Supreme Court decision clarifies the test for a constructive taking, expanding scope of compensation for property owners

November 7, 2022 | Malcolm Lavoie

Introduction

On Friday, October 21, the Supreme Court of Canada released its decision in Annapolis Group Inc. v. Halifax Regional Municipality, 2022 SCC 36. The main issue in the case was the proper approach to assessing government liability for a constructive taking, also known as a de facto expropriation. A constructive taking arises where government action is understood to be tantamount to an expropriation or a taking property, despite not formally transferring title to the government. A constructive taking can give rise to an obligation on the part of the government to provide compensation to the property owner. In their decision for the five-judge majority, Justices Côté and Brown affirm the existing test for a constructive taking from the case of Canadian Pacific Railway Co. v. Vancouver (City), 2006 SCC 5 [CPR]. However, the majority decision also clarifies the application of the test in ways that could expand the liability of governments for regulatory measures that deprive owners of all reasonable uses of their property.

Background

Beginning in the 1950’s, the Annapolis Group acquired lands in the Halifax area with the intention of eventually acquiring enhanced development rights and reselling the lands. In 2006, Halifax Regional Municipality adopted the Regional Municipal Planning Strategy. The Strategy reserved a portion of the Annapolis lands for a future regional park. The Annapolis lands were zoned as “Urban Settlement” and “Urban Reserve”, designations that contemplate possible future development following a secondary planning process. Beginning in 2007, Annapolis made several attempts to develop the land. In 2016, Halifax ultimately refused to initiate the secondary planning process. The Annapolis Group brought an action against the city alleging a constructive taking, misfeasance in public office, and unjust enrichment. As part of its claim, the Annapolis Group alleged that Halifax encouraged members of the public to treat its lands as a park, including by putting up signs and maps on the lands with the municipality’s logo.

Halifax moved for partial summary judgment, seeking dismissal of the constructive taking claim. The Nova Scotia Supreme Court dismissed the application, holding that the claim raised genuine issues of material fact requiring a trial. The Nova Scotia Court of Appeal reversed the motions judge’s decision, holding that the Annapolis Group’s claim did not have a reasonable chance of establishing a constructive taking under the prevailing CPR test. Accordingly, the Court of Appeal granted Halifax’s claim for partial summary judgment.

The CPR test requires a claimant to meet two criteria in order to establish a claim for a constructive taking: (1) an acquisition [by the government] of a beneficial interest in the property or flowing from it, and (2) removal of all reasonable uses of the property. The Nova Scotia Court of Appeal decision adopted a restrictive understanding of the “beneficial interest” requirement, holding that the land in question “must actually be taken” and acquired by Halifax in order for the claim to succeed. Since the Annapolis Group’s claim could not satisfy the Court of Appeal’s interpretation of the “beneficial interest” requirement, the Court concluded that the claim could not succeed.

The Annapolis Group successfully sought leave to appeal to the Supreme Court of  Canada. The appeal was heard on February 16, 2022.

The decision

The Supreme Court issued a closely divided, five-to-four decision. The majority decision of Justices Côté and Brown was supported by Chief Justice Wagner and Justices Moldaver and Rowe. Justices Kasirer and Jamal wrote a dissent on behalf of themselves and Justices Karakatsanis and Martin.

The majority opinion overturns the Nova Scotia Court of Appeal’s decision to grant the summary judgment application and holds that the constructive takings claim should proceed to trial.

In coming to this conclusion, the Court clarifies the proper approach to claims for constructive takings. The most significant takeaway from the decision concerns the proper interpretation of the “beneficial interest” requirement from the CPR test. This requirement was understood by some, including the justices on the Nova Scotia Court of Appeal, to mean that the government must have actually acquired some kind of property right. Such a strict interpretation of the beneficial interest requirement would drastically limit the scope of compensation for constructive takings. (Indeed, as Justice Brown once opined during his prior career as a legal academic, a narrow approach to the beneficial interest requirement would arguably conflate the distinction between a formal, de jure expropriation and a constructive, or de facto taking. By definition, constructive takings are understood to be tantamount to an expropriation despite not resulting in a formal transfer of a property right.) After a review of the case law, the majority rejects the Court of Appeal’s narrow characterization of the beneficial interest requirement, holding that it should simply be understood to require the conferral of an advantage of some kind on the government.

The majority’s broad interpretation of the beneficial interest requirement means that the focus in future cases will most likely be on the second branch of the CPR test: the removal of all reasonable uses of the property. A wide range of government measures result in the conferral of some kind of broadly defined advantage on government, such as a transfer of value or the preservation of land for the government’s desired purposes. The beneficial interest requirement, now understood broadly to mean an advantage, should be relatively easy for claimants in future cases to meet.

Some of the other key points in the majority decision include:

  • A constructive taking triggers a presumptive right to compensation, though this right can be rebutted by clear language in a statute indicating that no compensation is payable.
  • The term “constructive taking” is to be preferred over the term “de facto expropriation”, since the former term reflects an appropriately broad understanding of the ways in which government action can amount to a taking of property based on the effect on the owner.
  • A range of factors are potentially relevant to assessing whether government action amounts to a constructive taking. Some of these factors are set out at paragraph 45 of decision:

(a) The nature of the government action (i.e., whether it targets a specific owner or more generally advances an important public policy objective), 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. Where, for example, the land is undeveloped, the prohibition of all potential reasonable uses may amount to a constructive taking. That said, a mere reduction in land value due to land use regulation, on its own, would not suffice; and
(c) The substance of the alleged advantage. The case law reveals that an advantage may take various forms. For example, permanent or indefinite denial of access to the property or the government’s permanent or indefinite occupation of the property would constitute a taking. Likewise, regulations that leave a rights holder with only notional use of the land, deprived of all economic value, would satisfy the test. It could also include confining the uses of private land to public purposes, such as conservation, recreation, or institutional uses such as parks, schools, or municipal buildings.

  • The government’s intention can be relevant to assessing whether government action amounts to a constructive taking. While an intention to effect a taking is not a required element of liability, the government’s intentions could shed light on, for instance, how government decisions should be characterized. For instance, if the government’s intention in refusing secondary planning permission is to secure a park, then that is potentially germane to the analysis of whether the owner has effectively been deprived of all reasonable uses, resulting in the conferral of an advantage on the government.
  • Finally, the majority emphasizes the importance of common law protections for property rights, such as the doctrine of constructive takings. While property rights are not protected by the Charter of Rights, the majority notes that section 26 of the Charter states that the guarantee of Charter rights “shall not be construed as denying the existence of any other rights or freedoms that exist in Canada.”

The dissenting opinion would have dismissed the appeal. The dissent challenges the majority for altering the law as reflected in the CPR decision. According to the dissenting justices, a narrow understanding of the beneficial interest requirement is more appropriate.

Miller Thomson’s intervention

Miller Thomson acted for the intervener Canadian Constitution Foundation (CCF) in the appeal. The CCF was represented by Adrienne Funk and myself (Malcolm Lavoie), with assistance from Megan Kennedy and Jordan Magico. In intervening in the appeal, the CCF sought to secure stronger legal protections for Canadian property owners. We were extremely gratified to see that the majority decision adopted the arguments of the CCF on a number of points, including:

  • The need to interpret the “beneficial interest” requirement broadly;
  • The understanding that a constructive taking triggers a presumptive common law right to compensation that does not need to be grounded in a statute;
  • The factors relevant to assessing a constructive taking, set out at paragraph 45 of the decision, several of which were taken verbatim from the CCF factum;
  • The importance of common protections for property rights, despite their absence from the Charter; and
  • The proper characterization of pre-CPR cases, especially Manitoba Fisheries Ltd. v. The Queen, [1979] 1 SCR 101 and v. Tener, [1985] 1 SCR 533.

Interestingly, the dissenting opinion of Justices Kasirer and Jamal acknowledges the influence of the CCF’s arguments on the majority decision. At paragraph 103, the dissent challenges the majority for taking up the CCF’s invitation to “revisit” the CPR test by focusing the analysis on the effect of a measure on the property owner, rather than what is acquired by the government.

Practical implications

This decision could have important implications for municipal law, as well as other areas of law involving government regulation of property. The decision undoubtedly makes it easier for property owners to advance a claim for a constructive taking. In order to satisfy the first branch of the CPR test, a property owner now needs only to establish that the government measure in question confers a broadly defined “advantage” on the government, rather than a proprietary “beneficial interest”.

That said, it would be a mistake to think that the decision will open the floodgates of government liability. In order to succeed in a claim based on a constructive taking, a property owner must still establish that the measure deprives her of “all reasonable uses” of the property. The vast majority of regulatory measures, including zoning laws, will not meet that standard. Governments still have a relatively free hand to regulate based on powers authorized by statute, including in ways that have a significant impact on the value of property. The CPR test, even on the interpretation adopted by the majority, will only be satisfied by a small sliver of regulatory measures that have particularly extreme impacts on an owner’s property interest.

Moreover, it should be recalled that while compensation for a constructive taking is presumptively available at common law, it is always possible for the legislature to overrule that presumptive right through clear statutory language. If the applicable statute clearly states that no compensation is payable, then a claim cannot succeed. Practitioners will want to consult relevant statutes in order to assess the impact of the decision on their clients. For instance, in the context of Alberta municipal law, section 621 of the Municipal Government Act operates as a limit on municipalities’ liability for zoning decisions.

In cases where legislation does not clearly immunize a government from liability, claims based on land use restrictions may be possible. For instance, if the effect of a municipal bylaw is to deprive an owner of all reasonable uses of land, then a claim for compensation may be available at common law. The majority decision does highlight the relevance of the reasonable expectations of the owner to assessing claims for constructive takings. Accordingly, it would be advisable for municipalities to clearly communicate plans to limit development, as early as possible, in order to inform owners’ reasonable expectations.

The Annapolis decision could also have implications for other areas of law, besides municipal law. Past constructive takings claims have involved restrictions that precluded the development of mineral resources, as well as legislation that nationalized an industry, putting a company out of business.

Conclusion

The Annapolis decision is an important reminder of the importance of common law protections for property rights. The case could have important implications across a range of different areas of law.

Miller Thomson LLP is here to help with all of your business needs.  If you have questions about the Annapolis decision or any other matter, please contact a member of Miller Thomson’s Commercial Litigation team.

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