Commercial Real Estate Deals that Don’t Close

Commercial Real Estate Deals that Don’t Close

July 30, 2020

By Brian Babcock

When a real estate deal does not close, you may sue for damages, or claim specific performance.

The purpose of specific performance is to provide the you with the result that the contract contemplated – that is, the property.

The goal in a remedy for breach of contract is to put the innocent party back into the position they would have been in if the contract had been performed. So, if performance remains possible, it would be a more exact way to achieve that result than damages.

Until 1996, Canadian courts generally assumed that any piece of real estate was unique, and that specific performance was preferable over damages. In that year, the Supreme Court departed from this practice, saying “Residential, business and industrial properties are all mass produced much in the same way as other consumer products. If a deal falls through for one property, another is frequently, though not always, readily available.”

Since then, it has been particularly hard to convince a judge that investment properties are unique, including land for development. Since the goal is profit, damages for that lost profit seems to achieve the goal. And this remains true in many cases.

Real estate markets and business practices have changed over time, and this is reflected in new trends in how courts look at specific performance.

A few recent cases have suggested to us that in certain situations, specific performance involving commercial real estate is still available as an option. Examples include cases where:

  • a site with excellent road access and exposure near Canada’s Wonderland was intended for construction of a hotel
  • a site contained rare gravel deposits essential to the buyer’s business
  • a strip of land was required for an access road to adjoining lands already sold by the same seller to the same buyer
  • a commercial building was central to the buyer’s planned redevelopment of a larger block of land.
  • land and building was sold from the landlord to the tenant. Location, design and goodwill of a veterinary clinic all contributed to uniqueness. The sale of the real estate was tied to the sale of the business.

From this we might draw some tentative lessons:

  • specific performance is more common when it is related to an ongoing business proposition
  • a developer might get specific performance if the land is part of a larger project.
  • specific performance is more possible the more speculative the damages would be
  • specific performance is still unlikely for investment properties that are easily replaceable in the marketplace.

Until recently, it was generally thought that sellers could not obtain specific performance, as they ought to sell into the market and quantifying a loss if the sale price obtained was lower (plus damages for costs of resale). Recently, in rare cases, the courts have awarded specific performance for commercial properties where there was a limited market, and the nature of the transaction would be difficult to duplicate on the open market. There is an additional problem in these cases though –  what if the buyer cannot come up with the money?

If your deal does not close, you have to elect immediately whether to seek specific performance or seek damages. This is a tricky decision that is never without risk, but one that you should consult about with your lawyer if you are in this situation. Delay might mean the property becomes unavailable, or that the judge does not believe that you should be allowed to obtain specific performance, as explained in a previous article.