Calculating Damages for False Estoppel
The Quebec Court of Appeal in Meyerco Enterpresis Ltd. v. Kinmont Canada Inc. (2016 QCCA 89) has recently partially overturned a lower court ruling that awarded damages for a false estoppel signed by a tenant based on application of a cap rate paid by the buyer and addressee of the estoppel instead applying general principals of damages including mitigation.
Notwithstanding statements in the tenant estoppel that confirmed payment of rent without offset or compensation, the tenant was in fact paying its rent by offsetting services provided to a landlord affiliate. The tenant defaulted almost immediately after the sale.
The buyer sought redress by way of a reduction of purchase price (as opposed to cancellation of the transaction).
While there was no discussion on the scope of the representations provided, there was a finding of misrepresentation and fraud on the part of the vendor and its sole director, officer and shareholder.
The Court noted that the buyer did not include in its pleadings the termination of the lease in question, the amounts recovered by the buyer from the tenant as damages in the termination, nor the amounts payable under the lease with the replacement tenant.
While a court may in certain circumstances have discretion in awarding damages, this discretion would not be justified where proof of damages is relatively easy to make as was the case before the court.
The Court notes that article 1407 of the Civil Code of Quebec allows for a reduction of price equivalent to the damages a buyer would be justified in claiming.
Where a buyer chooses to seek a reduction in price as opposed to an annulment of the contract, the buyer must prove their damages being the reduced value of the property acquired and accessory damages as opposed to the price the buyer would have paid absent fraud (which can in certain circumstances be equivalent to the resulting loss of value).
The Court found residual value in vacant space in that it has re-leasing potential and hence some economic value. A simple cap rate formula while indicative of value is part of a more complex valuation and properly weighted.
Applying the principles to the case before it, the Court found that the buyer did not offer or attempt to offer any satisfactory objective persuasive evidence of its actual or real damages as to the diminished value of the property.
Given the lack of proof of damages, the Court did not substitute or award an alternative calculation and dismissed the suit, resulting in no recovery for the plaintiff (the lower court mentioned the lack of solvency of the seller hence the importance of a finding against the sole shareholder).
In a similar recent decision of the Superior Court of Quebec (Gestion Elm Bishop Inc. v. Milsa Farias and Samir Tadros - rendered July 3, 2015), the Court awarded damages against the shareholders of a corporation in favour of the purchaser of a building for a false 8 month discrepancy on the termination date of a lease provided in an estoppel to buyer's lender. The Court awarded the full 8 months as damages but noted buyer's reasonable mitigation efforts.
These decisions highlight the importance of financial due diligence against tenants as well as the establishment of mitigation efforts in proving damages in the event of a false estoppel.
damages Estoppel false estoppel financial due diligence fraud Landlord misrepresentation mitigation Quebec Court of Appeal rent tenant terminating lease termination