Supreme Court of Canada Clarifies Law of Constructive Takings
With its 2022 decision in Annapolis v Halifax Regional Municipality, the Supreme Court of Canada provided guidance on what constitutes a constructive taking of property. In 2024, the Court’s decision in City of St. John’s v Lynch, 2024 SCC 17, has now provided guidance on the application of key principles to the determination of compensation in constructive takings and other expropriation cases.
In a unanimous decision written by Justice Martin, the Court returned to first principles: emphasizing that compensation for expropriation is intended to put an owner back in the same economic position that they were in prior to the expropriation (para 30).
The Court confirmed that the Pointe Gourde principle, also known as “screening out the scheme”, applies to constructive takings in the same way as it does to statutory or de jure expropriations. The Pointe Gourde principle is a common law rule invoked as part of the determination of market value when land is expropriated. The principle seeks to remove extrinsic influences associated with the taking, ignoring both increases and decreases in value caused by the expropriation scheme to avoid placing an economic burden on the expropriated owner or granting to them a windfall gain (para 37). The Court clarified the application of the Pointe Gourde principle and confirmed that land-use regulations undertaken “with a view to the expropriation” must be screened out when determining the market value of expropriated land. This is the case regardless of whether the taking is de jure or constructive.
In applying that principle to the facts, the Court disagreed that the land-use regulations at issue were to be screened out in determining compensation arising from the City’s constructive expropriation of the Lynch Property. In overturning the Newfoundland and Labrador Court of Appeal’s decision and restoring the decision of the application judge at first instance, the Supreme Court emphasized that the determination of the scope of the “scheme” is a factual finding that is owed deference on appeal. It will now be up to the Newfoundland Board of Commissioners of Public Utilities to determine the quantum of compensation by applying the Supreme Court’s findings.
Background
The Lynches have owned a property on the outskirts of the City of St. John’s since 1917. Over the course of the decades, the property came under the jurisdiction of the City and has been subjected to various regulations that restrict development. In the 1990s, the property was identified as being within a watershed and under the 1994 Development Regulations only three uses were permissible: agriculture, forestry, and public utilities. Prior to that, a building prohibition that had been put into place in 1964 was amended in 1978 which would have permitted some form of residential development on the property. Since the 1990s, the Lynches had made attempts to obtain the City’s permission to develop the property. The City eventually confirmed in writing in 2013 that it would not allow any development of the property, not even agricultural, forestry, or public utilities uses.
In 2016 the Newfoundland and Labrador Court of Appeal concluded that the Lynch Property had been constructively taken, meaning that the City had extinguished all reasonable uses of the property and had obtained a beneficial interest in the land. The matter of compensation for that constructive taking was referred to the Board of Commissioners of Public Utilities. The City’s and the Lynches’ appraisers reached materially different conclusions regarding highest and best use of the property due to the fact that the Lynches’ appraiser was asked to assume that the current watershed zoning did not exist while the City valued the property as being subject to this zoning. The Lynches’ appraiser concluded the highest and best use was infill serviced building lots with residential medium density zoning and valued the market value of the land that was constructively taken at $875,000. The City’s appraiser concluded the highest and best use was as agricultural and forestry related uses, in light of the 1994 Development Regulations, and valued the land at $105,000. Alternatively, if the 1994 Development Regulations were “screened out”, the City’s appraiser agreed with the Lynches’ assessment of highest and best use and valued the property at $670,000 (see 2020 NLSC 92 at paras 4 and 7)
The Board subsequently sent a special case to the Supreme Court of Newfoundland and Labrador requesting direction on the following question:
“Whether the compensation should be assessed based on the uses permitted by the existing watershed zoning or whether that zoning should be ignored and the value determined as if residential development were permissible”
This question required the application of the Pointe Gourde principle, which stipulates that any change in the value of the property that was caused by the expropriation scheme itself is to be ignored in assessing the property’s value for compensation purposes.
The Supreme Court of Newfoundland and Labrador concluded the existing zoning should be applied. The Newfoundland and Labrador Court of Appeal overturned that decision and held that since the existing zoning was part of the scheme of the watershed designation and the City’s object of prohibiting development on the property, it needed to be screened out in determining compensation.
The Supreme Court of Canada’s Analysis
The Pointe Gourde Principle Applies to Constructive Takings
Despite submissions from some parties that the Pointe Gourde principle either does not apply, or applies differently, to constructive taking claims than it does to de jure expropriations, the Supreme Court confirmed that there should be no such distinction. It held that in cases of both constructive takings and de jure expropriations, the purpose of compensation is to return the property owner to the same economic position that they were in prior to the expropriation. The Pointe Gourde principle was developed to further that aim and therefore applies equally in both circumstances.
Compensation for market value under both the Newfoundland and Labrador Expropriation Act and the common law is about value to the owner, not value of the land to the expropriating authority (paras 29, 31).
The Pointe Gourde Principle and its Scope
The Supreme Court’s decision reviewed several examples of the application of the Pointe Gourde principle. These cases, in the Court’s view, demonstrated that the analysis was fact dependent and should focus on whether the regulatory action at issue was an “independent enactment”, or was made “with a view to the expropriation” (paras 41-45). Those falling into the latter category are to be screened out in the determination of compensation. Those in the former are not.
To determine whether an enactment was made “with a view to the expropriation”, one must look to the regulation’s purposes and effects. Determining the purposes and effects of an instrument can include a review of debates, deliberations, and statements of policy that gave rise to it (para 48).
The Court disagreed with the Appellant’s submissions that the analysis should be one of causation. It found that causation is of limited assistance in determining the scope of the expropriation scheme (para 50). It need not be established that “but for” the enactment there would have been no expropriation. That was too narrow an analytical focus. The Court clarified that while a constructive taking crystalizes at a particular moment in time when all reasonable uses of the land have been extinguished, expropriation is a process and regulatory actions prior to the final nail in the coffin may be screened out to ensure fair compensation is awarded. This precludes a “but for” causation analysis from being of any assistance to the exercise.
While the Court declined to set out an exhaustive list of factors that will bear on whether an enactment was made with a view to expropriation, it noted that relevant considerations can include:
Specificity: whether the land use restriction is enacted as part of a city-wide or province-wide policy, or targets specific properties;
Level of government: whether the impugned regulation was enacted by a different public authority than that which expropriated the property; and
Knowledge: a government’s knowledge of another level of government’s development plans (para 55).
The Court confirmed that it is not necessary to find that the regulating authority acted in bad faith in order for the regulation to be found to have been enacted with a view to the expropriation and, therefore, screened out as part the “scheme”.
Application to the Facts
In applying these principles to the Lynches’ case, the Court found that the 1994 Development Regulations were not enacted with a view to the taking. This conclusion relied on the appellate standard of review that deference is owed to a first-instance judge’s findings of fact, which can only be overturned for palpable and overriding error (para 59). The Court agreed with the application judge’s finding that the Development Regulations were “a link in the chain of events culminating in the expropriation in 2013,” but held that the key question was whether they were enacted at the time with a view to the expropriation. The application judge had found that they were not, and were not to be screened out in determining compensation (para 64). It is notable that the Development Regulations did not prohibit development of the property. To the contrary, they introduced three “discretionary” uses that could be made of the property, subject to the approval of the City.
Insights on the Lynch Decision
The Supreme Court’s unanimous decision signals its continued emphasis on full and fair compensation being provided to expropriated property owners. Notwithstanding concern that the 5-4 split in the Annapolis Group Inc v Halifax Regional Municipality decision signaled a deeper division among the Court’s members that would manifest in the Lynch decision, this did not happen.
The Supreme Court’s emphasis on the purposes and effects of regulations in determining whether an enactment was made with a view to expropriation strikes a balanced view of the Pointe Gourde principle. Governments cannot be permitted to downzone property in order to reduce the compensation payable to property owners. But neither are property owners entitled to be placed in a better position than they would have been without the taking, through payment of compensation as though their property had not been subject to any regulations or restriction to its use. While this assessment must always be made contextually, the Court’s analysis helpfully clarifies and synthesizes previous jurisprudence on the topic.
The Supreme Court’s decision rejected the Appellant’s argument that would have, in essence, collapsed the determination of whether a constructive taking had occurred with the analysis of what is included in the scheme for which the land was expropriated. The City of St. John’s argued that a test of “but-for” causation applied – essentially that whether, but-for the regulation in question, a constructive taking would not have occurred. Only regulations that met this test should, in the City’s argument, be screened out. Justice Martin expressly rejected this analytical framework. She noted that it was far too narrow, and confirmed that even in a constructive taking claim the scheme for which land is taken may begin before property is acquired or the owner loses all reasonable uses of their property.
By confirming that bad faith is not a prerequisite to finding that a regulation forms part of the scheme, the Supreme Court has distanced itself from the Ontario Court of Appeal’s decision in Salvation Army, Canada East v Ontario (Minister of Government Services), 1986 CarswellOnt 692 (ONCA). In that case the Court attempted to narrow the scope of the Pointe Gourde principle by importing a requirement of “bad faith” when determining what is to be screened out as part of the scheme of an expropriation. Subsequent case law has largely avoided engaging with the Court of Appeal’s holding on this point, and the decision in Lynch would seem to confirm that this aspect of the Salvation Army decision is no longer applicable.
The Lynch Court’s directive to examine the purpose and effect of land use regulations when defining the scope of the “scheme” is consistent with the interpretation of regulatory action in other sectors. For example, the constitutionality of legislation is determined on the “pith and substance” test, which examines whether the purpose and effect of the impugned statue or regulation falls within the authority of Parliament or a provincial legislature (see e.g., Reference re Genetic Non‑Discrimination Act, 2020 SCC 17; Ward v. Canada (Attorney General), 2002 SCC 17; Global Securities Corp. v. British Columbia (Securities Commission), 2000 SCC 21, among others). Though determining the scheme is a question of fact, litigants and tribunals may draw guidance from analogous legal principles when evaluating whether a policy or land-use regulation was made “with a view to the expropriation”.
The Court’s decision provides a balanced and fair endorsement of the continued applicability of the Pointe Gourde principle. This clarification of the law will likely ensure that the purpose of expropriation compensation statutes across Canada are maintained and that fundamental principles are honoured in the determination of compensation where land is taken in any form.
Notes
The Supreme Court of Canada heard the City of St. John’s appeal on November 16, 2023 and released its decision on May 10, 2024. Five interveners provided submissions on this matter to assist the Court: the Attorney General of British Columbia, the City of Surrey, the Canadian Home Builders’ Association, the Ontario Landowners’ Association, and Ecojustice Canada Society.
Shane Rayman, Conner Harris and Leah Cummings were counsel to the Canadian Home Builders’ Association and made submissions at the appeal hearing.