SCC takes expansive approach to regulatory ‘constructive taking’ claims against public authorities

By Cristin Schmitz

Law360 Canada (October 21, 2022, 6:32 PM EDT) -- Adopting an expansive approach to when private property owners can sue public authorities for de facto expropriations, the Supreme Court of Canada has ruled 5-4 that a Nova Scotia land developer may proceed to trial with its damages claim that the regional municipality of Halifax used its zoning powers to constructively take the developer’s private land for use as a public park, without compensation.

The majority judgment issued Oct. 21, co-written by Justices Suzanne Côté and Russell Brown, elaborates on and arguably liberalizes the first branch of the two-part test for “constructive taking” via regulation (previously known also as de facto expropriation) in a way that the four-judge minority argued “risks radically changing the complexion of municipal planning law by providing, in like up-zoning contexts, a windfall to developers who speculate at municipal taxpayers’ expense.”

The majority’s interpretation of the test for constructive taking that was unanimously established by the Supreme Court in the leading case of Canadian Pacific Railway Co. v. Vancouver (City), 2006 SCC 5, is apt to make it easier to sue governments for constructive takings, with potentially far-reaching implications since such cases against public authorities can involve big monetary, environmental, and business stakes (e.g. two coal mine developers this year sued Alberta’s government for $3.4 billion, arguing that the province’s reversal of its commitment to lift coal exploration restrictions de facto expropriated the developers’ mineral rights and coal lease.  

Brandon Kain, McCarthy Tétrault LLP

Brandon Kain, McCarthy Tétrault LLP

Brandon Kain of McCarthy Tétrault LLP in Toronto, who with Adriana Forest represented the Ontario Landowners Association, one of three interveners in support of the appellant property owner’s position, called the majority Annapolis decision “an important clarification” of CPR “since it confirms that private parties can bring constructive expropriation claims against public authorities, even if the public authority in question does not actually take away property from the private party.”

In the wake of Annapolis, Kain said the private party need only establish that the public authority acquired an “advantage” from the property through a regulatory measure, such as by causing the property to be enjoyed as a public resource, and that doing so removes all reasonable uses of the private property.

“This shifts the emphasis of the test away from what the public authority itself acquired in a proprietary sense, and toward the effect of the regulatory measure upon the property owner,” he explained.

Kain said the majority has also clarified that the public authority’s intention — while not an element of the test for constructive expropriation — “is still relevant to the inquiry. In particular, if the claimant can demonstrate that the public authority harboured the intention to constructively take the property through its regulatory measure, then this can serve as supporting evidence that a constructive taking in fact occurred.”

He added “this aspect of the new framework permits a more nuanced assessment of the public authority’s conduct, and could play an important role in future cases.”

Sarah McDonald, Ecojustice Canada Society

Sarah McDonald, Ecojustice Canada Society

Sarah McDonald of Halifax, who with Randy Christensen represented the Ecojustice Canada Society, which intervened in support of the city of Halifax along with the attorneys general of Canada, Nova Scotia, Ontario and B.C., told The Lawyer’s Daily “Ecojustice is extremely disappointed with the majority’s decision.”

“The majority purports to ‘clarify’ the test for de facto expropriation originally set out in the Canadian Pacific Railway case but, in reality, as argued by the dissent, the majority inappropriately extends CPR’s requirement that the public authority obtain a proprietary interest in the property at issue to encompass any ‘advantage’ accruing to the authority,” she said. “This subversion of the CPR test makes the acquisition element largely superfluous and dramatically expands the potential liability of governments at all levels engaged in land use and environmental regulation, likely undermining governments’ willingness and ability to regulate in the public interest.”

McDonald predicted “the adverse impacts on municipal governments’ zoning powers will be fairly immediate, while farther-reaching impacts are likely to develop as courts expand the definition of ‘advantage.’ ”

McDonald added that it is “conceivable that a court will conclude that a government obtains an advantage when a restriction on a property owner or rights holder allows it to avoid health care costs, meet climate targets, or protect species at risk. In fact, such claims have been brought in the past, but didn’t succeed under the previous interpretation of the CPR test.”

McDonald pointed, by way of example, to the Alberta Court of Queen’s Bench’s decision in Altius Royalty Corporation v. Her Majesty the Queen in Right of Alberta, 2022 ABQB 255, where she said the plaintiffs unsuccessfully claimed that their royalty interest in coal from a coal mine was de facto expropriated by existing regulations prohibiting coal-fired electricity generation by 2030.

“It’s certainly not inconceivable that such a case could succeed under the majority’s revised test,” McDonald suggested.

Counsel for Annapolis, Peter Griffin, Scott Rollwagen, Rebecca Jones and Amy Sherrard of Toronto’s Lenczner Slaght LLP, and counsel for the city of Halifax, Michelle Awad of McInnes Cooper in Halifax and Martin Ward, did not respond to requests for comment before press time.

In Annapolis, the five majority judges and four dissenters disagreed over what the first branch of the CPR test for a constructive taking means/requires, and how that test should be applied in the case at bar: Annapolis Group Inc. v. Halifax Regional Municipality, 2022 SCC 36.

Justice Russell Brown, Supreme Court of Canada

Justice Russell Brown, Supreme Court of Canada

Justices Côté and Brown, backed by Chief Justice Richard Wagner and Justices Michael Moldaver and Malcolm Rowe, held that the Nova Scotia Court of Appeal erred last year in granting summary judgment to the respondent Halifax Regional Municipality (HRM), thereby throwing out a claim by the appellant landowner, Annapolis Group Inc., that Halifax had essentially expropriated its private property for a public park, without compensation: Halifax Regional Municipality v. Annapolis Group Inc. 2021 NSCA 3.

The Supreme Court’s majority restored the 2019 order of the motion judge, who had dismissed the city’s application for summary judgment, finding that Annapolis’s constructive taking claim raised “vast genuine issues of material fact” that required a trial: 2019 NSSC 341.

At the Supreme Court, Justices Nicholas Kasirer and Mahmud Jamal, supported by Justices Andromache Karakatsanis and Sheilah Martin, ruled that the appeal court below properly granted partial summary judgment in dismissing Annapolis’s de facto taking claim as that claim had no real chance of success, under a proper interpretation and application of the CPR decision.

But Justices Côté and Brown ruled the contrary, explaining for the majority that “properly understood” the CPR test “provides that the reviewing court must decide: (1) whether the public authority has acquired a beneficial interest in the property or flowing from it (i.e. an advantage); and (2) whether the state action has removed all reasonable uses of the property.”

“The 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,” the majority reasoned. “That same jurisprudence supports the view that ‘beneficial interest’ 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.”

Justices Côté and Brown (the latter, as a law professor, wrote several scholarly works on the subject of regulatory takings, that were relied on by Annapolis to bolster its position) said that “to require actual acquisition would collapse the distinction between constructive (de facto) and de jure takings — a distinction which CPR explicitly preserves. If a constructive taking requires an actual taking, then it is no longer constructive.”

Moreover, interpreting “beneficial interest” broadly (as meaning “a benefit or an advantage accruing to the state”) ensures CPR’s coherence with previous jurisprudence, which did not understand “benefits” in the strict equitable sense of that term,” Justices Côté and Brown explained. “CPR merely sought to affirm, and not alter, the law of constructive takings.”

The minority disagreed with the majority’s view that the first prong 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.”  

Arguing the majority had changed the law as laid down unanimously in CPR, the dissenters urged that “the court should retain the CPR test for a de facto taking, which insists that a proprietary interest be acquired. CPR and the authorities it cited show there is no de facto taking unless there is both acquisition of a beneficial interest in the property or flowing from it and a removal of all reasonable uses of the property. The interest must be proprietary — not merely an advantage — and the acquisition must correspond to the deprivation.”

The litigation was launched by Annapolis after 2016, when Halifax adopted a resolution refusing to initiate the secondary planning process necessary to develop lands owned by the company. The developer started buying lands in the Halifax area in the 1950s and eventually acquired 965 acres, which it planned to develop and sell. In 2006, Halifax adopted a 25-year regional municipality planning strategy for land development, which also encompassed the appellant’s property.

The city’s planning strategy indicated that some lands would be zoned for a public park with the rest designated for “serviced development,” such as residential neighbourhoods. But for serviced development to occur on Annapolis’s lands, Halifax had first to adopt a resolution authorizing a “secondary planning process” and to make an amendment to the land-use by-law.

Starting in 2007, Annapolis tried several times, without success, to develop its lands. It was stymied altogether when Halifax adopted the resolution refusing to initiate the secondary planning process.

Annapolis responded by suing for alleged misfeasance in public office and unjust enrichment, as well as claiming that Halifax’s regulatory measures deprived the company of all reasonable or economic uses of its lands, resulting in a constructive taking without compensation, i.e. Halifax had essentially expropriated private property for a public park without paying for it.

Justices Côté and Brown explained that a court deciding whether a regulatory measure amounts to 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, 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; and (c) the substance of the alleged advantage.

The majority stipulated that the public authority’s intention is not an element of the test for constructive taking at common law. “The mischief addressed by the doctrine is one of advantages and effects, not that a public authority acted in bad faith or with an otherwise ulterior motive,” they explained.

However, “intention can be relevant to the inquiry,” Justices Côté and Brown added. “The underlying objective pursued by a public authority may provide supporting evidence for a constructive expropriation claim, but it is neither necessary nor sufficient. The assessment of intent has proved to be helpful in distinguishing between mere regulations in the public interest and takings requiring compensation at common law. What ultimately matters, however, irrespective of matters of intent, is whether the state-imposed restrictions on the property conferred an advantage on the state that effectively amounts to a taking.”

The majority concluded that in this case the motion judge’s legal conclusions that (1) a constructive taking need only have the effect of defeating the landowner’s reasonable use of land; and (2) the state’s intent may be relevant in assessing whether all reasonable uses of the land has been removed, were legally correct. Two disputed factual issues are particularly material to the CPR test, they remarked. “First, it is disputed whether Halifax is promoting the lands as a public park; this is material because, if proven, it would tend to support Annapolis’ claim that Halifax acquired a beneficial interest in the lands. Preserving a park in its natural state may constitute an advantage accruing to the state, thus satisfying the ‘acquisition’ element of CPR. Second, it is disputed whether Halifax, by allegedly treating the lands as a public park, has eliminated all uses of the lands except service development, which is conditional upon the approval of Annapolis’ secondary planning applications. This is material because, if proven, it may arguably support Annapolis’ claim that it has lost all reasonable uses of its property. If Annapolis can prove at trial that Halifax is unlikely to ever grant a secondary planning approval, this is clearly material to its constructive taking claim, as all reasonable uses of the land may be shown to have been eliminated where a permit needed to make reasonable use of the land is refused, such that the state has effectively taken away all rights of ownership.”

The minority saw things very differently.

“Firstly, Halifax has acquired no beneficial interest in the lands or flowing from them. It has simply refused to up-zone the lands,” Justices Kasirer and Jamal wrote. “Neither Halifax’s 2016 municipal resolution refusing to up‑zone the lands nor Halifax’s alleged acts of encouraging the public to trespass raises any genuine issue of material fact that Halifax has acquired a beneficial interest in the lands or flowing from them,” they reasoned. “The municipal resolution merely preserved the status quo by refusing to allow lands that have always been vacant and treed and situated next to a protected wilderness area to be developed into serviced residential communities. Halifax’s adoption of a municipal resolution refusing to up‑zone the lands also cannot be a basis for a de facto taking claim because the resolution did not result in Halifax acquiring any proprietary interest in the lands. Moreover, a public authority does not and cannot acquire a proprietary interest by encouraging others to trespass.”

Secondly, the dissenters argued, “the uncontradicted evidence is that Annapolis has been deprived of no reasonable uses, let alone all reasonable uses, of the lands. The zoning and uses of the lands remain entirely unchanged. The lands remain vacant and treed, just as they have been since Annapolis acquired them. Annapolis has the same rights with respect to the lands that it had prior to Halifax’s resolution in 2016. Halifax’s refusal to up‑zone the lands in 2016 thus did not deprive Annapolis of any reasonable uses of the lands. It simply disappointed Annapolis’ hope of developing them.”

More importantly, the minority contended, even if Annapolis could somehow show that Halifax will never up‑zone the lands, that could not establish that Annapolis has lost all reasonable uses of the lands. “The lands have never been used for serviced development, they have always been vacant and treed,” the dissenters emphasized. “The majority’s assertion amounts to saying that a refusal to up-zone vacant land can give rise to a de facto taking merely if all potential reasonable uses are prohibited. That would upset the settled law reflected in the jurisprudence, and it would eliminate Halifax’s statutory and common law protection from liability for refusing to up‑zone. Removal of all reasonable uses of the land must be assessed in relation to both its potential uses as well as the nature of the land and the range of reasonable uses to which it has actually been put.”

Photo of Justice Russell Brown from Supreme Court of Canada Collection

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