Supreme Court of Canada decision provides guidance on the assessment of compensation for de facto expropriations

The Supreme Court's decision in St. John's (City) v. Lynch, 2024 SCC 17 has added to the law on constructive expropriation by providing new guidance on how to determine the correct value of land that has been de facto expropriated. The key question answered is whether a regulatory enactment was made with a view to expropriation or was an independent regulation.

Factual background

The protracted litigation centres on a portion of land located in the Broad Cove River Watershed ("BCR Watershed"), bordering the eastern side of the Town of Paradise (the "Town") and the western side of the City of St. John's (the "City").

Since at least the 1990s, the Lynch family had sought planning approvals to permit development of their land — inquiries of the City included possible farming activity, tree harvesting, saw milling and the construction of wind turbines and solar panels. The City refused to issue any such approvals.

Importantly, the Lynch family's land is located in a Watershed zone under the City's Municipal Plan and the Development Regulations (the predecessor legislation to the province's Urban and Rural Planning Act, S.N.L. 2000, c. U-8 ("URPA")). The Watershed zoning came into effect in 1994, and resulted in a management plan adopted in 1996 that aimed to protect the City's water supply and keep St. John's watersheds "as pristine as possible." The Watershed zone has no "permitted uses" and only three discretionary uses that are subject to the recommendation of the City Manager: agriculture, forestry and public utilities.

To develop land in the BCR Watershed and the Watershed zone, permission would have to be obtained under section 104(4)(d) of the City Act, R.S.N.L. 1990, c. C-17 (the "City Act"). Alternatively, the proponent could ask the City to exercise its discretionary power under URPA to permit a zoning change. The City Act does not expressly set out what factors the City Manager should consider in making recommendations under section 104(4)(d), and on how the discretionary uses under the provincial planning regulations should interact with the City Act. Further, the City took the position that the City Manager is "entitled to refuse all applications for building on the land in order to keep the land 'unused in its natural state,' with its groundwater uncontaminated."^[1]

In 2011, the Lynch family asked the City about possible residential development or development for agricultural, forestry or public utility purposes. They were advised verbally that they would not be allowed to develop the property at all, and that the land had to be kept "unused in its natural state." In 2012, the Lynch family applied for rezoning and draft subdivision approval for a 10-lot subdivision pursuant to section 104(4)(d) of the City Act and under URPA.

On February 1, 2013, the City advised that the development application was rejected as being contrary to the City Act and the provincial planning legislation. Thereafter, the Lynch family commenced an action seeking a declaration that the property had been constructively expropriated.

Judicial background

Whereas prior appeals on the Lynch family's property addressed whether a constructive taking had occurred, the key issue before the Supreme Court of Canada in 2024 SCC 17 is how to determine the value of land that has been constructively taken or de facto expropriated.

At first instance in 2015, the Lynch family argued that the City, in preventing development of the property, sought to maintain the continuous flow of groundwater and acquired a beneficial interest, thereby meeting the first requirement of the test for constructive takings (discussed further below).

As for the second requirement of the test, the Lynch family contended that the City's development proposal and confirmation that the property had to be kept in its "natural state" denied the Lynch family all reasonable uses of the property. On the other hand, the City argued that no expropriation occurred because there had been only lawful land use regulation and no acquisition or taking of land. The court noted that, "based on the natural state of the land, its location in the sensitive ecosystem of the catchment area and the fact that historically it has seen no appreciable use, it cannot be said that all of the aggregate incidents of ownership by the [Lynch family] have been taken away."^[2]

Further, in analyzing the City Act, the court rejected the Lynch family's argument, noting that "the authority exercised by the [City] over the Applicants' land is regulatory in nature and absent the statutory authority to expropriate in the first instance the [City's] regulation of the [Lynch family's] property cannot amount to constructive expropriation."^[3]

In 2016, the Court of Appeal overturned the lower court decision by holding that the Lynch family's property had been constructively expropriated by the City as of February 1, 2013, when the City refused to approve the 10-lot subdivision. The Court of Appeal concluded that the "City purported to take away the [Lynch family's] right to appropriate the groundwater on their land and to give the City a beneficial interest in the Lynch property, consisting of the right to a continuous flow of uncontaminated groundwater downstream to the City's water facilities." This satisfied the first requirement of the test for constructive expropriation.^[4]

On the second threshold question, the Court of Appeal noted that the lower court erred by failing to ask whether the City Act and the exercise of the City Manager's discretion resulted in "deprivation of the reality of proprietorship."^[5] The Court of Appeal elaborated that,

"Having the property rights flowing from a Crown grant, with virtually unrestricted rights to build and to appropriate and use groundwater, transformed to merely a right to keep the land 'unused in its natural state,' results in virtually all of the aggregated incidents of ownership being taken away. All of the reasonable uses of the property were taken away and a compulsory taking, a de facto or constructive expropriation, resulted."^[6]

In its decision, the Court of Appeal held that the Lynch family had a right to file a claim for compensation pursuant to sections 18 and 19 of the Expropriation Act, R.S.N. 1990 (the "Expropriation Act"), as though a notice of expropriation had been served as of February 1, 2013, and, that they had a right to proceed to the Board of Commissioners of Public Utilities for a compensation hearing failing agreement on compensation with the City.

The parties failed to reach an agreement, and during the assessment of compensation, the Board of Commissioners of Public Utilities brought a question of law to the Supreme Court of Newfoundland and Labrador pursuant to section 26(3) of the Expropriation Act: should compensation be assessed based on the uses permitted by the Watershed zoning (i.e., the discretionary uses of agriculture, forestry and public utility) or should the zoning be ignored and the value determined as if residential development were permissible?

The Lynch family did, in fact, contend that residential was the highest and best use of their lands. Their expert appraiser, in "screening out" the Watershed zoning, opined that the market value of the property was $875,000 based on infill serviced lots with residential medium zoning. On the other hand, the City's expert appraiser provided two opinions: first, in determining the value based on the existing Watershed zoning, the value of the property was appraised to be $105,000 with a highest and best use determined to be agricultural and forestry related, with there also being potential for passive conservation use. Secondly, assuming the highest and best use to be medium density residential subdivision development, the City's appraiser provided a value opinion of $670,000.^[7]

In the 2020 reference case, the Supreme Court of Newfoundland and Labrador concluded that compensation for the constructive expropriation should be based on the existing Watershed zoning with discretionary uses of agriculture, forestry and public utility.^[8] This determination resulted in a further appeal, whereby the Court of Appeal determined that the compensation owed to the Lynch family must be determined as if the property had no land use zoning restrictions whatsoever.  

The Court of Appeal's reasoning was guided by the longstanding Pointe Gourde principle, which provides that increases or decreases in land value due to a public authority's "scheme" cannot be taken into account when determining compensation. The Court of Appeal found that the Watershed zoning was underlying the constructive expropriation of the Lynch family's property.

Issues on appeal to the Supreme Court

As appellant, the City asked Canada's highest court to clarify two inter-related issues that are key to the law on constructive expropriation and the determination of compensation:

1. What is the proper causation analysis to be applied in determining the loss to private landowners that have been constructively expropriated?
2. What effect should be given to the Pointe Gourde principle?

The Supreme Court contemplated the issue simply as: "how do zoning regulations and other land use restrictions affect the compensation due to owners of expropriated property?"

The decision in St. John's (City) v. Lynch will now guide how courts factor existing zoning regulations into the "scheme" when determining compensation by requiring a factual determination based on whether a regulatory enactment was made with a view to expropriation or, conversely, was an independent enactment.

Background to the law of constructive taking

Unlike formal expropriation, which typically follows a strict statutory procedure and compensation process, a constructive taking occurs through a public authority's exercise of regulatory power.

The leading case on constructive expropriation in Canada has been Canadian Pacific Railway v. Vancouver (City), 2006 SCC 5.

In that case, the Court set out the test for determining whether a constructive taking has occurred. The reviewing court must decide:

1. Whether a public authority has acquired a beneficial interest in the property or flowing from it (i.e., an advantage)
2. Whether the public authority's exercise of power has removed all reasonable uses of the property.

The concept of "beneficial interest" centres on the effect of a regulatory measure on a property owner rather than whether the public authority has acquired a proprietary interest in the land. 

The law on constructive expropriation was recently clarified and broadened in Annapolis Group Inc. v. Halifax Regional Municipality, 2022 SCC 36, where the Supreme Court said that in order for constructive expropriation to have occurred:

1. The public authority must acquire a beneficial interest in the property or flowing from it — interpreted broadly to mean an advantage to the government actor.
2. The property owner must lose all reasonable uses of the property.

Further, the Supreme Court said that a public authority's motive could be supporting evidence in making out a claim. That is, the underlying objective pursued by a public authority may provide supporting evidence for a constructive expropriation claim, but it is neither necessary nor sufficient. The Supreme Court noted that while not every instance of regulating the use of property amounts to a constructive taking, the line is crossed where "the effect of the regulatory activity deprives a claimant of the use and enjoyment of its property in a substantial and unreasonable way, or effectively confiscates the property". This means that "private rights in the property must be virtually abolished, leaving the [property owner] with 'no reasonable use' of the property."^[9]

As noted above, the key issue in St. John's (City) v. Lynch is how to determine value in constructive expropriations.

Underpinning the issue is the application of the Pointe Gourde principle, which emanates from a 1947 decision in the United Kingdom and has since been codified in expropriation legislation across Canada including Ontario's Expropriations Act at section 14(4)(b) and in section 27(1)(a) of Newfoundland and Labrador's Expropriation Act.^[10]

The concept is straightforward: the value of expropriated land should not be increased or decreased by the development (i.e., the "scheme") for which the land is being acquired. Further, the intent of the concept is straightforward: by determining value on permitted uses, "screening out the scheme" is meant to ensure neither the expropriating authority nor the property owner obtains a windfall. The difficulty with Pointe Gourde is in its application — compensation boards and courts have strained to correctly determine the breadth of the "scheme."

How, if at all, Pointe Gourde applies to constructive expropriations had yet to be addressed, which is a point raised by the City. But the key argument it raised at the Supreme Court is that the Court of Appeal applied the Pointe Gourde principle too broadly by concluding that the 1994 regulations that established the Watershed zone were to be ignored because they were causative of the constructive expropriation.

The City argued that it was absurd to find that compensation was to be assessed "as if the property was unconstrained by any zoning or development regulations," which the Court of Appeal had cautioned itself against:

"The concept of a scheme of expropriation must not be taken too far … If all actions by, say, a municipal expropriating authority using land use bylaws for general planning purposes, were to be regarded as part of the scheme that ultimately leads to an expropriation, it would lead to the absurd result that land use restrictions imposed for general planning purposes would always be disregarded. The result would be valuation based on unrestricted use. The case law clearly rejects this idea. The notion of valuation on the basis of highest and best use cannot completely disregard all such restrictions when valuing land expropriated for some public purpose."^[11]

Unlike constructive expropriation, the issue of "screening out the scheme" has been the subject of in-depth analysis by the Ontario Court of Appeal in the context of de jure or formal expropriations.

Among the leading cases is Windsor (City) v Paciorka Leaseholds Ltd., 2012 ONCA 431, in which the Ontario Municipal Board agreed with the property owner in finding that that the expropriation scheme began with downzoning in 1983, when the subject lands were identified as environmentally sensitive, and culminated with a formal taking in 2004. In making the finding, the Board rejected the City's argument that the studies and designations beginning in 1983 were part of an independent process to identify and protect endangered species.

The Divisional Court upheld the Board's decision, but a dissenting opinion found that it was unreasonable for the Board to not take into account evidence that Ontario's Provincial Policy Statement ("PPS") would have limited the development potential of the expropriated lands. The Court of Appeal agreed with the dissenting opinion, finding that the PPS was not part of the scheme and had to be considered in reaching a compensation amount. At a new hearing, the Local Planning Appeal Tribunal (as successor to the Board) commented that,

"The origin of a scheme is not always clear. It generally starts out as an imprecise concept that becomes progressively more definite and well known as time goes by. The progression from vagueness to becoming more definite generally makes it difficult to isolate the impacts of the scheme when estimating the market value of an expropriated property. To screen out those impacts, it may be necessary to screen out a significant period of time and a substantial number of actions taken by the expropriating authority."^[12]

The Supreme Court's reasoning in St. John's (City) v. Lynch

In St. John's (City) v. Lynch, the City argued that neither the statutory provisions in the City Act nor the Watershed zoning caused the constructive taking of the Lynch family property. Rather, the constructive taking occurred upon the City's exercise of administrative power to reject a development proposal.

In a unanimous decision, the Supreme Court of Canada allowed the appeal, finding that compensation for the Lynch family's land must take into account the Watershed zone, which was an independent enactment and not made with a view to expropriation.

The Supreme Court rejected the Court of Appeal's application of the Pointe Gourde principle, explaining that its use of causation to "screen out the scheme" was too broad and runs afoul of jurisprudence that confirms zoning regulations have a bearing on market value compensation. The Supreme Court warned that this approach would risk including "measures closely related to the expropriation that lower the property's value" but are not "links in the chain that enabled the taking to occur."^[13]

And so, Justice Martin, writing for the Court, explained that the key question in "screening out the scheme" in the context of a regulation's effect on property value, is a factual determination of "whether the enactment was made with a view to the expropriation or, conversely, was an independent enactment."^[14] 

The Supreme Court decision notes that this inquiry involves examining the purposes and effects of the regulatory enactment, which can be discerned by considering "the debates, deliberations, and statements of policy that gave rise to it" as well as "the municipality's long-term plans and correspondence involving officials."^[15] Further, analysis on application of Pointe Gourde should consider whether regulatory enactments were enacted by the same or a different authority than the one that expropriated, and whether they are city or province-wide policies, versus site-specific regulations.^[16]

The Supreme Court explains that focusing on only effects would risk allowing governments the ability to "downzone properties or freeze development in anticipation of expropriation to reduce the compensation payable," and "screening out" all prior regulatory enactments that impact property value, "regardless of whether they removed all reasonable uses of the property or were made with a view to expropriation", would result in a windfall to the property owner.^[17] By focusing on both purpose and effects, the analysis will work to provide fair compensation. 

On the facts at hand, Justice Martin  explained that the application judge was:

1. Alive to the Pointe Gourde principle.
2. Recognized that expropriation is a process and not a single regulatory act.
3. Properly focused on whether the Watershed zoning was part of the scheme rather than whether the Watershed zoning reduced the value of the Lynch family property.^[18]  

This led her to the correct conclusion that it was not the Watershed zoning, being an independent zoning regulation, but the City's decision to keep the Lynch family's property in an unused and natural state preventing development which constituted the "scheme".  

Key takeaways and conclusion

In addition to reminding us that a regulatory enactment that adversely affect property values is not compensable unless the regulation removes all uses of the property, the Supreme Court has also provided useful guidance on how market value compensation should be assessed in relation to "screening out the scheme."

In "screening out the scheme" in constructive takings, courts and land tribunals will be required to focus on the purposes and effects of the regulatory enactment by making a factual determination as to whether the regulatory enactment was made with a view to the expropriation or was an independent regulation.