Did you know that expropriation of land can occur in two ways?

Formal expropriation occurs where a public authority acquires legal title to the land without the landowner's consent. Constructive expropriation (also known as “de facto” expropriation) covers a situation where a public authority imposes such restrictive land use regulations that the landowner is effectively deprived of all rights to use and enjoy the land. Specifically, the conditions for constructive expropriation are (1) a public authority has acquired a beneficial interest in the land; and (2) a regulation removes all reasonable uses of the land. 

The Supreme Court of Canada’s (“SCC”) decision in St. John’s (City) v Lynch provides useful guidance on calculating compensation where a parcel of land has been constructively expropriated. 

What happened?

The landowners owned a parcel of land located on the western side of the Broad Cove River watershed. Successive legislative changes imposed increased restrictions on the use of the land. In particular: 

• In 1956, the land became subject to the City of St. John’s pollution control and expropriation powers.
• In 1964, the legislature prohibited the construction of buildings in the Broad Cove River watershed. This prohibition was amended in 1978 to allow the City to permit construction of an accessory to, or extension of, an existing building.
• In 1992, the City’s boundaries were extended to encompass the land, such that the land became subject to the building prohibition and the City’s zoning regulations.
• In 1994, a municipal plan and development regulation resulted in the land being rezoned as a “Watershed” zone which had no permitted uses and only three discretionary uses – agriculture, forestry and public utility.
• In 1996, the City adopted a report stating that the discretion to grant a development permit for one of the discretionary uses would only be exercised in limited circumstances.

Beginning in the 1990s, the landowners made multiple attempts to develop the land, all of which were unsuccessful. 

Ultimately, the landowners commenced legal proceedings, seeking a declaration that the land had been constructively expropriated. In a separate line of decisions, the Court of Appeal of Newfoundland and Labrador held that the land was constructively expropriated. However, the parties, namely the City and the landowners, were unable to agree on the appropriate compensation for the constructive expropriation of the land. 

Key issue and legal proceedings

The issue of compensation went through multiple levels of Court, with each decision focused on whether compensation should be assessed based on the uses permitted by the existing Watershed zoning, or whether the Watershed zoning should be ignored and the value determined as if residential development were allowed. This involved the consideration and application of the “no-scheme rule” (known as the Pointe Gourde principle), which stipulates that changes in value resulting from the expropriation scheme itself are to be ignored in determining compensation, regardless of whether those changes increase or decrease the market value of the land.

Supreme Court of Canada’s decision

In a unanimous decision, the SCC held that compensation for the constructive expropriation of the land should take into account the Watershed zoning. As a result, the land’s residential development value could not be considered. 

In reaching this conclusion, the SCC outlined the following general principles with respect to compensation for expropriation: 

• The objective of compensation for expropriation is economic reinstatement – “displaced landowners should be put back in the same economic position that they were in prior to the expropriation: no better and no worse”.
• Compensation is based on the expropriated land’s market value, being the value to the landowner rather than the expropriating authority.
• Market value may reflect a higher and better use of the land than its current state, but it cannot be based on speculative or unrealistic uses of the land. In this way, zoning regulations and other land use restrictions are relevant to determining the land’s market value and, in turn, compensation for expropriation.

The SCC then went on to consider whether the effect of the Watershed zoning on the land should be ignored for compensation (application of the Pointe Gourde principle), noting that the key question is whether the Watershed zoning was made with a view to the expropriation. In other words, the primary consideration is whether the Watershed zoning was made with the intention of never allowing any development on the land. Factors that may weigh in favour of taking land use restrictions into consideration in assessing compensation include: 

• Where the land use restriction is part of a city-wide or province-wide regulation rather than targeted at specific properties; and
• Where the regulation was enacted by a public authority that is different from the expropriating authority.

Takeaways

Land use restrictions do not, on their own, amount to constructive expropriation. Constructive expropriation only occurs where a beneficial interest accrues to a public authority and the regulation removes all reasonable uses of the land. Absent express statutory language to the contrary, a public authority cannot constructively expropriate land without compensating the landowner. St. John’s (City) v Lynch provides direction on how compensation should be assessed and in particular, whether land use restrictions are to be considered in determining compensation.

For further questions regarding constructive expropriation, please contact Miller Thomson LLP.