"Good morning, Justices"
You know that from time to time -- mostly thanks to our friend and colleague Shane Rayman and his firm -- we cover property goings-on north of the border when a good property rights case comes before the Supreme Court of Canada (see here and here for past examples).
Well, here's another one, this time involving "de facto [or constructive] expropriation" (or, as we call it, "regulatory takings"), where the question before the Court is how compensation is calculated after it was determined that the application of very restrictive zoning to otherwise developable property was is deemed a taking. Must valuation include or exclude the effects of the challenged regulation?
The oral arguments in the case were held last week (click here to watch a recording [English or French, your pick]).
Applying what in Canada is known as the "Pointe Gourde principle" -- the idea in expropriation valuation that the effects of "the scheme" should not influence the calculation of compensation (what we in the U.S. call "project influence" or "scope of the project" rule) -- the advocates had an in-depth discussion with the Justices.
As the Court's website summarizes the case:
In 1991, Newfoundland and Labrador reorganized its northeast Avalon municipalities, expanding St. John’s boundaries and triggering a new planning process for St. John’s. The Lynch property and others were zoned as “watershed” because they fall within the Broad Cove River Watershed, which feeds St. John’s municipal water supply. In 2011, the Lynches asked the City what sort of residential, agricultural, forestry or public utility uses the property could be put to. They were informed verbally that no development would be permitted. They then applied to develop a ten-lot residential subdivision. In a letter dated February 1, 2013, the City Manager rejected their application as being contrary to ss. 104 and 106 of the City of St. John’s Act and the development regulations which established the watershed zoning.The municipal water supply had been subject to statutory protection through limits on development since before the Crown Grant in 1917. In 1959, the City of St. John’s Act was amended to add the Broad Cove Watershed to the area within St. John’s control, even though it was not within the city itself. As a result, the Lynch property was subject to St. John’s pollution control and its powers of expropriation, and its use and development were restricted. Residential building was not expressly prohibited until 1964, when St. John’s amended the City of St. John’s Act to prohibit the erection of most buildings in the controlled area unless they were associated with existing private family dwellings. In 1978, these restrictions were softened to allow the City Manager to grant permission to build on the land. In 1992, St. John’s boundaries were expanded to include the Lynch property, so St. John’s general land use zoning applied to the property. The watershed zoning came into effect in 1994, and the resulting management plan, which included keeping St. John’s watersheds “as pristine as possible”, was adopted in 1996.
The Newfoundland and Labrador Court of Appeal held that the City Manager’s decision to prevent any development in any manner, set out in the February 1, 2013, letter, constituted constructive expropriation: Lynch v. St. John’s (City), 2016 NLCA 35, at paras. 66-67 (“Expropriation Decision”). The Court of Appeal remitted the issue of compensation to the Board of Commissioners of Public Utilities. In the course of determining compensation, the Board referred the following question to the Supreme Court of Newfoundland and Labrador under the Expropriation Act, R.S.N.L. 1990, c. E-19, s. 26(3), by special case:
Whether the Lynches’ compensation should be assessed based on the uses permitted by the existing zoning, which are agriculture, forestry and public utility uses, or whether the existing zoning should be ignored and the value determined as if residential development were permissible.
The applications judge granted compensation for constructive expropriation of property based on existing watershed zoning. The Court of Appeal allowed the appeal in part, ordering that compensation be determined without reference to watershed zoning.
To us, this doesn't seem like that complex a question. Of course you can't solely focus on the value of the property subject to the regulatory restrictions which are being challenged as a taking. If you did, you'd always end up either with a "no taking" or a "little to no compensation" conclusion. Nor do you focus solely on the valuation of the property free of the regulations. Instead, shouldn't the valuation compare the value and uses of the property before the taking (i.e., the property's uses before the regulation), with the property's uses and value after the regulations are imposed? That way, the owner recovers the loss in value caused by the offending regulation.
While the "scope of the project" rule -- or, as the advocates and the Court call it "the effects of the scheme" -- makes a lot of sense when valuing property in direct expropriations, it makes a lot less sense when the taking is de facto. Why? Because there is no "scheme" or "project" -- at least how we normally think of these things. The reason we exclude the effects of the scheme in direct expropriation is that project influences are contrary to the idea that valuation is based on arm's length transactions, which, by definition, transactions which are part of a project are not.
Much of the difficulties here might be avoided by the Court recognizing that there isn't a 100% alignment between direct expropriations and de facto takings, and that the Pointe Gourde principle may not match up exactly with de facto takings. Regulation, after all, isn't a scheme or project.
We shall continue to follow along with this fascinating case and bring word of the judgment (and reasons for the judgment aka the opinion(s)) when issued.
