Assessing real property damages: The repair cost and the issue of betterment

Damon Stoddard

In recent years, the value of real property in the Greater Toronto Area has increased significantly. In a rising real estate market, if a negligent act or omission causes property damage, the cost to repair or replace such property may be greater than the diminution in value of such property.

As a result, plaintiffs are increasingly claiming damages for repair and replacement costs, rather than claiming damages for diminution in the value of their property. This article will review recent case law and address the following legal issues that arise in these instances:

1. Should damages be assessed on a cost to repair basis, or a diminution in value basis; and
2. The principle of betterment.

Assessing real property damages:
The leading Ontario Court of Appeal decision in James Street Hardware & Furniture Co. v. Spizziri ^[1] provides a clear statement of two competing approaches to the measure of damages with respect to torts affecting land. In that decision, the Court of Appeal cites the following passage from McGregor on Damages,^[2] a leading text on tort law:

The difficulty in deciding between diminution in value and cost of reinstatement arises from the fact that the plaintiff may want his property in the same state as before the commission of the tort but the amount required to effect this may be substantially greater than the amount by which the value of the property has been diminished. The test which appears to be the appropriate one is the reasonableness of the plaintiff’s desire to reinstate the property; this will be judged in part by the advantages to him of reinstatement in relation to the extra cost to the defendant in having to pay damages for reinstatement rather than damages calculated by the diminution in value of the land. [emphasis added]

In a 2016 Superior Court decision entitled, Scaffidi-Argentina v. Tega Homes Developments Inc., ^[3] the plaintiffs’ residential rental property was rendered uninhabitable after the defendant constructed a multi-unit condominium complex on abutting property.

The plaintiffs failed to adduce evidence of the cost to rebuild their property, and did not prove that they intended to do so. Further, the trial judge held that it would not be reasonable for the plaintiffs to rebuilt since it was unclear what changes would be required to meet new building standards, or what additional costs would be associated to meet those standards.^[4]

In Scaffidi, the trial judge held that awarding damages on the basis of diminution in value of the property was the fairer and more practical approach. The plaintiffs were also awarded damages for lost rental income.

By contrast, in a 2017 decision, Jarbeau v. McLean, ^[5] the Ontario Court of Appeal set aside the trial judge’s decision, and awarded the plaintiffs the cost to repair their home. The plaintiffs had purchased a home that was not building code compliant and should never have been built in the first place. At trial, the plaintiffs obtained an expert report from an engineer on the required repairs, and a contractor’s pricing estimate, on the cost to complete the repair work.

In Jarbeau, the Court of Appeal held that the plaintiffs should not be awarded damages on the lesser diminution in value basis, because that did not take into account the real difficulty of selling the plaintiffs’ home, or the cost of demolition, if the property was sold as vacant land. ^[6]

The Court of Appeal held that “the fairest measure of damages is that which would provide the Jarbeaus with what they bargained for – a home free of defects; and that there was “no issue of a windfall or betterment if the cost to repair is awarded”.^[7]

The Principle of Betterment and recent case law:
The essential purpose and most basic principle of tort law is that a plaintiff is to be placed in the position he or she would have been in but for the defendant’s negligence. It is therefore necessary to determine the plaintiff’s position after the tort, and to assess the plaintiff’s “original position”. It is the difference between these positions, the “original position” and the “injured position”, which is the plaintiff’s loss. ^[8]

A defendant is not required to put the plaintiff in a better position than his or her original one. Case law provides that “betterment is a question of fact to be determined on the evidence, and with regard to what is reasonable in the particular case”. ^[9] In property damage cases, the starting point is the cost of repair, which the plaintiffs must prove on a balance of probabilities. In some instances, however, betterment may be proven by the defendant, and it will fall to the trier of fact to assess the amount of the betterment.

In a 2014 decision, Fors v. Overacker, ^[10] the defendants sold their home to the plaintiff, but did not disclose certain water problems, or advise the plaintiff of skylight leaking. The defendants were found to be negligent, but argued that the plaintiff would receive considerable betterment if he received roof repairs which resulted in a new roof design, and a new septic system to replace an old system with a life span of only a few more years.

The court disagreed, and held that the remedial work relating to the skylight was both for repairs caused by water damage and to prevent future water damage. The court noted that the defendants had “no figure for betterment”, and that it would be “inequitable to reduce damages for this expense by some amount for betterment that … would be speculative”. ^[11]

In a 2016 Superior Court decision entitled Gemeinhardt v. Babic ^[12] the plaintiff purchased a property from the defendant. After closing, the plaintiff discovered mould, structural defects, a broken furnace, an unsafe garage and renovations that had been completed without building permits. The municipality issued orders to repair the unsafe building. There was no evidence that a home inspector would have discovered these latent defects upon inspection.

In Gemeinhardt, the defendant was found liable for negligent misrepresentation. The judge held that the buildings were essentially a complete write-off and worth nothing because of the latent defects. The defendant had not proven that the plaintiff would enjoy a betterment as a result of being awarded the cost of reinstating her house, additions and garage. The principle of betterment did not apply on the facts of this case. ^[13]

Conclusions:
Recent case law suggests that Ontario courts will assess damages on a diminution of value or cost to repair basis, depends on the particular facts of each case. In Scaffidi, the court held that the process of determining damages should be “a practical one designed to do justice between the parties”, and “not be unnecessarily complicated or rule-ridden”. ^[14]

The plaintiff has the onus to prove its damages, including repair or replacement costs. The plaintiff also has to prove that it intends to repair and rebuilt the subject property.

With respect to betterment, the defendant must prove that the alleged repair work will enhance the value of the property beyond the plaintiff’s original position. A reduction in damages based on a betterment claim cannot be speculative. To sustain a claim for betterment and reduce a plaintiff’s damages, a defendant ought to obtain a report from a pricing contractor setting out the specific repairs required to address the proven defects.