On October 21, 2022 the Supreme Court of Canada ("SCC") rendered its decision in Annapolis Group Inc. v. Halifax Regional Municipality 1 ("the Decision").
In this five-to-four decision the SCC revisits the test required for a property owner to be entitled to compensation following a constructive taking under the common law.
Although it deals primarily with the scheme applicable in common law, the Decision will have a major influence on Québec civil law.
On one hand, the Decision is part of a series of decisions that make it easier for taxpayers to demonstrate that they have been the victims of disguised expropriation. On the other hand, the majority of the SCC judges confirmed that demonstrating that a municipal by-law removes the reasonable uses that an owner can make of immovable property is sufficient to show disguised expropriation 2. That means that a municipal by-law that does not amount to total confiscation of the immovable property could still lead to disguised expropriation even if it does not make it impossible to use the land, for example if it imposes uses that are not reasonable for the owner. Such uses could include forestry, maple syrup production or leisure activities (such as hiking and cross-country skiing trails).
Some authors have commented on this decision by stating that the existence of a disguised expropriation in Québec law remains dependent on proof of an absolute denial of the exercise of the right of ownership, which in our view is inaccurate and is more consistent with the SCC minority opinion.
2. Constructive Taking Versus Disguised Expropriation
Appropriation or "taking" is the forced acquisition of property by the State for public purposes 3. It is said to be de jure when it is an acquisition of title by a public authority, such as a municipality, in return for compensation.
In the common law provinces, taking is said to be constructive when a public authority, such as a municipality, acquires de facto ownership of a property, i.e. without compensation, without formal exchange of title and through its regulatory power 4. Property owners who face overly restrictive municipal regulations will claim that this is actually a constructive taking.
In Québec this concept is known as disguised expropriation. The Decision is a reminder that the applicable test for identifying this concept is distinct from that of constructive taking 5. Disguised expropriation is limited to a single test for no-fault liability, namely, the demonstration that the regulation removes all reasonable use of the immovable property. The choice of the words "reasonable use" is important because one legal trend - which the SCC majority in the Decision seems to have set aside - required the demonstration of an "absolute denial" of the exercise of the right of ownership, making it impossible to use the property 6.
3. The Decision
3.1. The facts and the judicial history
Briefly, Annapolis Group Inc. ("Annapolis") owns several woodlots in the Halifax Regional Municipality ("Halifax"), totalling 965 acres ('the Property"). Halifax adopted a 25-year municipal planning strategy in 2006. The Property is part of the land covered by that strategy. A portion of the Property was set aside for future inclusion in a regional park, but most of it was zoned as "urban reserve" or "urban agglomeration." Both of these designations significantly restricted the ability of Annapolis to conduct residential development on its lands, but did not make future use impossible.
Annapolis sued, claiming that Halifax's regulatory measure deprived it of reasonable uses of its Property, which it claimed constituted a constructive taking 7. Halifax sought a summary judgment by way of a preliminary motion to dismiss the action at the outset. Annapolis opposed the motion, arguing that its action raised genuine issues of fact that required a trial. The SCC majority ruled in favour of Annapolis, and the case was set down for a trial on the merits.
3.2. Reforming the test for constructive taking
Much of the debate before the SCC centred on the burden of proof on an owner who alleges that he or she is the victim of common law constructive taking. According to the majority, a "beneficial interest" means a property-related advantage that accrues to the State when it exercises its regulatory power 8. This concept does not require the municipality to actually aquire the property; it can arise when municipal by-laws governing the use of a property allow it to be used as a public resource 9. "Beneficial interest" instead relates to the effect of a regulatory action on the applicant 10. In this case, the advantage Halifax obtained over the Property amounted to a beneficial interest and, consequently, a constructive taking 11.
In its analysis, the majority also recognized that there are similarities between the common law doctrine of constructive taking and the Québec civil law doctrine of disguised expropriation based on article 952 of the Civil Code of Québec, particularly with respect to the loss of reasonable uses of the land 12. However, it confirmed that these two tests are distinct.
Québec civil law provides for a no-fault liability scheme in which the owner does not have to demonstrate that the public authority has acquired an advantage over the disputed land 13. A municipal by-law that removes reasonable uses could therefore open the door to a disguised expropriation recourse.
3.3. The majority-minority dialogue on the demonstration of disguised expropriation
The major contribution of the Decision to Québec civil law is the dialogue between the majority and the dissenting judges on the test for disguised expropriation. Before the Decision a legal trend required proof that a by-law resulted in an "absolute denial" of ownership rights 14. It required proof that the municipal by-law made it impossible to use the land or that the by-law amounted to a true forfeiture of the property.
Both the majority and the dissenting judges dealt with the burden of proof to be met in order to demonstrate that a municipal by-law causes disguised expropriation. The dissenting judges relied on the restrictive legal trend referred to above. For them, the test for demonstrating a disguised expropriation was "extremely stringent," since an owner must demonstrate an "absolute negation of the exercise of the right of ownership, rendering its use impossible, or equivalent to an actual confiscation of the property."15
The majority opinion confirms, however, that such a strict criterion is not necessary. Proof that a municipal by-law removes reasonable uses of the property will be sufficient to demonstrate disguised expropriation 16. There is no need to prove that there are no possible uses on the land affected by a municipal by-law. Any remaining doubts in the doctrine and case law seem to have been resolved in favour of taxpayers.
4. The authors' comments
At first glance, while there may have been confusion between the Québec civil law test for disguised expropriation and the common law test for constructive taking, the SCC clearly acknowledges that the two tests are independent and follow their own legal traditions. It is our view that decisions dealing with constructive taking should not be relied on to assess whether there is disguised expropriation.
The Decision confirms that, notwithstanding the clarification provided by the SCC on the demonstration of constructive taking under common law, that burden remains more demanding than the proof of disguised expropriation in Québec civil law. That is why it is important not to confuse the two tests.
The main contribution of the Decision to Québec civil law lies in the dialogue between the majority and the dissenting judges. The majority stated that the test for disguised expropriation is the removal of reasonable uses, not the absolute denial of ownership rights. The Decision confirms that it is no longer necessary for a property owner to prove the impossibility of using his or her land or that it has been confiscated.
The Decision is also part of a series of recent judgments in favour of taxpayers in matters of disguised expropriation 17. This is really good news for real estate developers who come up against overly restrictive municipal by-laws. The courts have once again acknowledged that disguised expropriation can occur when a municipality uses its zoning power to attempt to unduly limit real estate development. As the Québec Court of Appeal stated in Dupras, even if a municipality exercises its regulatory power under the guise of a laudable objective such as protection of the environment, [TRANSLATION] "where such efforts result in a disguised expropriation, the cost of the measure cannot be borne by the owner alone, who is entitled to adequate compensation."18
1 2022 SCC 36.
2 See Lorraine (Ville) v. 2646-8926 Québec inc, 2018 SCC 35; Dupras c. Ville de Mascouche, 2022 QCCA 350 (application for leave to appeal to SCC dismissed, 2022 CanLII 88678) ("Dupras")
3 The Decision at paras. 17-18.
4 Ibid., at para. 18.
5 The Decision, at para. 48
6 See Wallot c. Québec (Ville de), 2011 QCCA 1165; and Ville de Léry c. Procureure générale du Québec, 2019 QCCA 1375.
7 The Decision at paras. 9-10.
8 Ibid., at para. 4.
10 Ibid., at para. 38.
11 Ibid., at paras. 4 and 27.
12 Ibid., at para. 46.
13 Ibid., at para. 48.
14 See Wallot c. Québec (Ville de), 2011 QCCA 1165 at para. 47 and Ville de Léry c. Procureure générale du Québec, 2019 QCCS 1375 at para. 17.
15 The Decision at paras. 127.
16 The Decision at para. 48.
17 See Lorraine (Ville) v. 2646-8926 Québec inc., supra, fn. 2; and Dupras c. Ville de Mascouche, supra, fn. 2.
18 Dupras c. Ville de Mascouche, supra, fn. 2 at para. 39.
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