutual Lease Condition whose alleged non-fulfillment Brewers relied upon to terminate.

Reasoning and analysis

The trial judge found that Brewers had breached its contractual obligations, including its duties to act honestly and in good faith and to cooperate to achieve the objects of each APS. Brewers was precluded by promissory estoppel from relying on its strict legal right to terminate under the Mutual Lease Condition, and was also liable for misrepresentation arising from Mr. Lucas' misstatements, which Block relied upon to its detriment. Liability was not contested on appeal.

The principal issue before the Court of Appeal was the measure of damages. Brewers argued that the trial judge had committed the same error reversed by the Court of Appeal in The Rosseau Group Inc. v. 2528061 Ontario Inc., 2023 ONCA 814, by awarding development profits rather than applying the normal measure — the difference between the contract price and the market value of the properties at the date of breach. Brewers further argued that the Rosewater sale price represented market value, meaning Block suffered no damages. Block's damages expert, Larry Andrade of Deloitte LLP, calculated the present value of Block's loss of profit as at November 5, 2015 — the date of breach — at $15,505,056, applying a 10% discount rate to projected development cash flows. Brewers' responding expert, Dennis Leung of Grant Thornton LLP, used the same general approach and the same discount rate, calculating Block's potential profits at between $7.6 million and $10.2 million.

The Court of Appeal, in reasons authored by Zarnett J.A., distinguished the damages methodology accepted by the trial judge from that which had been set aside in Rosseau Group. In Rosseau Group, the trial judge's calculation had not used the breach date as the assessment date, had not applied a discount rate, and had not considered the risks and timing involved in achieving a potential development — it had simply totalled projected profits at the end of a hypothetical redevelopment years after the breach. By contrast, in the present case, both parties' experts calculated the present value of projected development profits as at the date of breach using a discount rate, asking what a reasonable party would pay or accept at that point in time for a future stream of cash flows, taking into account risk and the time value of money. The court identified four key differences from Rosseau Group: the breach date was used as the assessment date; the calculation accounted for timing and risk through the discount rate; the formulation was expressly derived by answering what a reasonable market participant would pay at the date of breach; and the approach was the same one taken by Brewers' own experts.

The court also rejected Brewers' argument that the trial judge was obliged to treat the Rosewater sale price as determinative of market value. It noted that the Rosewater transaction occurred almost immediately after termination of the APSs, the price was less than what Block had agreed to pay, and Mr. Lucas' conduct in orchestrating the sale had been the subject of harsh criticism by the trial judge, who found it likely that he had sought to withdraw from the deals with Block to benefit his friend and business associate. Neither party's economic loss expert had treated the Rosewater price as determinative of the economic equivalent of what Block had been deprived of at the date of breach.

On mitigation, Brewers argued on appeal — for the first time — that the trial judge had erred by conflating Block with its corporate affiliates and ignoring Block's independent obligation to mitigate, relying on the Supreme Court's decision in Southcott Estates Inc. v. Toronto Catholic District School Board, 2012 SCC 51. The court rejected this argument on two grounds. First, at trial both parties had proceeded on the basis that Block and its affiliates should be treated as one, and there was no reversible error in the trial judge addressing the issue on that premise. Second, the case was distinguishable from Southcott, where the plaintiff had been a special purpose vehicle with limited capital that made a strategic decision not to acquire replacement assets for litigation reasons. In the present case, Block had substantial financial backing and no operational or financial constraints; Brewers' breach did not change Block's financial position or affect decision-making across its corporate group. The trial judge's finding that the six post-breach property acquisitions were independent transactions that would have been made regardless of the breach meant they could not constitute mitigation.

Ruling and overall outcome

The Court of Appeal dismissed the appeal in its entirety. Block Developments Inc. was the successful party, with the trial judge's damages award of $15.5 million, plus prejudgment interest, upheld on appeal. Block was further awarded costs of the appeal fixed at the agreed sum of $60,000, all inclusive.