Environmental liabilities, tender and leasing disputes and
many other risks exist in the
world of property development.
We regularly counsel our clients
on the benefits of having separate
companies to manage these risks.
However, this type of creditor
protection strategy may need to
be revisited when advising clients
on mitigating losses from a failed
transaction — as illustrated by
the following decision.
In Southcott Estates Inc. v.
Toronto Catholic District School
Board, [2010] O.J. No. 1772,
Southcott Estates Inc. entered
into an agreement of purchase
and sale to purchase surplus
land from the Toronto Catholic
Butterworths®
JARED
SCHWARTZ
District School Board on June
14, 2004. Southcott was a subsidiary of Ballantry Homes Inc.,
created for the purpose of purchasing the land. The agreement included a condition that
the board comply with Ontario’s
Planning Act for severance of
the land from the parent parcel.
After a number of delays, the
closing was extended to no later
than Jan. 31, 2005. The board
did not begin the severance pro-
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cess until after Southcott’s due
diligence period expired. The
severance hearing was scheduled for Dec. 16, 2004, but
Southcott had not yet filed its
development application. The
board was advised that the severance hearing
should be delayed
until Southcott’s
development
application was
reviewed.
establish that there were comparable properties available or
that had they been purchased
Southcott’s loss could have been
avoided. Justice Spiegel held
that Southcott was entitled to
$1,935,500 plus costs.
“Taking advantage of the creditor protection
offered by a newly incorporated company
may be advantageous for new business
opportunities, but may cause significant
prejudice to any ongoing claims.
The board
applied for severance despite the
recommendation,
and at the hearing,
the local counsellor requested that
the application be
deferred until more progress
was made on the development
application. Southcott was then
advised to submit its development application as soon as
possible. The board had not
obtained approval for severance
by the end of December 2005
and on Jan. 17, 2005, refused to
extend the closing date any further, giving notice that it was
terminating its agreement with
Southcott.
losses. The controlling mind of
Southcott decided not to put any
assets in Southcott’s name to
avoid exposing those assets to
the risks associated with South-
cott’s litigation against the
Board. Southcott and Ballantry
were certainly
entitled to claim
the legal benefit
of limited liabil-
ity by virtue of
Southcott’s dis-
tinct legal per-
sonality. How-
ever, Southcott
and Ballantry
also have to live
with the conse-
quences of the
fact that
because Southcott has a distinct
legal personality, it is able to
assert a claim for damages and,
as a party asserting that claim, it
thus bears the ordinary duty of
mitigating its loss.”
Southcott was still successful
in the action, but damages were
reduced to $1 and the net result
was a cost award of $400,000 in
favour of the board.
Southcott filed an action
alleging that the board breached
its duty to use best efforts, acting
in good faith, to obtain severance. In a detailed decision,
Justice H. Spiegel held that the
board had, in fact, breached its
duty. Justice Spiegel also found
that the board had not discharged its onus of proving that
Southcott mitigated its losses
with subsequent purchases.
The board appealed, arguing
that while it may have breached
its contractual duty, the breach
was not the cause of the failure
to obtain severance by the clos-
ing date and claiming Justice
Spiegel erred in failing to find
that Southcott had failed to
mitigate. At trial, Southcott’s
representative admitted it never
had any intention to mitigate,
as Southcott was created only to
buy the land. The Court of
Appeal found this admission
sufficient to satisfy the board’s
onus to prove the failure to
mitigate, stating:
“The plaintiff in this case was
Southcott, a distinct legal entity,
and the issue is whether it took
reasonable steps to mitigate its
damages. Southcott cannot
escape or avoid its duty to miti-
gate damages by arguing that it
was a part of Ballantry and that
Ballantry would have purchased
the other lands even if this trans-
action had not failed. Thus, the
duty to mitigate rests upon
Southcott. Southcott decided not
to take any steps to mitigate
damages. Ballantry’s actions
demonstrate that other good
quality investment properties
were available and that South-
cott could have mitigated its
On Nov. 18, leave to appeal to
the Supreme Court of Canada
was granted. While we wait for
the matter to be heard, clients
engaged in litigation need to
make a strategic decision as to
whether the creditor protection
benefits of separate entities out-
weigh the potential prejudice
that may be suffered from a fail-
ure to mitigate.
The mitigation analysis is
interesting as Southcott, being
incorporated solely for the pur-
chase of the land, clearly made
no attempt to purchase replace-
ment investment properties,
although such attempts were
made by its parent company and
other related entities. Justice
Spiegel, however, held that the
evidence presented did not
Taking advantage of the
creditor protection offered by a
newly incorporated company
may be advantageous for new
business opportunities, but may
cause significant prejudice to
any ongoing claims.
Jared Schwartz is an associate lawyer at Patterson Law in
Halifax. He is a commercial
lawyer with a practice focused
on business structuring, acquisitions and secured lending.
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Year in Review
R: A CANADIAN PARIAH
TION BUREAU RESOLVES MLS FIGHT
WINS MISCONDUCT BAT TLE
MART FIRMS ADAP T TO SMARTPHON
MERGERS GO MEGA
AL SCC BILL WILL IMPACT NOMINEES
TAMIL MIGRANTS TRIGGER CONTROVER
Year in
Review
Look for our special Year in
Review section in this week’s
issue of The Lawyers Weekly.
