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The Court of Appeal in Alberta v. Shell Canada Products Ltd.

January 11, 2022

Ontario

,

Canada

Issue

Can an owner recover damages for the cost of remedying construction defects in addition to damages for the diminution in value of the property?

Conclusion

In certain cases, even after repair, the value of the property is less than it was originally. When this occurs, the owner is entitled to the cost of restoring the property and to an additional amount to compensate for the residual deficiency. In a case where the evidence justifies a finding that there has been, on top of the cost of repairs, some diminution in market value — or, to put the point another way, justifies the conclusion that the loss to the plaintiff has not been fully compensated by the receipt of the cost of complete and adequate repairs, because of a resultant diminution in market value — the plaintiff should not be deprived of recovery under that head of damage also. (Tridan Developments Ltd. v. Shell Canada Products Ltd.)

Where the property, after undergoing repair, would still be of less value than it was originally, the owner will be entitled to the cost of repair and to an additional sum to compensate for the residual deficiency. (Bustos v Tardif)

In 618369 Alberta Ltd. v. Canadian Turbo (1993) Inc., the plaintiff owned a commercial property from which it conducted its business. The plaintiff's neighbour was a gas station formerly owned by Shell Canada Products Limited ("Shell"). Gas tanks on the neighbouring gas station site leaked and contaminated the plaintiff's property. Shell acknowledged responsibility for the contamination, and Shell paid the cost of remediating the plaintiff's property. However, the Court found that the plaintiff was also entitled to damages for the diminution in value of its land in the amount of $20,000 (approximately $27,600 in 2022 dollars), as evidenced by several offers to purchase the land the plaintiff received during the material period.

In McClean v. Manorgate Estates, the plaintiffs brought an action for damages arising from the undermining of the foundation of their home. The plaintiffs claimed damages for diminution in value or stigma in the amount of $350,000. Although the plaintiffs provided an expert to quantify the stigma damages, the Court rejected the expert's opinion evidence. Nevertheless, due to the nature and extent of the damage to the foundation, the Court accepted that even with the restoration proposed, the market value of the property would be impacted. In the absence of any evidence which the Court could accept concerning the amount by which the property had diminished in value upon completion of the repairs, but finding that there would be some diminution in value of the property, the Court awarded the plaintiffs the nominal amount of $25,000 (approximately $31,000 in 2022 dollars) for diminution of value in addition to the cost of repairs.

Law

In the seminal case of Tridan Developments Ltd. v. Shell Canada Products Ltd., 2000 CarswellOnt 1969 (ONSC), varied on other grounds 2002 CanLII 20789 (ON CA), the Court described the circumstances when damages for diminution in value of a property is available in addition to damages for remedying construction defects:

68 In certain cases, even after repair, the value of the property is less than it was originally. When this occurs, the owner is entitled to the cost of restoring the property and to an additional amount to compensate for the residual deficiency: S.M. Waddams, The Law of Damages, 3rd ed. (Toronto: Canada Law Book Inc., 1997) at p. 111. As stated in the English Court of Appeal by Roskill L.J. in Payton v. Brooks, [1974] R.T.R. 169 (Eng. C.A.) at p. 176:

In a case where the evidence justifies a finding that there has been, on top of the cost of repairs, some diminution in market value — or, to put the point another way, justifies the conclusion that the loss to the plaintiff has not been fully compensated by the receipt of the cost of complete and adequate repairs, because of a resultant diminution in market value — I can see no reason why the plaintiff should be deprived of recovery under that head of damage also.

This is also good law in Canada. The plaintiff is entitled to the cost of repairing the property and any difference in value between its former worth and that of the property when repaired: see e.g. Porteous v. Chotem (1920), 51 D.L.R. 507 (Sask. C.A.) and Walter v. Seibel, [1927] 2 D.L.R. 1005 (Sask. C.A.).

In Bustos v Tardif, 2015 ABQB 202 (CanLII), a case relating to a damaged motor vehicle, the Court, citing from S.M. Waddams, The Law of Damages, provided further principles regarding damages for diminution of value:

[17] Guidance to the determination of damages for diminution in value of property is found in S.M. Waddams, The Law of Damages, loose-leaf (consulted in March 2015), (Toronto: Thomson Returns Canada Ltd, 2013) at paras 1.2310-1.2320:

Compensation for deficiencies in property falls to be made in a wide variety of circumstances. The substantive legal categories are vastly different but the problems of assessment of compensation have a common theme. The cases now for consideration are those in which the complaint is that, but for the defendant’s wrong, the plaintiff would have been in possession of property superior to that which the plaintiff in fact has. This is the substance of… the complaint of the owner whose property is negligently damaged. A question commonly arising in all these kinds of cases is whether the plaintiff’s loss should be measured by the cost of restoring the property or by the diminution of its capital value.

Where the cost of restoration is equal to or less than the diminution of capital value the cost is always recoverable even if the plaintiff does not actually incur the cost. This has been often described as a way of measuring the capital diminution, and indeed it is arguable that wherever the cost of restoration appears to be less than the diminution of capital value, the two are, on analysis, properly considered to be equal…Where the property, after undergoing repair, would still be of less value than it was originally, the owner will be entitled to the cost of repair and to an additional sum to compensate for the residual deficiency....In Payton v. Brooks this principle was approved by the English Court of Appeal in respect of damage to a car. Though the plaintiff failed, on the facts, to prove any residual loss after repair, the court accepted that he would, on appropriate facts, be entitled to recover. Roskill L.J. said:

There are many cases which arise, whether in the field of contract law or of tort, where the cost of repairs is a prima facie method of ascertaining the diminution in value. It is not, however, the only method of measuring the loss. In a case where the evidence justifies a finding that there has been, on top of the cost of repairs, some diminution in market value – or, to put the point another way, justifies the conclusion that the loss to the plaintiff has not been fully compensated by the receipt of the cost of complete and adequate repairs, because of a resultant diminution in market value – I can see no reason why the plaintiff should be deprived of recovery under that head of damage also.

(Footnotes omitted)

In 618369 Alberta Ltd. v. Canadian Turbo (1993) Inc., 2004 ABQB 283 (CanLII), the plaintiff owned a commercial property from which it conducted its business. The plaintiff's neighbour was a gas station formerly owned by Shell Canada Products Limited. Gas tanks on the gas station site leaked and contaminated the plaintiff's property. Shell acknowledged responsibility for the contamination, and Shell and the plaintiff entered into a Remediation Agreement. Shell paid the cost of remediation. However, the Court found that the plaintiff was also entitled to damages for the diminution in value of its land in the amount of $20,000 (approximately $27,600 in 2022 dollars), as evidenced by several offers to purchase the land the plaintiff received during the material period:

[39] The plaintiff alleges that there has been a diminution in the value of the property for which it should be compensated. This is in addition to the cost of remediation, which cost has been borne by Shell. The principles applicable to this claim were stated in Tridan Developments Ltd. v. Shell Canada Products Ltd. (2000), 35 R.P.R. (3d) 141 (Ont. S.C.J.) at para 68:

[...]

[70] I have concluded that this is a case where the plaintiff is entitled to damages for diminution in the value of its land, despite the fact that it is Shell which has paid the cost of remediation. Those damages are $20,000 which is the difference between the amount offered by the Minors and accepted by Sports Tech in September, 2001($310,00) and the Skylark offer in September, 2003 ($290,000).

In McClean v. Manorgate Estates, 2010 ONSC 949 (CanLII), the plaintiffs brought an action for damages arising from the undermining of the foundation of their home. The plaintiffs claimed damages for diminution in value or stigma in the amount of $350,000. Although the plaintiffs provided an expert to quantify the stigma damages, the Court rejected the expert's opinion evidence. Nevertheless, due to the nature and extent of the damage to the foundation, the Court accepted that even with the restoration proposed, the market value of the property would be impacted. In the absence of any evidence which the Court could accept concerning the amount by which the property had diminished in value upon completion of the repairs, but finding that there would be some diminution in value of the property, the Court awarded the plaintiffs the nominal amount of $25,000 (approximately $31,000 in 2022 dollars) for diminution of value in addition to the cost of repairs:

[64] The plaintiffs claim damages for diminution in value or stigma in the amount of $350,000.

[65] In circumstances where damaged property after being repaired has less value than before the damage occurred, then, in addition to the cost of repair, the owner will be entitled to an additional amount of damages to account for the reduced value of the property. This principal was recognised by Roskill L.J. in Payton v. Brooks, [1974] R.T.R. 169 (C.A.) at p. 176:

There are many cases which arise, whether in the field of contract law or of tort, where the cost of repairs is a prima facie method of ascertaining the diminution in value. It is not, however, the only method of measuring the loss. In a case where the evidence justifies a finding that there has been, on top of the cost of repairs, some diminution in market value – or, to put the point another way, justifies the conclusion that the loss to the plaintiff has not been fully compensated by the receipt of the cost of complete and adequate repairs, because of the resultant diminution in market value – I can see no reason why the plaintiff should be deprived of recovery under that head of damage also.

See too: Tridan Developments Ltd. v. Shell Canada Products Ltd. (2002), 2002 CanLII 20789 (ON CA), 57 O.R. (3d) 503 (C.A.)

[66] The defendants submit that the plaintiffs are entitled to no damages for diminution in value or stigma because when all of the repairs specified by Mr. Stanley have been done to the Property that there will be no diminution in value of the Property.

[67] In support of their claim, the plaintiffs called Mr. Barry Lebow. Mr. Lebow has many years of experience in the real estate industry as a real estate agent, appraiser and mortgage professional. He is a Fellow of the Realtor Institute.

[68] At the outset of Mr. Lebow’s evidence, the defendants objected to Mr. Lebow testifying in relation to a model which he proposed to utilize to determine the stigma value of the Property. In the interests of expediting the trial, I reserved on the defendants’ objection and permitted Mr. Lebow to give his evidence in its entirety. Having heard and considered Mr. Lebow’s evidence, I would give effect to the defendants’ objection concerning Mr. Lebow’s use of his model for determining stigma value.

[69] In reaching his opinion as to the stigma value of the Property, Mr. Lebow used what he referred to as an empirical modeling formula to determine a stigma factor which he then applied to the estimated market value of the Property to determine the stigma value.

[70] Mr. Lebow’s model utilizes 11 factors in order to determine what is called the “stigma factor”. The 11 factors are: inconvenience to owner during investigation and testing; inconvenience to owner or tenant during site remediation; legal fees; administrative fees; third-party claims; extra insurance costs; adverse changes in regulatory statutes; potential costs to find temporary accommodation; difficulty in obtaining mortgage financing; additional marketing time to achieve any sale; and ongoing monitoring and engineering costs. The model uses three categories to assess risk for each of the 11 factors: low, medium and high. Mr. Lebow evaluates each factor in respect of the property in question utilizing his experience and expertise and, based on his assessment, assigns a point score for each factor. The point range is 1–3 in the low category; 4-6 in the medium and 7-9 in the high. The total points obtained are called the “Total Stigma Factor”.

[71] Depending on whether the Total Stigma Factor is in the low, medium or high risk category, it is next divided by the total points available in the applicable risk category to obtain a percentage. The total points available in the applicable risk category are then multiplied by the resultant percentage to come up with a factor which is then applied to the estimated market value of the subject property to come up with a dollar value for the “potential stigma factor" for the property in question.

[72] Applying the model to the present case, Mr. Lebow assesses the 11 factors in respect of the Property and arrives at a Total Stigma Factor of 52 points which is in the medium range [52 is the total in his report. In his evidence he corrected the total to 51 but did not do the follow-up calculations. This example therefore is based on the numbers in Mr. Lebow’s report]. Mr. Lebow then divides 52 by 66 (the total points available in the medium range) to obtain 79%. He next multiplies 79 x 66 to get 44%. Finally, using an estimated market value of $800,000 for the Property, Mr. Lebow applies the stigma factor of .44 to the market value and estimates the potential stigma factor to be $352,000.

[73] Mr. Lebow also approaches diminution in value of the Property by asserting that in his professional opinion the stigma factor renders the house of no value and that it should accordingly be demolished for construction of a new home. It is his opinion that the value of the Property, if vacant, is in the range of between $400,000 and $450,000. Estimating the unimpaired market value of the Property at $800,000, Mr. Lebow concludes that the stigma value of the Property is, effectively the value of the house, which is between $350,000 and $400,000.

[74] I have a number of problems with Mr. Lebow's approaches to valuing stigma associated with the Property.

[75] In the first instance, this is the first time that Mr. Lebow has given evidence in court utilizing his model. Although he stated that the model has been used and accepted many times in courts in the United States, I was provided with no evidence of such use or acceptance. Even assuming the model is something that has been widely used and accepted by the real estate industry and courts in the United States, the U.S. model is not the model Mr. Lebow used in his evidence. Mr. Lebow testified, quite proudly, that he has adapted the model for use in Canada. It appears that his changes relate to the factors that are assessed but how those changes impact on the validity of the model used in the U.S. is unknown. More importantly, in my view, Mr. Lebow was unable to explain how the model worked mathematically. As noted, the model uses a point classification system. Each of the 11 factors is given equal weighting. Mr. Lebow was unable to explain why this was so and if it had any effect on the outcome. He was also unable to explain how the math worked to come up with his stigma adjustment factor. When questioned in cross-examination about this, he could not explain what the purpose of the two calculations was and what they were trying to achieve. He retreated to describing himself as a "technician" and deferred to someone in his office, not mentioned in his report, who was the mathematician. He said that he did it the way he was trained to do it.

[76] It is also clear from a review of the 11 factors used in Mr. Lebow's model that he is calculating stigma in respect of the Property prior to any of Mr. Stanley’s proposed remediation work being undertaken. As noted at the outset, however, the issue in determining stigma damages is whether, after the remediation, there will be any diminution in the value of the Property. To the extent that Mr. Lebow’s model has any validity, it does not calculate the stigma value after remediation.

[77] Further, the factors of the plaintiffs’ inconvenience in having to live with the problem from its inception through the remediation and the fact of temporary accommodations that Mr. Lebow purports to take into account and evaluate in his model are items which are within the sole discretion of the court in the assessment of damages. They are items that are taken into account and evaluated as part of the assessment of damages apart from stigma. To incorporate them into a calculation of stigma damages in my view results in double compensation.

[78] For the above reasons therefore, I am simply not prepared to accept the reliability of Mr. Lebow’s model or any results he obtained from it.

[79] Nor am I prepared to accept Mr. Lebow’s evidence in respect of the value of stigma attaching to the Property after the restoration has been done. In my view, Mr. Lebow’s conclusion in that regard is driven entirely by the result he obtained utilizing his model rather than by any separate independent analysis. I say this for the following reasons. The first relates to the basis of Mr. Lebow’s determination of the value of stigma. He expresses the opinion that the Property has a value as vacant land of between $400,000 to $450,000. Although he said in his report that he reached this conclusion based on “extensive investigation into land sales in the Beach area and nearby areas” in his testimony it was clear that he based it on the sale of 142 Silver Birch to Manorgate in late 2005, early 2006. He then estimates the unimpaired market value of the Property at $800,000. This “estimate” is at the time of his report in August 2009 and has no comparables or analysis to support it. In my view, in the absence of any supporting analysis, Mr. Lebow’s conclusions of value are suspect and by comparing a 2005/06 value with a 2009 value with no adjustment, he is mixing apples and oranges. Further, notwithstanding that the house has gone through extensive stabilization and leveling and is slated to have an additional $200,000 in restoration work done on it, Mr. Lebow has provided no analysis of why he is of the opinion that, following completion of the work, “the stigma factor renders the house of no value”. In his report, he states that conclusion after the paragraph entitled: Empirical Model Conclusion.

[80] Notwithstanding that I completely reject Mr. Lebow’s evidence regarding the stigma value of the Property, I accept his evidence that even with the restoration proposed, the market value of the Property will be impacted. The Property and in particular the house, suffered major damage as a result of the undermining of its foundation. Although the work done to stabilize and lift the house arrested the problem and strengthened the foundations along the south wall and portions of the east and west walls of the house, Mr. Stanley’s evidence and the Isherwood letter of January 29, 2007 establish that it was not restored to the condition it was in prior to July 13, 2006. Even after the stabilization work was done in September 2006, the house still had significant damage to its exterior and interior. Mr. Stanley’s proposed restoration work will remedy this damage but it too will not return the house to the condition it was in prior to July 13, 2006. As Mr. Stanley points out, upon completion of the repairs, the interior first and second stories of the house should show no signs of distress. However, the repairs to both the interior and exterior of the house will be apparent upon close inspection. Prospective purchasers will be aware of the problem. While the plaintiffs will be able to produce the engineering reports detailing what was done and the engineers’ opinions, some purchasers may not wish to proceed or, if they do, they will do so on the premise that they can purchase the Property for a price less than the market value.

[81] Two of the factors Mr. Lebow considered, extra insurance costs and difficulty in obtaining a mortgage, are factors in my view which should be considered in determining stigma value. In this case there is no evidence that as a result of the damage to the Property the plaintiffs or any prospective purchaser have had or will have any difficulty either obtaining a mortgage on the Property or getting insurance for the house. To the extent that Mr. Lebow testified to the contrary, I reject his evidence. His evidence concerning issues with obtaining insurance or a mortgage was not based on any specific research involving the Property specifically.

[82] The evidence also establishes that, in most cases, stigma damage will diminish over time. The defendants submit that because the plaintiffs have said that they intend to live in the house for the foreseeable future, any stigma value is eliminated. In my view, the fact that the stigma reduces over time, while a factor to be considered, should not operate to reduce any stigma value in this case. While the plaintiffs intend today to remain in the house, circumstances can easily change.

[83] In the absence of any evidence which I accept concerning the amount by which the Property has diminished in value upon completion of the repairs, but finding that there will be some diminution in value of the Property, I am only prepared to award the plaintiffs the nominal amount of $25,000. This amount recognizes my view that while Mr. Stanley’s proposed repairs will restore the Property, the plaintiffs’ house will not be completely restored to the way it was before the damage occurred resulting in some minor diminution in the value of the Property.

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