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Compensation for expropriation: Fair, but not more than fair

By Erin Best, Stephen Penney, Robert Bradley, Megan Kieley1 and Elizabeth Fleet1

Expropriation is a live issue in Canadian courts. The Supreme Court of Canada’s decision to broaden the test for constructive expropriation in Annapolis Group Inc. v Halifax Regional Municipality (2022 SCC 36), for example, has had far-reaching impacts on subsequent expropriation cases.

More recently, two cases originating from Newfoundland and Labrador have made their mark on Canadian expropriation law. The Supreme Court of Canada’s decision in St. John’s (City) v Lynch and the Newfoundland and Labrador Court of Appeal’s decision in Shute v Paradise (Town) have clarified the law of damages in the context of expropriation claims. This article outlines these recent decisions and their impact on municipalities and future expropriation claims.

 

St. John’s (City) v Lynch (2024 SCC 17)

Background

St. John’s (City) v Lynch is the culmination of a long-standing dispute between the Lynch family and the City of St. John’s. The Lynch family owns a property in a watershed on the outskirts of the City. Water on the property drains into a river used by the City for its local water supply. After several changes to municipal zoning regulations, the Lynch property was limited to discretionary agriculture, forestry and public utility uses. In 2013, the City refused the Lynch’s formal application for residential development. As a result, the family turned to the Court, seeking compensation for the constructive taking of their property.

In 2016, the Court of Appeal determined that the property had been constructively taken by the City, and that the Lynch family was entitled to compensation (Lynch v St. John’s (City), 2022 NLCA 29). The matter proceeded to the Board of Commissioners of Public Utilities to determine the appropriate amount of compensation. The Board sought the opinion of the Supreme Court of Newfoundland and Labrador Trial Division as to whether compensation should be assessed as if residential development were permissible or if the existing zoning restrictions should influence the compensation assessment.

The Trial Division determined that compensation should be based on the watershed zoning and not on the prospective residential development, as the Lynch family had argued. The Court of Appeal reversed the decision, concluding that compensation should be determined without reference to the existing watershed zoning. The City appealed to the Supreme Court of Canada.

Decision

The Supreme Court of Canada unanimously allowed the City’s appeal and upheld the Trial decision.

Compensation payable for expropriation

In the context of an expropriation claim, the goal of compensation is to return the property owner to their position prior to expropriation – not to create a windfall. In the Court’s view, if the existing zoning restrictions were ignored, the Lynch family would be compensated for something they never had. This would be contrary to the principle that property owners should receive “fair compensation but not more than fair compensation”.

The Supreme Court of Canada also recognized an important exception to this approach. According to the Pointe Gourde principle, restrictions stemming from the expropriation scheme itself are to be ignored when assessing compensation. Although expropriation occurs at a certain point in time – when all reasonable uses of a property have been removed – the Pointe Gourde principle does not only exclude regulations that achieve that end. It also excludes any restrictions enacted with a view to the expropriation. This protects property owners by ensuring that, in anticipation of expropriation, a government cannot utilize restrictions to decrease the value of a property.

Any independent restrictions enacted with a view to regulating development, on the other hand, are to be included in the assessment of compensation. The Court found that the watershed zoning restrictions were independent from the expropriation scheme, and therefore they could not be excluded under the Pointe Gourde principle.

Several appraisals of the Lynch land were supplied, and they provide a stark illustration of the impact of this decision. The Lynch’s appraiser assessed the property as if residential development had been allowed, resulting in an appraisal of $875,000. The City’s appraiser completed assessments based on both the watershed zoning and residential development scenarios. When existing zoning restrictions were ignored, the value of the property was appraised at $670,000. However, when the restrictions were considered, the land was appraised at only $105,000.

 

Shute v Paradise (Town) (2024 NLCA 19)

Background

The Town expropriated an easement over a strip of the Shute’s residential property to accommodate a utility pole line as part of a road widening project. The Town offered to compensate the Shutes based on the appraised value of the property, plus legal fees.  In addition, at the Shutes’ request, the Town moved and replaced an old retaining wall, added a sloped ditch with decorative stone in front of the property and replaced much of the driveway and curb. The Shutes argued they were not offered adequate compensation for the property and, in addition, were entitled to non-pecuniary damages for mental distress, as well as punitive damages.  They argued they were entitled to full indemnity for their legal costs before the Board and the Courts.

The Board awarded global compensation of $65,000. The Shutes appealed and the Town cross-appealed. The Trial Division held that the compensation payable should include: (1) $8,417 for the property interests expropriated, together with simple interest; (2) reasonable pre-Board hearing solicitor client costs; and (3) costs before the Board hearing to be taxed on a Column III basis. The Trial Division ordered that the parties should bear their own costs in the proceedings before it. The Shutes appealed to the Court of Appeal.

Decision

The Court of Appeal dismissed the Shutes’ appeal and awarded the Town, represented by Stewart McKelvey, its costs of the proceedings before it, to be taxed on a Column V basis.

Compensation payable for expropriation claims

On the issue of compensation payable for expropriated property, the Court referenced the “principle of equivalence” which provides that property owners should be paid neither less nor more than what they lost. In other words, compensation for expropriated property should not leave property owners in a better financial position than before the expropriation.

Non-pecuniary damages not available

A significant portion of the Shute’s claim was for non-pecuniary damages for mental distress. The Court of Appeal unequivocally stated that “non-pecuniary damages are not available under the statutory compensation scheme set out in URPA [the Urban and Regional Planning Act]”2.

This clear statement of the Court of Appeal promotes the important balance between the public interest and an individual’s private property interests.

Costs award: The importance of reasonableness and proportionality

The Town argued that the Shutes’ position throughout negotiations was unreasonable and that they unduly complicated the expropriation process.

The Court of Appeal awarded the Town its costs of the appeal on a Column V basis. In so doing, the Court emphasized that there are consequences for parties who act unreasonably and disproportionately in expropriation matters. The Court noted that the Shutes’ submissions contravened procedural rules, failed to contain a concise statement of facts, and introduced new arguments on appeal.

 

Key Takeaways

Lynch and Shute are consequential decisions for municipalities and property owners alike. A key takeaway from these cases is the continued relevance of the principle of equivalence. This means that in the context of expropriation, property owners will be compensated for what has been taken, but not more.

For municipalities, this ensures that regulations can be enacted without the risk of excessive compensation awards. In particular, expropriation claims often arise in the context of environmental protection regulations. These decisions create a favourable balance between private property rights and a public body’s ability to pursue important efforts like environmental protection.

At the same time, these decisions should not be viewed as a deterrence to property owners seeking fair compensation. Rather, they serve as a reminder to act reasonably and proportionately.


This client update is provided for general information only and does not constitute legal advice. If you have any questions about the above, please contact a member of our Municipal Group.

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[1] At time of publication, Megan Kieley and Elizabeth Fleet were employed with the Firm as summer  students.
[2] Shute at para 68.

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