



COURT OF APPEAL FOR ONTARIO

CITATION: First Elgin Mills Developments Inc. v. Romandale
    Farms Limited, 2014 ONCA 573

DATE: 20140806

DOCKET: C57028

Epstein, Lauwers and
    Pardu JJ.A.

BETWEEN

First Elgin Mills Developments Inc.

Applicant (Appellant)

and

Romandale
    Farms Limited, Angela Maria Roman, Anne
    Catherine Ruth Roman, David Andrew Roman, Stephen
    George Roman, and Helen Elizabeth Roman-Barber

Respondents (Respondents)

John J. Longo and Martin J. Henderson, for the appellant

R. Leigh Youd and Adam J. Wygodny, for the respondents

Heard:  December 11, 2013

On appeal from the decision of Justice Edward M. Morgan
    of the Superior Court of Justice, dated June 19, 2013, with reasons reported at
    2013 ONSC 4220.

Lauwers J.A.:

OVERVIEW

[1]

The appellant, First Elgin Mills Developments Inc., purchased development
    land from the respondents for slightly more than $12.5 million dollars, secured
    by an interest-free vendor take-back (VTB) mortgage payable over seven years.
    The agreement of purchase and sale contained a price adjustment clause by which
    the purchase price could be reduced if the amount of developable land was less
    than expected. The appellant applied for a declaration that, as a result of the
    operation of the price adjustment clause, nothing was owed on account of the
    purchase price. The appellant also sought a consequential order discharging the
    mortgage. The respondents cross-applied for a declaration that the price adjustment
    clause would not operate to reduce the purchase price because it had expired
    and, as a result,  the appellant was obliged to pay the remaining balance of
    about $1.4 million to the respondents.

[2]

The application judge dismissed the First Elgins application and
    allowed the respondents cross-application.

[3]

For the reasons set out below, I would allow First Elgins appeal.

FACTS

[4]

An understanding of the facts and circumstances affecting the future
    development of the property is critical to interpreting the agreement of purchase
    and sale. There are no material facts in dispute.

[5]

At issue is the Triple R property (the property), which comprises
    71.7175 acres, and is largely farmland. It is located in a part of Ontario
    affected by the
Greenbelt Act
, 2005
, S.O. 2005, c.1 and its
    regulatory structure. The Act came into force in February 2005 and limited the
    amount of acreage of the property that could be developed for residential or
    other more intense uses.

The Agreement of Purchase and Sale

[6]

The respondent, Romandale Farms Ltd., and 2001251 Ontario Inc., a
    numbered company affiliated with the appellant, First Elgin Mills Developments
    Inc., entered into the agreement of purchase and sale (the Agreement) on
    August 29, 2005. The Agreement covered three properties: one was known as the
    Snider/McGrisken property; the second as the Elgin South property; and the third
    was the subject of First Elgins application and this appeal. The Agreement was
    amended by an Amending Agreement dated March 14, 2006 that resolved issues
    between Romandale Farms and other related owners of the property without
    affecting the basic elements of the deal between First Elgin and Romandale
    Farms.

[7]

First Elgin bought the property for $12,550,562 (71.7175 acres at
    $175,000), calculated on the basis that the entire property was developable. The
    Agreement contained a price adjustment clause that would reduce the purchase
    price if, on March 16, 2011, the proportion of non-developable land exceeded 20
    per cent of the total acreage. On March 16, 2006, when the transaction closed,
    First Elgin paid more than $8.7 million to the respondents (70 per cent of the
    total value).

[8]

The Agreement contemplated a single VTB mortgage. As the result of the
    Amending Agreement, the balance of $3,765,770 was secured, not by one, but by
    two interest-free VTB mortgages in equal amounts of $1,882,885, each having a term
    of seven years. As part of the settlement among the Romandale Farms-related
    entities that led to the Amending Agreement, the other named respondents were
    not to be affected by the price adjustment clause. Only the balance to be paid
    to Romandale Farms under its VTB mortgage was required to absorb the impact of
    the clauses operation. The Amending Agreement further provided that any price
    reduction in excess of the amount owed on the Romandale Farms VTB mortgage
    would be satisfied out of a transaction related to other lands.

[9]

The Agreement used the short form, ND Land, to denote the non-developable
    land, which was defined, in s. 2(a), as:

land prohibited from development by law, subject to
    environmental protection requirements, wood lots, land below top-of-bank and
    the set-backs from top-of-bank, streams and floodplain, existing easements but
    not including up to half of the existing lake on the subject property to a
    maximum of two acres.

[10]

The payment provisions and the price adjustment clause were set out in
    ss. 3(a) and (b) of the Agreement:

(a) The purchase price shall be based
    on the sum of $175,000 per acre which price will be calculated using the
    existing most recent survey of the subject property which Romandale represents
    and warrants accurately describes the subject property. The purchase price
    shall be reduced at the end of the 5
th
year of the term of the VTB
    #2 Mortgage (as hereinafter described) by the amount that the acreage of the ND
    Land within the Triple R Property exceeds 20% of the total acreage. The
    determination of the amount of acreage of such ND Land shall be made in the
    same manner as that described in section 2(a) hereof;

(b) The purchase price shall be paid to
    the extent of 70% thereof by certified cheque on closing and the balance by way
    of a vendor take-back mortgage (the VTB #2 Mortgage) with a term of 7 years,
    bearing no interest, with a balloon principal payment of $1 million at the end
    of the 3
rd
year of the term. The price adjustment described in
    section 3(a) hereof shall be applied at the end of the 5
th
year of
    the term, and 50% of the balance owing under the VTB #2 Mortgage shall be paid
    at the end of the 6
th
year of the term and the balance at the end of
    the 7
th
year of the term.

[11]

The VTB #2 Mortgage was intended to be the mortgage on the property. It
    was replaced by the two VTB mortgages referred to above in para. 8.

[12]

The reference in s. 3(a) to section 2(a) hereof was to another
    provision in the Agreement that created a mechanism for determining the acreage
    of non-developable land for the purpose of calculating any reduction in the
    purchase price under the price adjustment clause. Section 2(a) provided:

(a) The parties shall each retain their
    own consultant to determine the acreage of the ND Land and both parties shall
    agree upon a third independent qualified consultant to determine the acreage of
    the ND Land in the event that their own consultants cannot agree upon such
    acreage. In the event of such disagreement, the amount of the ND Land shall be
    deemed to be the average of the amounts determined by the 3 consultants. Such
    determination of the amount of acreage of the ND Land shall be final and
    binding upon the parties, with no rights of appeal therefrom. The parties shall
    each bear the cost of their own consultant and 50% of the cost of the third
    consultant.

[13]

Section 7(c) of the Agreement provided that [t]ime shall be of the
    essence hereof. The Amending Agreement confirmed that time continues to be of
    the essence of the Agreement.

[14]

As required by s. 3(b) of the Agreement, the balloon principal payment of
    $1 million was made at the end of the third year of the term in March 2009. The
    remaining balance of $1,332,884.48 on each VTB mortgage was to be paid in equal
    amounts at the end of the sixth and seventh years of the term, assuming that
    there was no price reduction to account for excess non-developable land.

[15]

As noted, under s. 3(a) of the Agreement, the price reduction was to
    occur at the end of the 5
th
year of the term of the VTB #2 Mortgage,
    which was March 16, 2011. First Elgin did not seek a price adjustment on or
    before that day.

[16]

On the day the Agreement was signed, the parties were, on paper, already
    anticipating a price reduction because the greenbelt legislation identified
    9.231 hectares (22.8102 acres) of the property as non-developable. This was 11.8046
    percent or 8.4682 acres above the 20 per cent threshold in the Agreement. (The
    respondents claim that the correct figure is 8.4662 acres.) Accordingly, on the
    date of the Agreement, First Elgin was already eligible for a price reduction
    of at least $1,481,935, (8.4682 acres x $175,000) before taking into account
    the other elements included in the definition of ND Land (for example, wood
    lots).  However, that possible price reduction would only occur if there were no
    offsetting changes in the greenbelt legislation that would expand the amount of
    developable acreage before March 16, 2011.

[17]

The property is located in the North Markham development area. The
    landowners in that area, including First Elgin and Romandale Farms, joined
    together to form the North Markham Landowners Group. The Group jointly shared
    the cost of various studies and consultations required by the land development
    process. These included on-site surveys and measurements of environmental and
    natural heritage features, including mapping by environmental consultants such
    as terrestrial and aquatic ecologists, hydrogeologists, and civil engineers
    with expertise in storm water management.

[18]

During the environmental assessment process, it appeared that a minnow
    known as the redside dace, an endangered species, might have a habitat in the
    waterways on or around the property. This could have affected the development
    potential, or developability, of the property. By November 2011, however, it
    was known that the property did not contain a redside dace habitat.

[19]

On January 2, 2012, Elgin Mills provided the respondents with an area
    certificate that showed the amount of non-developable land assessed by the
    consultant, a surveyor, after considering the information provided by the
    engineering consultants. The certificate stated that there were 15.8696 acres
    of excess non-developable land. If that figure were accurate, the purchase
    price would be reduced by $2,777,180 (15.8696 acres x $175,000) through the
    operation of the price adjustment clause.

[20]

The respondents expert, in his report dated June 2, 2012, determined
    that only the greenbelt lands, totalling 9.231 hectares, should be taken into
    account when using the price adjustment clause, assuming that it was still
    enforceable. This would yield a price reduction of $1,481,935. He considered
    that the woodlots and other features of the property listed in the definition
    of ND Land were, nonetheless, developable.

[21]

It appears, therefore, to be common ground that, if the price adjustment
    clause is found to apply, First Elgin would be entitled to a price reduction of
    at least $1,481,935.

The Decision under Appeal

[22]

The nub of the application judges decision is found in para. 43:

Under the Agreement, in order for the party proposing a price
    adjustment to assess the quantity of ND Land that the fluid development
    approval process might produce, the assessment had to be tied to a specific
    point in time. What is developable today may be only partially developable in
    five years and entirely non-developable in seven, or vice versa.
For this
    reason, time was of the essence under the Agreement in choosing the 5 year
    point for the assessment to be done.
[Emphasis added.]

[23]

The application judge noted, at para. 47 that:

Five years under the Mortgage came and went and [First Elgin]
    said and did nothing. No communication about the calculation of ND Land was
    sent to the Respondents, no consultant report was prepared and, in fact, no
    consultant was retained by [First Elgin] until the five year point was long
    gone.
The key moment in time for calculating any price adjustment passed the
    parties by.
[Emphasis added.]

[24]

He concluded, at para. 48, that:

As indicated, change in some of the variables that define ND
    Land was as inevitable as it was unpredictable.
For that reason, no change
    in any one of the variables could displace the chosen five year point for
    exchanging the expert reports and calculating the ND Land.
[Emphasis
    added.]

[25]

The application judge, at para. 26, set out and specifically rejected First
    Elgins argument that it was impossible to determine the extent of the
    non-developable land on March 16, 2011 - the five year point.

The Positions of the Parties

[26]

First Elgin asserts that the application judge erred in concluding that:
    (i) the Agreement required the purchase price adjustment to be determined by
    the fifth anniversary of the mortgage; (ii) time was of the essence in relation
    to that exercise; and (iii) First Elgin was obliged to trigger the price
    adjustment process. Before this court, First Elgin continues to assert that it
    was not possible to make the price adjustment in March 2011, because the
    planning process was not sufficiently advanced by that time to permit a fully
    informed determination.

[27]

First Elgin argues that it is entitled to a total purchase price
    reduction of $2,777,180 (15.8696 acres x $175,000) as a result of excess
    non-developable lands. Although this would exceed the amount owing under the
    Romandale Farms mortgage, the Amending Agreement provided that any price
    reduction in excess of the amount owed on the mortgage would be satisfied out
    of a transaction related to other lands. Finally, First Elgin asserts that, if
    this court finds that the application judge was correct in his interpretation
    of the Agreement, then First Elgin is entitled to relief from forfeiture.

[28]

The respondents argue that the application judge correctly interpreted
    the Agreement and that his interpretation is entitled to deference. Time was of
    the essence, and First Elgin was required to take steps towards realizing the
    ND Land Adjustment prior to March 2011. Since First Elgin took no such steps, the
    respondents contend that it is not entitled to a reduction in the purchase
    price. They add that First Elgins explanation for its delay in pursuing the
    price reduction is not credible and should not influence the result. Finally,
    the respondents submit that relief from forfeiture is not available to First
    Elgin

The Standard of Review

[29]

In my view, the standard of review on
    this appeal is correctness, since it involves the interpretation of a contract,
    with due deference to be paid to the application judge on those determinations
    in which the facts dominate:
The Plan Group v. Bell Canada
, 2009 ONCA
    548, 96 O.R. (3d) 81, at paras. 19-20, 27, 30, 31.

ISSUES

[30]

First Elgin poses two issues to be resolved on this appeal:

(1) Was the application judge
    correct in interpreting the date on which the amount of non-developable land
    was to be determined as a form of limitation period to which the Agreements
    time of the essence clause was applicable; and

(2) If so, is First Elgin
    entitled to relief from forfeiture?

Since, in my view the answer to
    the first question is no, I see no need to address the second.

ANALYSIS

[31]

The process of moving raw land through the land development process is
    complex, time consuming, and expensive. The outcome is frequently uncertain. The
    application judges description of the vagaries of the land development system,
    found in paras. 11-13 and 35-42, are entirely accurate. His use of the
    adjective fluid to describe the land development process, at para. 43, is apt.

[32]

The parties to this litigation are sophisticated and experienced land
    developers and were legally represented throughout the proceedings. The principals
    affidavits show that, when they entered into the Agreement, they were aware
    that the process of developing the property would be fluid and the outcome somewhat
    unpredictable, and that it would take time  perhaps years to finalize the
    propertys development potential. There were provincial, regional, and local requirements
    to be met, any of which could affect the propertys development potential of
    the property.

[33]

In my view, the structure and the provisions of the Agreement show four
    salient features relevant to its interpretation. First, the parties were
    sufficiently confident about the future prospects of the property to set the
    price and to allocate between them the risk that less than its full area would be
    developable. This is shown by the adoption of a 20 per cent threshold before
    the price adjustment clause could be triggered. The value lies in the
    developable land. Both parties assumed that most of the property, at least 80
    per cent of it, would eventually be developable.

[34]

Second, the nature of the transaction in this fluid context therefore
    had a constitutive tension that is reflected in the Agreement. First Elgin was
    interested in paying only for developable land. Putting off the date on which
    the amount of developable land would be determined for the purpose of applying
    the price adjustment clause would be to First Elgins advantage, since the
    passage of time increased certainty. The respondents, however, did not want to
    wait forever for the purchase price to be finalized. The parties compromised on
    a horizon of five years, and set the date on which the amount of
    non-developable land would be determined as March 16, 2011, being the fifth
    anniversary (the determination date).

[35]

I therefore agree with the application judges comments in para. 43,
    which I reproduce here for convenience, except for the italicized sentence:

Under the Agreement, in order for the party proposing a price
    adjustment to assess the quantity of ND Land that the fluid development
    approval process might produce, the assessment had to be tied to a specific
    point in time. What is developable today may be only partially developable in
    five years and entirely non-developable in seven, or vice versa.
For this
    reason, time was of the essence under the Agreement in choosing the 5 year
    point for the assessment to be done.
[Emphasis added.]

[36]

I also agree with the application judges view, expressed at para. 44,
    that a determination can be made at any given point in time, recognizing that
    it may be different at yet some other point in time. He was right to reject First
    Elgins position that such a determination on the determination date was
    impossible.

[37]

Third, the parties agreed on a mechanism for determining the quantum of
    non-developable land. That mechanism, if fully deployed, would have taken some
    time since it involved three different consultants. Although s. 2(a) of the
    Agreement contemplates that both parties would retain their own consultants to assess
    the non-developable acreage, I agree with the application judges observation,
    at para. 25, that, since the price adjustment clause could only result in a
    reduction of the purchase price, the practical onus was on First Elgin to be
    the first to retain a consultant and obtain a report. I also agree with him
    that the respondents were not in breach of the Agreement by failing to retain a
    consultant until after the determination date. As the respondents note, they could
    well have simply accepted First Elgins consultants report. In such
    circumstances, there would have been no need to retain their own expert and run
    the entire process for determining the quantum of non-developable acreage,
    through to its conclusion.

[38]

Fourth, the parties agreed on a mechanism for recovering any overpayment
    on account of the purchase price out of what was owing on the mortgage on the
    sixth and seventh anniversaries, with the possibility of collecting excess
    overpayments through a transaction on another property. No doubt, the parties
    wanted to avoid the need for legal proceedings.

The Agreement set a
    Valuation Date, not a Deadline

[39]

Although I agree with many of the application judges observations, in
    my view, he erred in his interpretation of the Agreement. In particular, he interpreted
    s. 3(a) and the line, the purchase price shall be reduced at the end of the fifth
    year of the term, as a deadline that operated in a manner similar to the
    expiry of a limitation period. As I read the Agreement, that interpretation is
    not consistent with the commercial purpose of the provision in the Agreement;
    it would produce a result that is not commercially reasonable in the context of
    the transaction, the structure of the Agreement, and the facts on the ground. I
    disagree specifically with the last sentence of para. 43, which states that: [f]or
    this reason, time was of the essence under the Agreement in choosing the 5 year
    point for the assessment to be done.

[40]

In my view, the application judge erred in framing the question, at
    para. 26:

[First Elgins] case, therefore, turns on its assertion that
    the determination of ND Land was impossible at the five year point. [First
    Elgin] must establish that it was necessary, not just for itself but for both
    parties, to wait until a later date in order to make a definitive
    determination.

[41]

While First Elgin framed its case that way, at least in part, the real
    issue before the application judge was how the price adjustment clause in the Agreement
    should be interpreted in the context of this case.

[42]

For the following reasons, I am of the view that the application judge
    erred in characterizing the provision as a hard deadline by which the price
    adjustment had to be made. First, the language of s. 3(a) does not expressly specify
    a date by which the actual amount of developable acreage must be determined  and
    the calculation of the purchase price completed, nor does s. 2(a), which prescribes
    the mechanism by which the amount of ND Land was to be determined.

[43]

Second, the conclusion that s. 3(a) imposes a deadline is not consistent
    with the nature of the mechanism for determining the developable acreage.  While
    s. 2(a) does not set the timelines for the various steps to be taken, it is
    obvious that time would be necessary to complete the process.

[44]

Third, the information which the parties needed to establish the
    developable acreage would not be finalized until after the determination date.
    Only at that point would it be clear that an event that affected the propertys
    development potential, such as some municipal enactment or a change to the
    greenbelt regulation, had not occurred.

[45]

Fourth, the application judges finding is inconsistent with the
    inherent timeline in the Agreement. The fixing of the value on the fifth
    anniversary date would have cash-flow implications for the parties until a year
    later when it came time to pay the next instalment under the VTB mortgage.
    While the Agreement is silent on the date by which the process to determine the
    quantum of non-developable land was to begin, it is arguably implicit that the
    parties intended the process to have been completed before the second last
    balloon payment under the mortgage, although they did not impose that deadline.
    I draw this inference from the fact that the balloon payment was itself to have
    been the primary mechanism to adjust the cash to be paid to complete the
    purchase.

[46]

There is no evidence that the determination process could not have been
    accomplished in time, even with the starting date of January 2, 2012, the date
    on which First Elgin provided the respondents with the area certificate
    setting out its position on the ND Land. In short, there was no functional
    necessity for the deadline that the application judges interpretation would
    impose.

[47]

I note that the application judge seems somewhat uncertain about the effect
    of the notional deadline. When was the determination process to establish the
    quantum of non-developable land to start and end? One reading of his reasons is
    that the determination process must be completed by the fifth anniversary.
    Another reading is that he thought the process must be commenced by that date.

[48]

In my view, there is no basis for the argument that the process was to have
    been concluded by the end of the fifth year. That would have pushed back the
    exchange of consultants reports and the determination process involving the
    third consultant by some time, when even less of the relevant information about
    the development potential of the land would have been available. Similarly,
    nothing in the Agreement indicates that the parties were required to commence
    the process by the end of the fifth year.

[49]

Fifth,
    the application judge effectively implied a term where the normal conditions
    for doing so are not met. A court may imply a term in a contract where doing so
    is necessary to give effect to the intention of the parties and to give
    business efficacy to the agreement: see
M.J.B. Enterprises Ltd. v. Defence
    Construction (1951) Ltd.
,

[1999] 1 S.C.R. 619, at paras. 27-29.
    Further, it must be obvious that the parties intended the contract to include
    such a term before a court will imply it.

[50]

In my view, the term implied by the application
    judge, that the price adjustment process had to be completed (or, at least,
    commenced) by the fifth year of the mortgage, does not make business sense in
    the context of this case and does not meet this standard for implying a
    contractual term: see
Venture Capital USA Inc. v. Yorkton
    Securities Inc.
(2005), 75 O.R. (3d)
    325, leave to appeal to S.C.C. dismissed, [2005] S.C.C.A. No. 334.

[51]

Finally, I note that the application judges decision would mean that First
    Elgin left about $1.4 million on the table by waiting until after the
    determination date, if it really was meant to operate as a deadline. This makes
    no commercial sense. If anything, it is the respondents who were unreasonable
    in thinking that they could get away without a price reduction if the date
    passed without an adjustment being sought.

[52]

There is, in short, no date to which the time of the essence clause
    attaches in determining the ND Land. The application judge misapprehended the
    role of the determination date in s. 3(a) of the Agreement. In my view, the determination
    date is best interpreted and understood as an as of date for the purposes of
    calculating the quantum of non-developable acreage, similar to a valuation date.
    Future possible variations would not be taken into account. I agree with the
    application judges observation, at para. 48:

As indicated, change in some of the variables that define ND
    Land was as inevitable as it was unpredictable. For that reason, no change in
    any one of the variables could displace the chosen five year point for
    exchanging the expert reports and calculating the ND Land.

[53]

The application judge was correct to say that the parties chose the end
    of the fifth year of the mortgage as the relevant time for calculating the
    proportion of the land that was not developable. They did so in order to bring
    some certainty to the process. He erred, however, in also holding that First
    Elgin was required to complete, or even commence, the process for determining
    the proportion of ND land by that date. Such a requirement does not make
    business sense in the context of the rest of the Agreement and the overarching
    land development process.

[54]

In my view, as noted earlier, the determination date in the Agreement is
    analogous to the valuation date that occurs in other commercial contexts,
    such as the date as of which the value of expropriated land, or the value of
    a minority interest in an oppression case, or the calculation of unfunded
    liability in a pension plan, is to be determined. In effect, the motion judge
    conflated the concepts of a valuation date and a deadline date, and erred by
    turning the determination date into a deadline.

[55]

In such valuation cases, the date of valuation usually has nothing to do
    with the dates by which the process of valuation must be started and ended. The
    timing for that process is found elsewhere, in agreements or in legislation
    like the
Expropriations Act,
R.S.O. 1990, c. E.26
.
In
    expropriation cases, for example, land is valued at the date of expropriation,
    although the determination of that value normally does not occur until much
    later. The parties are obliged to retain experts who will, using the best
    available evidence, value the property as of the date of expropriation.

DISPOSITION

[56]

I would set aside the judgment of the application judge, and declare
    that First Elgin is entitled to a purchase price reduction in accordance with
    the Agreement to be determined by the mechanism set forth in that document.

[57]

I would fix the costs of the appeal in the amount of $10,000, all
    inclusive, and reverse the costs award in the court below and order the
    respondents to pay First Elgin the same amount for the costs of that proceeding.

Released:  August 6, 2014 GE

P.
    Lauwers J.A.

I
    agree Gloria Epstein J.A.

I
    agree G. Pardu J.A.


