Regulatory restrictions affect land value: this is no secret.
However, where a property owner has been expropriated through gradual regulatory restrictions, all impacting the property value, how far can we turn back the clock? Which regulatory restrictions should or should not be considered for the purposes of establishing the property's fair market value?
The Supreme Court of Canada (the "SCC") provided the analytical framework governing these questions in St. John's (City) v. Lynch, 2024 SCC 17 ("St-John's").
To do so, the SCC provided clarity upon a principle established in 1947 by the Judicial Committee of the Privy Council in Pointe Gourde Quarrying and Transport Co. v. Sub‑Intendent of Crown Lands. Long ago, the Privy Council established that when calculating compensation due to a constructively expropriated landowner, changes in the value of the expropriated property resulting from the "expropriation scheme" are to be ignored.
However, in considering this principle, courts have had difficulty determining if a regulatory act is part of an "expropriation scheme", and how to consider causation in the analysis.
In St-John's, the SCC ruled that causation does not drive the inquiry: a too broad approachor too restrictive approach to causation obfuscate the true question, which is whether the act at issue was made with a view to expropriate. The SCC established that the intent behind the regulatory act must be analyzed to determine whether it is part of the "expropriation scheme": this means that, contrary to what many public bodies argue, compensation is determined above the impact of the sole act which caused the expropriation.
While the SCC did not rule in the landowner's favour in St-John's, the principles stemming from this decision provide clarity and assistance to constructively expropriated landowners in obtaining fair compensation. These principles aim to protect landowners from "downzoning", a practice through which a public body could gradually freeze a land's value, with the view of ultimately taking it for pennies on the dollar.
Background
The case centered on a property owned by the Lynch family. The property is located in the Broad Cove River watershed, which provides drinking water to the City of St-John's (the "City"). Since the mid 20th century, the watershed has been subject to various use controls aimed at protecting the City's water supply. In 1994, the Lynch property became subject to watershed zoning, imposed by the City, which eliminated all "permitted uses" on the property, but provided for a small number of "discretionary" uses.
In 2011, the Lynch family inquired with the City about possible uses for the property, including farming, solar panels, tree harvesting or a residential development. The City responded that the land must be kept unused and in its natural state. Nevertheless, the Lynches applied for a 10-lot residential development on the property.
In 2013, the City formally rejected the Lynch family's development application. The Lynch's land had effectively been frozen out of any reasonable use.
In 2016, the Lynch family obtained a declaration through the courts that their property had been constructively expropriated in 2013 as a result of the City's refusal of their development proposal.
The matter was thereafter referred to the Board of Commissioners of Public Utilities, who was tasked with determining appropriate compensation. In that process, the parties disagreed on the property's value.
As a preliminary matter, the Board referred the case to the Supreme Court of Newfoundland and Labrador to adjudicate a question of law. The question presented by the Board was:
"Whether the [Lynchs'] compensation should be assessed based on the uses permitted by the existing zoning, which are agriculture, forestry and public utility uses, or whether the existing zoning should be ignored and the value determined as if residential development were permissible."
The City maintained that compensation should reflect the property's decreased market value due to the 1994 zoning constraints. The Lynch family argued compensation should disregard the 1994 zoning and reflect market value as if residential development were allowed.
The ruling
The application judge agreed with the City's position, concluding that the 1994 watershed zoning regulation was independent to the act of constructive expropriation in 2013. Compensation should reflect the constraints on the property in 2013.
The Newfoundland and Labrador Court of Appeal ruled in the Lynch family's favour, holding that the 1994 zoning regulation was part of a broader expropriation scheme, meaning the decrease in property value resulting from the 1994 zoning constraints should be ignored in calculating compensation.
In a decision based on a detailed analysis of the specific facts at hand, the SCC reversed the Court of Appeal's decision and reinstated the application judge's ruling. The Court found that the 1994 regulation was an "independent enactment" by the City and was not made "with a view to the expropriation".
While not positive to the landowner in this specific case, the SCC's ruling provides a roadmap for future expropriated parties to argue for fair compensation when faced with sequential regulatory acts that culminate in constructive expropriation.
Analysis
The Court expressed significant reservations about relying on a causal link in determining if a regulatory act is part of a scheme made with a view to expropriation. Of importance for future expropriated parties, the Court outright rejected a narrow view of causation in which only the effects of the act constituting expropriation—i.e., the act that removes all reasonable uses of the property—should be excluded from compensation calculations:
[53] [...] while, under the Annapolis criteria, a taking crystallizes at a particular moment in time, expropriation is nonetheless a process (Dell Holdings, at para. 37). Merely excluding the act or decision of the state actor that constituted the taking, and nothing further, would permit a state actor to progressively downzone or freeze a property in anticipation of acquiring it in an attempt to reduce the compensation payable. [...] (our emphasis)
Instead, the SCC recognized that constructive expropriation can be a gradual process rather than a single regulatory act. It stated that any regulatory measure adopted with a "view to the expropriation" should be considered as part of the regulatory scheme leading to expropriation and its effects excluded from the calculation of compensation:
[54] While there must be a connection between the regulation and the expropriation for its effects to be excluded, a focus on causation masks the true inquiry. As I have explained, giving effect to the Pointe Gourde principle requires consideration of whether an enactment was made with a view to the expropriation. If it was connected in this manner, it should be considered part of the expropriation scheme and its effects excluded from the compensation assessment. (our emphasis)
Further, the Court unequivocally stated that there is no need to prove bad faith or some kind of nefarious "scheme" on the part of the expropriating party. A regulatory act can be rooted in public interest considerations and still be made with a view to expropriation if there is an intimate connection between the regulatory act and project for which the expropriation occurs:
[56] Bad faith is not a prerequisite to a finding that an enactment was made with a view to expropriation. No "'scheme' in any nefarious connotation need be proved" (Kramer, at pp. 246-47, per Spence J.). Plainly, by-laws that control development in anticipation of eventual expropriation can be firmly rooted in public interest considerations. For example, on the facts of Gibson, there would have been a sound policy reason for the City of Toronto to adopt a by-law preventing building construction on a parcel of land it was intending to later expropriate for road widening. If that was its intent, however, the enactment would be ignored in assessing compensation for the parcel's expropriation. Gibson illustrates that the existence of an "intimate connection" between the impugned regulatory enactment and the project or development that the expropriation facilitates may signal that the enactment was made with a view to expropriation (p. 538). In short, applying the Pointe Gourde principle requires consideration of whether the enactment was made for the purpose of expropriating rather than regulating.
Three key takeaways may be gleaned from the above:
- Courts may disregard any regulatory measure adopted with a view to the expropriation when calculating compensation, including prior measures that do not constitute the taking.
- Excluding only the act or decision by a public body that constituted the taking, and nothing more, would incentivize public bodies to progressively downzone or "freeze" a property prior to acquiring it, with the aim of reducing compensation owed. Courts do not endorse such manipulative schemes.
- Proving that the public body acted in bad faith is not a requirement in determining that a regulatory measure was crafted with a view to expropriation. There is no need for nefarious intent. By-laws controlling development in anticipation of an eventual expropriation can be rooted in valid public interest considerations but still be excluded from the compensation calculation.
While ultimately not positive to the Lynch's interests, this decision provides principles which will allow landowners to avoid downzoning in constructive expropriation cases, and the tools to challenge unfair compensation. It will be interesting to see how Courts interpret St-John's in the coming years and in what measure Courts will turn back the clocks!
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