SCC outlines compensation for constructive expropriation: economic reinstatement is the Lynch-pin

In St. John’s (City) v. Lynch, 2024 SCC 17, the Supreme Court of Canada reviewed the law governing the calculation of compensation for “constructive” expropriation. Lynch rounds out a 2022 decision by the Supreme Court that clarified the test for constructive expropriation—i.e., the scenario where an authority legally restricts all “reasonable uses” of a property¹. In this latest decision, the Supreme Court addressed how compensation is calculated when a constructive expropriation occurs.

The decision illustrates the highly contextual analysis that authorities and owners face when determining compensation in situations of constructive expropriation. It also presents strategic lessons for both sides.

What you need to know

• Compensation for expropriation is meant to achieve economic reinstatement—the “no better, no worse” principle. The goal is to put the owner in the position they would have been in if the expropriation had not occurred.
• Changes in market value driven by restrictions that predate the expropriation are excluded. Compensation must not address changes in market value caused by measures that predate the constructive expropriation. The goal is only to remedy the measures that form part of the constructive expropriation.
• Strategic considerations. Because of its highly contextual nature, core questions about what qualifies as constructive expropriation are central to determining both (1) whether an expropriation occurred, and (2) what compensation is owed. Where these issues are determined separately (as in this case), core issues will likely be litigated twice. This creates strategic considerations for both sides. Where authorities and owners want to engage in an efficient process, it may be desirable to seek to deal with both the question of entitlement and compensation together.

Background

“Constructive” expropriation explained

Expropriation is the taking of a private property by a public authority. Each jurisdiction in Canada has legislation dealing with compensation when public bodies expropriate private property.

Sometimes, there may be a “taking without a taking”—an authority may impose such limiting restrictions (e.g., on the use of land) that the owner’s ability to use the land has, as a practical matter, been taken away, even if they retain legal title. This is “constructive” expropriation.

What amounts to a constructive expropriation is highly contextual, as restrictions are often imposed incrementally over time.

The property

The land in question was a rural property in Newfoundland and Labrador, owned by the Lynch family for over 100 years. The family acquired the land through a Crown grant in 1917. The appeal concerned a 7.36-acre portion of the original grant. The property was largely in a natural state, located on one edge of a watershed that drains to the Broad Cove River, which is used by the City of St. John’s as a municipal water supply.

Successive legislative changes imposed increased restrictions on how the property could be used. In 1959, legislative changes brought the property within the City’s pollution control and expropriation powers. Further legislation in 1978 prohibited new construction in the watershed but gave the City the power to permit modifications to existing buildings. In 1992, a municipal reorganization brought the property within the City’s zoning regulations. A 1994 municipal plan and development regulation established a “watershed zone” that included the property. As of 1994, only three possible “discretionary” land uses remained for the property: agriculture, forestry and public utility. In 1996, the City issued a public report outlining that discretion to permit land development in even these three ways would be exercised only rarely to protect the City’s water supply.

Starting in the 1990s, the Lynch family began to explore options to develop the property. Because of the City’s restrictions, in 2008, they sought to transfer the property to a neighbouring town for development. The City denied the boundary change. In 2011, the Lynch family sought permission to develop the property for residential use within the City’s boundaries. The City denied this change, too. Undeterred, the Lynch family submitted a formal application to develop a 10-lot residential subdivision on the property. In 2013, the City rejected the application. The City confirmed its intention that the property remain undeveloped, in its natural state, to protect the City’s water supply.

Valuing the expropriation

The family obtained a declaration that the property had been constructively expropriated and applied for compensation. In a decision that was not appealed, the Newfoundland and Labrador courts held that the City had expropriated the property when it determined that the land within the watershed zone should remain in a natural, undeveloped state.

The parties disagreed on how to value the property, given its location and the family’s long ownership. The City valued the property at $105,000 based on its location in a watershed zone. The Lynch family valued the property at $875,000 based on the proposed 10-lot residential development.

The focus of the dispute was on the impact of the 1994 regulation establishing the watershed zone. The City argued that the 1994 regulation predated the constructive expropriation of the property, and therefore any valuation of the property must start from the assumption that residential development was not permitted. The family argued that the watershed zoning was part of the expropriation, and they should receive value for the property that recognized its residential development potential (i.e., a value that ignored the zoning restrictions).

The application judge sided with the City. She concluded the 1994 watershed zoning regulation predated the constructive expropriation of the property, as the 1994 regulation allowed the City the discretion to permit limited development (for agriculture, forestry and public utilities). The expropriation occurred when the City decided to use its discretion under the 1994 regulation to keep the land in a natural, undeveloped state.

The Court of Appeal allowed the Lynchs’ appeal. It concluded the 1994 regulation was part of a broader scheme of regulating the watershed, and the City’s determination to disallow development was only the latest installment of that broader scheme. In the Court of Appeal’s view, the watershed zoning was part of what “caused” the expropriation.

The Supreme Court’s decision

A unanimous Supreme Court of Canada reversed the Court of Appeal. The Supreme Court confirmed that the compensation calculation had to start with the watershed zoning restrictions in place when the City decided not to allow further development of the land. As a result, the property’s residential development value could not be considered.

The Supreme Court confirmed the following:

• Compensation for expropriation is based on the “economic restatement” principle—property owners should be put back in the same economic position they were in before the expropriation: “no better and no worse”.
• Market value can reflect a property’s development potential but must recognize existing zoning restrictions.
• For constructive expropriations, when determining whether a particular restriction is part of the expropriation, the focus should be on whether the enactment was made “with a view to the expropriation”, not whether it “caused” the expropriation—as this case demonstrates, this is a difficult principle to apply in practice.
• Factors indicating that a restriction is an “independent enactment” (and therefore not part of the expropriation) include:
  • restrictions enacted as part of a city or province-wide policy that do not target a specific property; or
  • restrictions enacted by a different public authority than the expropriating authority.

Takeaways

Most expropriations involve taking legal title. In those circumstances, the question of entitlement (did an expropriation occur?) is not part of the compensation analysis, and entitlement may not be in dispute.

For constructive expropriations, the question of what amounted to expropriation is central to both (1) entitlement, and (2) compensation. Where successive government measures impose incrementally greater restrictions on the use of a property, the question of whether an expropriation has occurred and when it occurred are interrelated.

Where the issues of entitlement and compensation are dealt with separately (as they were in this case), the parties may end up litigating the core question of which combination of successive measures amounted to a constructive expropriation twice. This presents strategic considerations for both sides. Owners may be able to obtain a favourable entitlement decision early without having to precisely pinpoint the moment that expropriation occurred; however, doing so may leave considerable uncertainty over the actual value of the property, resulting in much lower compensation than may have been expected. Conversely, authorities will have considerable incentive to bifurcate the issues because a win on entitlement may avoid the cost of litigating detailed quantification questions needed to determine compensation. Authorities will also have incentive to continue to probe core entitlement issues at the compensation stage, as precision in a constructive expropriation case can lead to significantly lower compensation amounts.

Where the two parties want to engage in an efficient process, it may be desirable to seek to deal with both the question of entitlement and compensation together.