Remedy in Real Estate Transactions - Term Paper Example

Name of Student Name of Professor Name of Course Date Concept of "Specific Performance" and Its Availability as a Remedy in Real Estate Transactions 1. Introduction: This paper seeks to analyze and discuss the legal reasoning of specific performance and its availability as a remedy in real estate transactions in Canada. It is said that the Supreme Court of Canada’s ruling in Semelhago v. Paramadevan changed the inevitable granting of the remedy of specific performance in enforcing contracts for the purchase and sale of residential properties, due to such land’s perceived inherently unique qualities. Have the Semelhago Case established how cases to be decided in the future? Do other jurisdictions particularly under US or UK practice the same or different set of rules than that of Canada as far as the use of remedy of specific performance is concerned? These and other questions will guide us in our analysis and discussion of the remedy. 1.1 Definition Specific performance is a form of equitable relief in which a court orders one party to a definite and certain contract to perform what the party has promised to perform. It is frequently used when a seller of land changes his mind and refuses to go through with the transaction. (freeadvice.com, 2006) It in effect grants the plaintiff what he actually bargained for in the contract rather than damages for not receiving it; thus specific performance is an equitable rather than legal remedy. By compelling the parties to perform exactly what they had agreed to perform, more complete and perfect justice is achieved than by awarding damages for a breach of contract. Specific performance is applied in breach of contract actions where monetary damages are inadequate, primarily where the contract involves land. 2. Analysis and Discussion We will approach the analysis and discussion through question and answer type for us to have a better understanding of the interrelated issues? Q1. May a plaintiff who is entitled to specific performance as a remedy in a real estate transaction, ask for damages instead? If yes, what are the grounds? The answer is of course in the affirmative. This is because preset jurisprudence says so. Sopinka J. (1996) in the case of Semelhago v. Paramadevan (1996), among others, said: “A party who is entitled to specific performance is entitled to elect damages in lieu thereof.” He cited that the jurisdiction to award damages in lieu of specific performance was conferred on the Court of Chancery by The Chancery Amendment Act, 1858 (U.K.), 21 & 22 Vict., c. 27 (known as Lord Cairns' Act). He acknowledged that although the Act was repealed, in Leeds Industrial Co-operative Society, Ltd. v. Slack, [1924] A.C. 851; he posited that the House of Lords established that the jurisdiction to award damages in lieu of specific performance was maintained. He then said: “This jurisdiction exists as part of the law of Ontario by virtue of the Courts of Justice Act, R.S.O. 1990, c. C.43, s. 99, which provides: ‘A court that has jurisdiction to grant an injunction or order specific performance may award damages in addition to, or in substitution for, the injunction or specific performance.’” (Semelhago v. Paramadevan) (Paraphrasing made). He further proceeded saying: Lord Cairns' Act permits damages to be awarded in some circumstances in which no claim for damages could be entertained at common law. See Leeds, supra, and Wroth v. Tyler, [1974] 1 Ch. 30, at p. 57. In cases in which damages could also be claimed at common law, the principles generally applicable are those of the common law. In Johnson v. Agnew, [1980] A.C. 367, at pp. 400-401, Lord Wilberforce stated that: The general principle for the assessment of damages is compensatory, i.e., that the innocent party is to be placed, so far as money can do so, in the same position as if the contract had been performed. Where the contract is one of sale, this principle normally leads to assessment of damages as at the date of the breach -- a principle recognized and embodied in section 51 of the Sale of Goods Act 1893. But this is not an absolute rule: if to follow it would give rise to injustice, the court has power to fix such other date as may be appropriate in the circumstances. Q2. When is it obligatory to compel specific performance? Is it not a choice of the plaintiff? The court will have to determine first whether compensatory damages would be adequate and whether the land is unique. If the i land is unique, in the sense that ‘no two parcels are exactly alike’ and money is inadequate, the court must award specific performance. (See case Semelhago v. Paramadevan) Q3. If the plaintiff asks for damages, what are rules in the award for damages? How do those principles apply to the case Semelhago? Having established the right of the party, who is entitled to specific performance, to elect damages in lieu thereof, and assuming the court has now jurisdiction to grant an injunction or order specific performance, then the court now may award damages in addition to, or in substitution for, the injunction or specific performance. Sopinka J. said that the general principle for the assessment of damages is compensatory, i.e., the ‘innocent party is to be placed, so far as money can do so, in the same position as if the contract had been performed, must be followed’. (Semelhago v. Paramadevan) Sopinka mentioned that where the contract is one of sale, this principle normally leads to assessment of damages as at the date of the breach -- a principle recognized and embodied in section 51 of the Sale of Goods Act 1893. However, he said that “this is not an absolute rule: if to follow it would give rise to injustice, the court has power to fix such other date as may be appropriate in the circumstances.” (Semelhago v. Paramadevan) (Paraphrasing made) Further, he explained: The rationale for assessing the damages at the date of breach in the case of breach of contract for the sale of goods is that if the innocent purchaser is compensated on the basis of the value of the goods as of the date of breach, the purchaser can turn around and purchase identical or equivalent goods. The purchaser is therefore placed in the same financial situation as if the contract had been kept. Q4. What are the options when a party repudiates in the real estate contract? To understand the dynamics of the options under real estate contract, Sopinka J. in the case Semelhago said: Where a party to a contract repudiates it, the other party has an option to accept or not to accept the repudiation. If he does not accept it there is still no breach of contract, and the contract subsists for the benefit of both parties and no need to mitigate arises. On the other hand, if the repudiation is accepted, this results in an anticipatory breach of contract in respect of which suit can be brought at once for damages. He then explained that the claim for specific performance can be seen as reviving the contract to the extent that the defendant who has failed to perform can avoid a breach if, at any time up to the date of judgment, performance is tendered. He thus, concluded saying: “In this way, a claim for specific performance has the effect of postponing the date of breach.” .” (Semelhago v. Paramadevan) (Paraphrasing made) Q5. What is really the role of damages in relation to specific performance? Damages are substitute to specific performance. This is confirmed by Sopinka when he said in the case of Semelhago: On the wording of the section, the power "to award damages to the party injured, . . . in substitution for such . . . specific performance," at least envisages that the damages awarded will in fact constitute a true substitute for specific performance. Furthermore, the section is speaking of the time when the court is making its decision to award damages in substitution for specific performance, so that it is at that moment that the damages must be a substitute. The fact that a different amount of damages would have been a substitute if the order had been made at the time of the breach must surely be irrelevant. Q6. What is the basis of the rule that damages as substitute for specific performance? The rule that damages constitute as substitute for performance has basis in common law and existing jurisprudence. This is made clearer by the statement of Sopinka which reads: This was also the basis upon which Rimes was decided by the Ontario Court of Appeal. The reasons for judgment of MacKinnon A.C.J.O. cite Wroth v. Tyler with approval, pointing out that that case was not overruled by Johnson v. Agnew, supra. I agree with that observation. In Johnson v. Agnew, Lord Wilberforce, speaking for the House of Lords, concluded that in view of the flexibility of the common law rule with respect to the date for the assessment of damages to which I have referred, the view taken by Megarry J. in Wroth v. Tyler was consistent with the common law. I therefore conclude that, in the circumstances of this case, the appropriate date for the assessment of damages is the date of trial as found by the trial judge. Technically speaking, the date of assessment should be the date of judgment. That is the date upon which specific performance is ordered. For practical purposes, however, the evidence that is adduced which is relevant to enable damages to be assessed will be as of the date of trial. It is not usually possible to predict the date of judgment when the evidence is given. Q7. What is the advantage of choosing damages in instead of specific performance? Since damages are intended as substitute for specific performance, it considers the value at the time of judgment as against the price at the time of sale of the real estate. It could therefore result to a windfall as what happened in the case of Semelhago. This is clear in the words of Sopinka when he agreed that this approach (through damages) may appear to be overly generous to the respondent in this case and other like cases and may be seen as a windfall and that in his opinion, this criticism is valid if the property agreed to be purchased is not unique. (Semelhago v Paramadevan ) Q8. Are there cases when the court award specific performances as matter of right in real estate transactions? If yes, what are the instances? The court determines whether money would be adequate after examining the subject matter of the contract itself. If the land is unique and money is inadequate an award for specific performance should be made. (Semelhago v Paramadevan ) Q9. Under what cases or circumstance may ‘uniqueness’ be present to justify award of specific performance? Sopinka J said: Different considerations apply where the thing which is to be purchased is unique. Although some chattels such as rare paintings fall into this category, the concept of uniqueness has traditionally been peculiarly applicable to agreements for the purchase of real estate. Under the common law every piece of real estate was generally considered to be unique. Blackacre had no readily available equivalent. Accordingly, damages were an inadequate remedy and the innocent purchaser was generally entitled to specific performance. Given the flexibility of the rule at common law as to the date for the assessment of damages, it would not be appropriate to insist on applying the date of breach as the assessment date when the purchaser of a unique asset has a legitimate claim to specific performance and elects to take damages instead (see Wroth v. Tyler; Johnson v. Agnew; and Mavretic v. Bowman, [1993] 4 W.W.R. 329). The rationale that the innocent purchaser is fully compensated, if provided with the amount of money that would purchase an asset of the same value on the date of the breach, no longer applies. This disposition would not be a substitute for an order of specific performance. The order for specific performance may issue many months or even years after the breach. The value of the asset may have changed. It must be noted that Sopinka stated: “Moreover, the claim for specific performance revives the contract to the extent that the defendant who has failed to perform can avoid a breach if at any time up to the date of judgment, performance is tendered. In cases such as the one at bar, where the vendor reneges in anticipation of performance, the innocent party has two options. He or she may accept the repudiation and treat the agreement as being at an end.” He further explained that in that event, both parties are relieved from performing any outstanding obligations and the injured party may commence an action for damages. Alternatively, Sopinko said: “the injured party may decline to accept the repudiation and continue to insist on performance. In that case, the contract continues in force and neither party is relieved of their obligations under the agreement.” He also mentioned about the elaboration in McGregor on Damages (13th ed. 1972), at p. 149. Q10. Cite instances or court decisions where there is uniqueness. Sopinka in the case of Semelhago said: Courts have tended, however, to simply treat all real estate as being unique to decree specific performance unless there was some other reason for refusing equitable relief. See Roberto v. Bumb, [1943] O.R. 299 (C.A.), at p. 311; Kloepfer Wholesale Hardware and Automotive Co. v. Roy, [1952] 2 S.C.R. 465; Nepean Carleton Developments Ltd. v. Hope, [1978] 1 S.C.R. 427, at p. 438. Q11. A. Is the any case where aside from uniqueness of the land, award for specific performance may still be made to the plaintiff? Yes, in case the compensation paid is not adequate. Q12. Assuming there is uniqueness of the land in question; may the plaintiff still choose damages? The answer is still affirmative since, as decided the in the case of Semelhago, the court said: Specific performance should, therefore, not be granted as a matter of course absent evidence that the property is unique to the extent that its substitute would not be readily available. The guideline proposed by Estey J. in Asamera Oil Corp. v. Seal Oil & General Corp., [1979] 1 S.C.R. 633, with respect to contracts involving chattels is equally applicable to real property. At p. 668, Estey J. stated: Before a plaintiff can rely on a claim to specific performance so as to insulate himself from the consequences of failing to procure alternate property in mitigation of his losses, some fair, real and substantial justification for his claim to performance must be found. Q13. What is the status of the remedy of specific performance in other jurisdiction, such as US and UK? Remedies for breach on sale of real property under US as cited by Transfer of Interests in Real Property, (n.d.) quoted the following report on Specific Performance: Generally where dollar damages at law cannot provide an adequate remedy, equity will take jurisdiction and order the defendant to perform the contract. (Sometimes, equity may also enforce a promise to forbear from doing something by granting an injunction.) Requirements to compel performance. Specific performance is especially important in the real estate business in connection with contracts for the transfer of interests in land. Since every piece of land is unique, the law presumes that the breach of an agreement to transfer real property cannot be relieved adequately by money compensation. For specific performance to be available as a remedy, however, certain other requirements must normally be met before the court will compel a party to perform a contract. If specific performance is to be ordered, the remedy must be mutual. However, by statute, even if the agreed counter-performance would not be specifically enforceable, specific performance may be compelled if: (a) specific performance would otherwise be an appropriate remedy, and (b) the agreed counter-performance has been substantially performed or can be assured. Comments: Based on the above, a similarity in jurisprudence between US and Canada about first finding for damages first before equity remedy of specific performance comes as a next option. Q14. What is the status of the remedy in specific performance in the Canada? Are the rulings in the case of In Re Tropiano v. Stonevalley Estates Inc., 11 Suntract Holdings Ltd. v. Chassis Service & Hydraulics Ltd., Peate v. Elmsmere Limited Partnership consistent with the case of Semelhago? In the absence of evidence to the contrary, we are constrained to involve case of Semelhago where the court enunciated the rule: ‘Specific performance should, therefore, not be granted as a matter of course absent evidence that the property is unique to the extent that its substitute would not be readily available.’ (Semelhago v. Paramadevan) It must be stated however, that the court did not really make a final determination as to the right of specific performance in the case of Semelhago since the court said: “both parties were content to present the case on the basis that the respondent was entitled to specific performance. The case was dealt with on this basis by the Court of Appeal. In the circumstances, this Court should abide by the manner in which the case has been presented by the parties and decided in the courts below.” It then advised that in future cases, under similar circumstances, a trial judge will not be constrained to find that specific performance is an appropriate remedy. (Semelhago v Paramadevan) As to the consistency or inconsistency of the other cases mentioned above with case of Semelhago, Herskowitz, (n.d.) in Tropiano v. Stonevalley Estates Inc., the purchaser entered into a contract with the vendor for both the purchase of a ravine lot, and the construction of a new house thereon in accordance with detailed plans and specifications approved by both parties. The author cited Mr. Justice Sharpe concluding that the test of uniqueness was satisfied, based solely on the fact that the property was a ravine lot intended for residential purposes, and that the purchaser had demonstrated an emotional attachment to the specific location of the property and its natural setting. (Paraphrasing made). On the other hand, the same author said that in 11 Suntract Holdings Ltd. v. Chassis Service & Hydraulics Ltd., the purchaser entered into a contract for the purchase of an industrial property, which the purchaser had intended to utilize it in a well-established redevelopment plan involving not only the property in question, but also the properties in the immediate vicinity of it. The author also cited Madame Justice Lax’s carefully considering that the burden of proving the subject property's uniqueness, in an action for specific performance lies with the purchaser, (Herskowitz, n.d.) (Paraphrasing made). Finally, in Peate v. Elmsmere Limited Partnership, Herskowitz, (n.d.) said “…. there was no apparent issue or debate as to the existence of another property being available, the court concluded, in a rather facile manner, that on that basis alone the purchaser satisfied the test of uniqueness.” Comment: Based on the above, the doctrine in Semelhago is being followed. There is really a need to establish the uniqueness of the property by the purchaser before he could be entitled to the remedy of specific performance. 3. Conclusion We have seen the present state of law in Canada about the remedy under study, that specific performance is not a matter of course absent any proof of uniqueness. The burden of proof belongs to the plaintiff to prove uniqueness of the real estate and his failure to do so would not entitle him to specific performance and hence compensatory damages in lieu of specific performance shall be awarded him. It is not bad after all because if he will be awarded damages because the latter is intended to be the substitute for what he could have had in terms of value had the specific performance was awarded by the court. In the case of Semelhago, the value was considered windfall if the property is unique. Moreover should the damages would turn out be inadequate, the action for specific performance could be deemed revived and which makes it better for the plaintiff because the proper time to determine the proper breach is up to the date of judgment, which means that amount of breach could become higher depending the economic value of the real estate property, which normally increase over time. To be entitled however to the equity relief of specific performance, the plaintiff must not have committed any breaches or fraud or he or she must have been in good faith from the start. Also, he must be able to prove uniqueness and that compensation for damages is not adequate. In the absence of any new development under English Law since the Semelhago case was decided, it may be presumed that the case cited in the Semelhago decision in 1996 in Canada Supreme Court is still the jurisprudence in Canada as of this writing. It must be noted that some of the bases of Semelhago case are from English law which are presumed to be still subsisting due to absence of evidence pointing to the other side. Hence the present rule stays. The present rule has reason in law and in experience. Criticism was forwarded on the ground that why can the court not make an objective standard of determining uniqueness, of the real estate so as to qualify for specific performance. It is submitted that the present rule is fair enough since the plaintiff will have to convince the court that the real property in question is unique to him. The fact that the defendant will also have his or her day in court would mean that the result is fair enough. In what ever way we try to look at it, the plaintiff will always have the remedy for damages in case he will not be cable to prove uniqueness of the property. There is also wisdom in giving the option to the plaintiff, on what remedy he chooses since, it will be him who will benefit or who will suffer. The fact that the proper time of determining is at the time of judgment; there must be no prohibition to amend agreement in that process of settling the case. It is worth noting to include here a part of the conclusion of Herskowitz, H. (n.d.) on the author’s article in the aftermath of the Semelhago case, which partly reads: “it is incumbent upon solicitors, if given the opportunity to draft the agreement of purchase and sale, to specifically address one’s entitlement or disentitlement to the remedy of specific performance.” Cases Cited 1. Chaulk v. Fairview Construction Ltd. (1977), 14 Nfld. & P.E.I.R. 13 2. Estey J. in Asamera Oil Corp. v. Seal Oil & General Corp., [1979] 1 S.C.R. 633 3. In Re Tropiano and Stonevalley Estates Inc. 4. Johnson v. Agnew, [1980] A.C. 367, at pp. 400-401 5. Kloepfer Wholesale Hardware and Automotive Co. v. Roy, [1952] 2 S.C.R. 465 6. Leeds Industrial Co-operative Society, Ltd. v. Slack, [1924] A.C. 851 7. Mavretic v. Bowman, [1993] 4 W.W.R. 329 8. McNabb v. Smith (1981), 124 D.L.R. (3d) 547, at p. 551 9. Nepean Carleton Developments Ltd. v. Hope, [1978] 1 S.C.R. 427, at p. 438. 12 10. Peate v. Elmsmere limited partnership, (n.d.) {www document} URL http://www.dzlaw.com/featuredarticles/specific.html, accessed April 8,2006 11. Roberto v. Bumb, [1943] O.R. 299 (C.A.), at p. 311 12. Semelhago v. Paramadevan 415 File No.: 24325, [1996] 2 S.C.R, 13. Suntract Holding ltd. V. Classic Service Ltd., 36 O.R. (3d) 328, [1997], O.J. No. 5003 14. Tropiano v. Stonevalley Estates (1997), 36 O.R. (3rd) 92 (Ont. Gen. Div.) 15. Wroth v. Tyler, [1974] 1 Ch. 30, at p. 57 Statutes and Regulations Cited 1. Chancery Amendment Act, 1858 (U.K.), 21 & 22 Vict., c. 27. 2. Courts of Justice Act, R.S.O. 1990, c. C.43, s. 99. 3. Section 51 of the Sale of Goods Act 1893 Works Cited 1. McGregor H. (1972) on Damages, 13th ed London: Sweet & Maxwell,(1972) . 2. Herskowitz, H. Specific Performance In Aborted Ontario Real Estate Transactions In The Aftermath Of Semelhago V. Paramadevan [1996] 2 S.C.R. 415 (n.d.) {www document} URL www.dzlaw.com/featuredarticles/specific.html, accessed April 9,2006 3. Transfer of Interests in Real Property, Remedies, in case of breach, (n.d.){www document} URL http://www.dre.ca.gov/pdf_docs/ref06.pdf, accessed April 8,2006 4. Freeadvice.com (2006) www document} URL (http://law.freeadvice.com/general_practice/legal_remedies/specific_performance.htm), April 10,2006 Read More