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Supreme Court of Newfoundland and Labrador rejects developer’s constructive expropriation claim

By Stephen Penney & Matthew Raske

In the recent decision Index Investment Inc. v. Paradise (Town), 2023 NLSC 112, the Supreme Court of Newfoundland and Labrador validated the Town of Paradise’s decision to rezone lands owned by a developer for conservation. The rezoning decision, which occurred as part of the Town’s municipal plan review, was found to be reasonable and did not amount to a constructive expropriation of the developer’s land.

Municipalities can take comfort in this decision. It affirms the principle that cities and towns do not owe compensation to private landowners whose lands are reduced in value by the reasonable exercise of municipal zoning authority.

This decision is also notable in that it is the first in the province to evaluate a claim for constructive expropriation since the Supreme Court of Canada clarified the two-prong test in Annapolis Group Inc. v. Halifax Regional Municipality, 2022 SCC 36. Ultimately, Index confirms that landowners face a high evidentiary threshold to make out a claim of constructive expropriation.

Background

A developer owned parcels of undeveloped land (the “Properties”) within the jurisdiction of the Town of Paradise (the “Town”). The Town conducted a municipal plan review following which it adopted a new municipal plan and development regulations (the “New Plan”). Under the New Plan, the Properties were rezoned.

Previously, the Properties had been zoned Residential Subdivision Area. Under this zoning, development was not permitted as of right. The developer could propose development by submitting a plan to the Town, but the Town retained discretion to accept or reject it.

Under the New Plan, there was a change in the zoning of the Properties. Part of the Properties were designated Rural Residential. Under this zoning, low density residential development was a permitted use. The remainder of the Properties – steeper sloped areas – were designated Conservation. This zoning is intended to provide a natural buffer around streams, ponds, wetlands, and areas of known hazards.

The developer contended that the New Plan decreased the value of the Properties. It applied for judicial review, arguing that the Town’s decision to rezone the Properties should be quashed because it was an unreasonable exercise of the Town’s statutory planning authority. Alternatively, the developers argued, the Properties had been constructively expropriated by the Town.

Issues

There were two main issues before the Court:

  1. Did the Town properly exercise its statutory authority in deciding to rezone the Properties?
  2. Did the Town constructively expropriate the Properties through rezoning them?

Decision

The Court found in favour of the Town on both issues.

The developer failed to establish that the Town improperly exercised its statutory authority or acted unreasonably in deciding to rezone the properties. The developer also failed to make out its claim for constructive expropriation.

The Town’s decision was reasonable

In administrative law, a reasonable decision is based on rational and logical reasoning and is justified in relation to the law and facts constraining the decisionmaker. In the context of municipal zoning decisions, where written reasons are not expected or provided, the determination of whether a decision is reasonable hinges largely on two factors: the enabling legislation and the record.

The Court reviewed the legislative provisions establishing municipal zoning authority. In doing so, it walked through the substantive and procedural requirements municipalities must meet in preparing a municipal plan and development regulations. These were the legal constraints bearing on the Town’s decision.

Having reviewed the relevant law, the Court turned to the facts. The record showed that the Town followed the process mandated by the enabling legislation. The Court found that public consultation played a significant role in the municipal plan review, and the Town had been attentive to the concerns of private landowners raised at those meetings. The developer, for whatever reason, chose not to participate.

The record also confirmed a logical reason for the rezoning: the Town was concerned about sloping on the Properties. Through the municipal plan review process, the Town had been presented with information indicating a relationship between steep slopes and increased risks. Accordingly, it made the decision to zone as Conservation all properties believed to have slopes of 20% or greater.

On this basis, the Town’s rezoning decision was found to be reasonable and deserving of deference in the circumstances.

There was no constructive expropriation

The developer also failed to show that the Town had constructively expropriated the Properties.

The test for constructive expropriation comes from Canadian Pacific Railway v. Vancouver (City), 2006 SCC 5. To succeed in their claim, the developer had to show:

  1. The Town acquired a beneficial interest in, or flowing from, the Conservation Properties; and
  2. The rezoning had removed all reasonable uses of the Conservation

The majority of the Supreme Court of Canada recently refined the first prong of the test in Annapolis Group Inc. v. Halifax Regional Municipality, 2022 SCC 36. It observed that a “beneficial interest” is to be understood as an “advantage” to the municipality, which can fall short of actually taking a proprietary interest.

The majority in Annapolis emphasized that it was merely clarifying the test, not changing it; and prior caselaw on constructive expropriation would remain good law. The Court took the majority at their word and relied extensively on these prior cases in her application of the test.

On the first prong of the test, the developer did not show the Town had acquired an advantage from its decision to rezone part of the properties as Conservation. In previous cases, claimants had cleared this hurdle by showing their lands were regulated in a way that permitted enjoyment of them as a public resource. The developer in this case adduced no such evidence. It simply alleged that having land zoned Conservation within the Town’s territory amounted to an advantage to the Town. The Court rejected this argument, finding that a municipality does not acquire a benefit through the mere act of downzoning.

The developer also alleged a loss in value to the Properties. The Court accepted that the value of the Properties may have decreased as a result of the zoning decision. However, a loss of economic value no matter how extensive is not enough. The developer had to prove that some advantage – any advantage – flowed to the Town as a result of the rezoning. Because no advantage was demonstrated on the evidence, the Town could not be found to have “taken” anything.

On the second prong of the test, the developer also failed to show that the rezoning decision eliminated all reasonable uses of the Conservation Properties. The Court observed that the standard here is “high” and “strict”. To succeed, a claim requires a “robust” evidentiary record that discounts all remaining possible uses of the land as unreasonable.

In this case, the New Plan allowed several possible discretionary uses for land zoned Conservation. The onus was on the developer to show that these possible uses were not reasonable uses. It failed to do so. The only evidence on this point was an affidavit from the developer stating the rezoning decision had resulted in a substantial loss in economic value. The Court observed that a loss in economic value is not equivalent to there being no reasonable uses of the Property. Without the requisite evidence, the Court could not find that all reasonable uses of the Conservation Properties had been eliminated.

In concluding there was no constructive expropriation, the Court also relied on findings that the Town’s rezoning decision did not target the developer specifically and did not frustrate its reasonable expectations for use of the Properties. Under the previous zoning, the developer still may have been prevented from developing the Properties due to sloping issues. Under the New Plan, the Town retains discretion to approve development that does not conform with the zoning requirements. The developer had not applied to develop the Properties in any way, and had indicated it had no intention to do so in the foreseeable future.

Key takeaways

This decision confirms, in the wake of Annapolis, that the evidentiary threshold to make out a claim of constructive expropriation remains high. The onus is on the landowner to adduce concrete evidence of an advantage flowing to a municipality as a result of regulatory action affecting their property. The simple fact that a zoning decision reduced the value of privately held land is insufficient to make out a claim of constructive expropriation.

We encourage municipalities to seek legal advice when conducting a municipal plan review or preparing new development regulations. A lawyer can help ensure this process complies with statutory requirements and results in reasonable decisions. In this way, municipalities can pre-empt costly claims by landowners adversely affected by zoning decisions.

St. John’s Partner, Stephen Penney, successfully argued this case on behalf of the Town of Paradise


This update is intended for general information only. If you have questions about the above, please contact the authors, or a member of our Municipal Law group.

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