22 March 2023

Expropriation Through Regulation May Warrant Compensation

Gardiner Roberts LLP


Gardiner Roberts is a mid-sized law firm that advises clients from leading global enterprises to small & medium-sized companies, start-ups & entrepreneurs.
The doctrine of "constructive taking" requires a property owner to be compensated where state action has the effect of acquiring the legal or beneficial interest in one's property.
Canada Corporate/Commercial Law
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The doctrine of "constructive taking" requires a property owner to be compensated where state action has the effect of acquiring the legal or beneficial interest in one's property. The Supreme Court of Canada recently discussed this doctrine in Annapolis Group Inc. v. Halifax Regional Municipality, 2022 SCC 36 (CanLII) ("Annapolis") where it reaffirmed that a court should focus on the impact of state action on the property's owner, and not on the actual equity or ownership status.

In the 1950s, Annapolis Group acquired 965 acres of property that it planned to develop but had not yet been able to do so. In the Halifax 2006 Regional Municipal Planning Strategy, the City zoned Annapolis's lands in a manner that contemplated future development, but did not permit development at that time. Annapolis tried to rezone the lands for development in 2007, but Halifax refused to initiate the process.

Annapolis sued the City, arguing a constructive taking had occurred and compensation was payable. Halifax moved for summary judgment. The motion judge dismissed the summary judgment motion, agreeing that there was a triable issue. On appeal and reproduced in paragraph 14 of Annapolis, the Court of Appeal held there was little chance of establishing "an acquisition by Halifax of a beneficial interest in the Annapolis Lands or flowing from the Lands, and the removal of all reasonable uses of the Lands".

On appeal to the Supreme Court of Canada, in a 5-4 decision, the majority overturned the Court of Appeal and allowed the case to proceed to trial. First, the Court reviewed the two part test for establishing constructive taking as laid out in Canadian Pacific Railway Co. ("CPR") v. Vancouver (City), 2006 SCC 5 (CanLII), [2006] 1 SCR 227. In this case, the city of Vancouver restricted CPR's plans to develop residential and commercial usage on an unused rail corridor. There, the Court held:

30. For a de facto taking requiring compensation at common law, two requirements must be met: (1) an acquisition of a beneficial interest in the property or flowing from it, and (2) removal of all reasonable uses of the property.

The majority decision in Annapolis reaffirms this test and clarifies that the beneficial interest analysis in the first step is centered around the impact of the taking, rather than whether a proprietary interest was in fact taken by the state.

[39] First, to require actual acquisition would collapse the distinction between constructive (de facto) and de jure takings — a distinction which CPR explicitly preserves (paras. 30-37). Simply put, if a constructive taking requires an actual taking, then it is no longer constructive. It follows that the Court of Appeal's requirement of an actual acquisition of the Annapolis Lands cannot be necessary to satisfy the CPR test for a constructive taking. [Emphasis in original.]

The court also discussed how advantages flowing to the state, such as forcing private land to be used for public purposes, would satisfy this first prong.

[38] In our view, the foregoing jurisprudence — upon which the CPR test was expressly stated as resting — supports an understanding of "beneficial interest" as concerned with the effect of a regulatory measure on the landowner, and not with whether a proprietary interest was actually acquired by the government. Conversely, that same jurisprudence supports the view that "beneficial interest", as that term appears in the first part of the test stated in CPR, refers not to actual acquisition of the equity that rests with the beneficial owner of property connoting rights of use and enjoyment, but to an "advantage" flowing to the state. [Emphasis in original.]

Annapolis also clarifies how to determine the existence of a beneficial interest by specifying that substance is to prevail over form, and that factors such as advantage received by the state, the historical and current usage of the land as well as the nature of the state taking action must all be considered in context.

[45] To this, we would add that, because the test focusses on effects and advantages, substance and not form is to prevail. A court deciding whether a regulatory measure effects a constructive taking must undertake a realistic appraisal of matters in the context of the specific case, including but not limited to:

(a) 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;

(b) The nature of the land and its historical or current uses. Where, for example, the land is undeveloped, the prohibition of all potential reasonable uses may amount to a constructive taking. That said, a mere reduction in land value due to land use regulation, on its own, would not suffice; and

(c) The substance of the alleged advantage. The case law reveals that an advantage may take various forms. For example, permanent or indefinite denial of access to the property or the government's permanent or indefinite occupation of the property would constitute a taking (Sun Construction, at para. 15). Likewise, regulations that leave a rights holder with only notional use of the land, deprived of all economic value, would satisfy the test. It could also include confining the uses of private land to public purposes, such as conservation, recreation, or institutional uses such as parks, schools, or municipal buildings.

Importantly, the court also explained that the state's intention should not impact the CPR test, except to support a conclusion that a taking has occurred. This means that a lack of state intent to expropriate will not hinder a finding that a constructive taking happened whereas evidence of intent may assist in proving a taking occurred.

[52] ... The public authority's intention is not an element of the test for constructive takings at common law. Again, the mischief addressed by the doctrine is one of advantage and effects, not that a public authority acted in bad faith or with an otherwise ulterior motive...

[53] This does not mean, however, that intention is irrelevant to the inquiry. Indeed, the case law we discuss below suggests that the objectives pursued by the state may be some evidence of constructive taking. Stated differently, the intention to take constructively, if proven by the claimant, may support a finding that the landowner has lost all reasonable uses of their land (inasmuch as a finding of this effect can be supported by evidence that such an effect was intended). But the absence of evidence of the state's intention does not preclude a property holder's claim. It follows that intent may constitute a "material fact" in the context of a constructive taking claim. We stress, however, that the focus of the inquiry must remain on the effects of state action.

Despite the majority's view, the four dissenting Justices held that the constructive taking test should remain narrowly construed and require an actual proprietary interest to be acquired by the state.

[85] First, we disagree with our colleagues' view that the first element of the CPR test — which requires "an acquisition of a beneficial interest in the property or flowing from it" — should be replaced with the much broader notion of an "advantage", whether or not "a proprietary interest was actually acquired by the government" (see paras. 4, 25, 27, 38, 40 and 44-45). Our colleagues' reformulation involves an unwarranted departure from CPR and significantly expands the potential liability of public authorities when regulating land use in the public interest. In our view, this Court should retain the CPR test for a de facto taking, which insists that a proprietary interest be acquired. Courts across common law Canada have applied this test without difficulty. [Emphasis in original.]

Given the majority's decision, the doctrine of constructive taking has been broadened and may be used as a remedy for situations in which state action leads to advantages flowing to the state while correspondingly depriving the landowner of all reasonable uses of the property. Governments of all levels should be cognizant of the fact that regulation significantly impacting property usage may lead to a finding of a constructive taking regardless of their actual intent. A PDF version is available to download here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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