Supreme Court expands the doctrine of constructive expropriation

Canada's law on de facto / constructive expropriation has been clarified and broadened by the Supreme Court's recent 5-4 decision in Annapolis Group Inc. v. Halifax Regional Municipality, 2022 SCC 36.

In joint reasons for judgement, Justices Côte and Brown, with Chief Justice Wagner and Justices Moldaver and Rowe concurring, held that a constructive taking occurs where: (1) a beneficial interest — understood as an advantage — in respect of private property accrues to the state, which may occur where the use of such property is regulated in a manner that permits its enjoyment as a public resource; and (2) the impugned regulatory measure removes all reasonable uses of the private property at issue. Moreover, they held that courts assessing de facto expropriation or constructive taking claims "must undertake a realistic appraisal of matters in the context of the specific case, including but not limited to:

1. The nature of the government action (i.e., whether it targets a specific owner or more generally advances an important public policy objective,) notice to the owner of the restrictions at the time the property was acquired, and whether the government measures restrict the uses of the property in a manner consistent with the owner's reasonable expectations;
2. The nature of the land and its historical or current uses … ; and
3. The substance of the alleged advantage."[1]

Lower court and Court of Appeal decisions

Gowling WLG's national Expropriation Law Group previously highlighted both the lower court and Nova Scotia Court of Appeal decisions involving Annapolis Group Inc. ("Annapolis") and Halifax Regional Municipality ("Halifax") as top expropriation cases in its 2021 year in review.

To recap that summary, Annapolis claimed that Halifax had de facto expropriated its lands by refusing to proceed with a secondary planning process, a mechanism that is required to advance the lands toward serviced development. Annapolis argued Halifax was exercising dominion over its lands by encouraging members of the public to utilize the lands as a park, and had an ulterior motive to refuse the secondary planning process. Halifax's motion for summary judgment of Annapolis's claim was dismissed, allowing the claim to go to trial and Halifax appealed that decision. The Court of Appeal concluded that the motive of an expropriating authority is not a factor in the analysis of a de facto expropriation, and, in applying the two-step test described in Canadian Pacific Railway v Vancouver (City), 2006 SCC 5 ("CPR"), ultimately found that Halifax's refusal did not amount to a de facto expropriation as the facts of the case did not show (1) the acquisition of a beneficial interest in the property or flowing from it; or (2) the deprivation of all reasonable uses of the property.

Supreme Court arguments and decision

Before the Supreme Court, Annapolis argued that the law of de facto expropriation requires re-interpretation, particularly regarding the existing two-step test in CPR and (1) the requirement for a claimant to prove the authority has acquired a beneficial interest; and (2) the lack of consideration given to the motive of a government authority when considering whether a de facto taking has occurred. The test, according to Annapolis, created a logical inconsistency by collapsing the distinction between de jure and de facto expropriation while also unduly restricting property owners' rights. Further, the test, Annapolis argued, was out of line with the Supreme Court's decision in Lorraine (Ville) v. 2646‑8926 Québec Inc., 2018 SCC 35, which held that "when property is expropriated outside this legislative framework for an ulterior motive, such as to avoid paying an indemnity, the expropriation is said to be disguised."

In response, Halifax rebutted Annapolis' suggestion as to the uncertainty and confusion with what it sees as a broad and flexible two-step common law test in CPR and the civil law doctrine concerning disguised expropriation. Further, Halifax argued that an improper purpose is not relevant to whether an interest in land has been expropriated, but does provide a basis for judicial review of the exercise of statutory power — Annapolis has confused the legality and the effect of a regulatory act.

Majority decision

The majority of the Supreme Court held that Annapolis' appeal should be allowed and that the motion judge was correct in concluding that "(1) a constructive taking need only have the effect of defeating the landowner's reasonable use of land; and (2) the state's intent may be relevant in assessing whether all reasonable uses of land has been removed."[2]

The majority held that "[requiring] actual acquisition would collapse the distinction between constructive (de facto) and de jure [i.e., formal] takings."[3] In defining the nature of a "beneficial interest," the majority explained that the concept is "to be broadly understood as an 'advantage'" and that "if the interest acquired by the state can be one which flows from the property, what must be shown by the property owner can fall short of an actual acquisition by the state."[4] The Court found that a broad interpretation, focused essentially on that of an "advantage" accruing to the state, is supported by the CPR test.[5]

In other words, beneficial interest means "the effect of a regulatory measure on the landowner, and not with whether a proprietary interest was actually acquired by the government."[6] In that sense, the Court of Appeal erred in requiring Annapolis to show that Halifax actually acquired its lands.[7]

The majority is clear to point out that "not every instance of regulating the use of property amounts to a constructive taking" and that "the line between a valid regulation and a constructive taking 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."[8]

On motive, the majority explain that "a public authority's intention is not an element of the test for constructive takings at common law," but that intention is not irrelevant to the court's inquiry into a constructive taking claim.[9]  That is, "the underlying objective pursued by a public authority may provide supporting evidence for a constructive taking claim. But it is neither necessary nor sufficient."[10]

Minority decision

In the Supreme Court's dissenting opinion, Justices Karakatsanis, Martin, Kasirer and Jamal disagree with the majority's decision to replace and broaden the legal test from "an acquisition of a beneficial interest in the property or flowing from" to merely an "advantage."[11] Such departure from the existing CPR test has no basis and "significantly expands the potential liability of public authorities when regulating land use in the public interest."[12] Rather, the test should remain that a de facto taking requires a public authority to acquire a beneficial interest that is proprietary — and not just an advantage — and related to a deprivation.[13]

Further, the minority decision disagrees that the intention of the public authority is a material fact when assessing a claim for de facto expropriation; rather, is it the effect of the public authority's regulatory activity that is the material fact.[14] On the facts before it, the minority reasoned that Annapolis did not  satisfy the CPR test. First, Halifax did not acquire a beneficial interest in the Lands or flowing from them but "has simply refused to up-zone the lands."[15] And second, the evidence shows that Annapolis, with its lands entirely unchanged in terms of zoning and uses since it acquired them, has been deprived of "no reasonable uses — let alone all reasonable uses" of its lands.[16]

Summary

As raised by the minority Justices, a broadened test for de facto expropriation has the potential to bring unique challenges to public authorities pursuing public projects.  While the Supreme Court decision recognizes a broader scope for potential claims by landowners against state regulation of property, it provides important guidance on matters involving regulatory decisions by public authorities affecting private land. The focus will now turn to the lower courts' application of the refined test that will illuminate if, how and when a public authority will be accountable for de facto / constructive takings. The decision will undoubtedly spawn a number of cases that test the boundaries and, given the narrow 5 to 4 decision for landowners' rights, it may not be the last word from the Supreme Court on this complex and interesting area of law.