In the recent decision of St. John’s (City) v. Lynch, 2024 SCC 17, the Supreme Court of Canada clarified the law on constructive expropriation. The Court examined how zoning and land use regulations impact the compensation owed to a property owner for expropriation.
The Court confirmed that local governments are required to compensate property owners for constructive expropriation, based on the fair market value of the property being expropriated. However, the Court held that zoning and land-use restrictions will factor into the fair market value, insofar as any restrictions were imposed on the property for an independent public purpose other than an intended expropriation of the property.
Formal Expropriation and Constructive Expropriation
Expropriation occurs when a public authority acquires privately-owned property for public purposes without the owner’s consent. This action triggers a common law presumption that the public authority will compensate the property owner, typically based on the property’s fair market value.
In British Columbia, a “formal” expropriation follows the procedures outlined in the Expropriation Act. The public authority acquires legal title by providing the property owner with notice, reasons, and compensation for the expropriation.
A “constructive” expropriation happens when a public authority acquires private property by exercising its regulatory powers. As discussed in our previous article, the Supreme Court of Canada interprets constructive expropriation as occurring where a public authority: (1) acquires a beneficial interest in a property; and (2) removes all reasonable uses of the property.
Factual Background of St. John’s (City) v. Lynch
The Lynch family owned a 7.36-acre property on the western side of the Broad Cove River watershed (the “Property”). Groundwater within this watershed flows toward the Broad Cove River, which supplies water to the City of St. John’s (the “City”).
Initially, the Property was in unorganized territory and free from planning authority or land use restrictions. However, over time, it became subject to various regulations:
- In the 1950s, provincial amendments to the City of St. John’s Act subjected the Property to the City’s pollution control and expropriation powers, despite it being outside the City’s boundaries.
- In the 1960s, the Province prohibited building construction within the watershed.
- In the 1970s, provincial legislation was amended to allow the City to permit construction within the watershed, subject to the city manager’s recommendation.
- In 1992, the City’s municipal boundaries were extended to include the Property.
- In 1994, the Property was zoned as “Watershed Zoning,” which:
- allowed no permitted uses for private property; and
- considered three discretionary uses: Agriculture, Forestry, and Public Utility.
- In 1996, the City and the Province adopted a watershed management plan, recommending the continued prohibition of building within the watershed region.
Despite these restrictions, the Lynch family sought permission to develop the Property for years. The City denied their requests to build, refused to allow the transfer of the Property to an adjacent municipality that might permit development, and in 2013, rejected an application for subdivision to develop the Property.
Following the 2013 rejection, the Lynch family sought judicial review. The Newfoundland and Labrador Court of Appeal declared that the Property had been constructively expropriated, entitling the Lynch family to compensation. The City brought an application to have the compensation amount determined by the Supreme Court of Newfoundland and Labrador, which was subsequently appealed to the Supreme Court of Canada.
Determination of Compensation
The Supreme Court of Canada held that the basic measure of compensation in an expropriation is fair market value, which can be influenced by zoning regulations and may reflect a higher and better use of the land than its current state. However, if the change in value is solely due to the scheme underlying the acquisition, it is not considered. This prevents public authorities from artificially lowering property values to reduce expropriation costs.
In the context of constructive expropriation, the Court held that both the purpose and effect of an enactment must be considered to ensure the property owner receives “fair compensation but not more than fair compensation.” The purpose examines whether the enactment was made with a view to expropriate, while the effect considers whether the enactment was independent from or intimately connected with the expropriation.
In this case, the Court needed to decide if the Watershed Zoning was part of the expropriation scheme. This decision would determine whether compensation should be based on the uses allowed under the Watershed Zoning (agriculture, forestry, and public utility) or if it should ignore the zoning, valuing the Property as if residential development were allowed. The difference in valuations was significant: the City’s appraiser valued the Property at $105,000 under Watershed Zoning, but at $670,000 for medium-density residential development.
The Supreme Court of Canada concluded that the Watershed Zoning was an independent enactment aimed at preventing pollution and protecting the water supply. Although the enactment reduced the uses of the Property, it was not part of the expropriation scheme, which included the City’s decision not to exercise its discretionary powers. Therefore, the compensation for the Lynch family should be based on the Property’s value for agricultural, forestry, and public utility uses under the Watershed Zoning, rather than for residential development. The Court held that ignoring the Watershed Zoning would grant the Lynch family a significant windfall and would “compensate them for something they never would have had absent the expropriation: unencumbered land to develop residential housing”.
Key Takeaways for Local Governments
The decision in St. John’s (City) v. Lynch provides several key takeaways for local governments:
- Local governments must compensate property owners for expropriation, whether formal or constructive, based on the fair market value of the property.
- The fair market value reflects the potential uses of the property, considering zoning and land-use restrictions imposed by the local government.
- Compensation aims to economically reinstate property owners, putting them back in the same financial position they were in prior to expropriation – no better, no worse.
- When determining if a local government’s regulatory actions should be disregarded for compensation purposes, the key factor is whether the action was independent or part of an expropriation scheme:
- If regulations form part of the expropriation scheme or are intentionally enacted to impact a property’s value before expropriation, the change in value caused by the regulations will be ignored for compensation purposes.
- If zoning or land use restrictions are imposed independently of any expropriation scheme, such as broad policies for pollution or erosion prevention affecting multiple properties, they are likely to be seen as independent enactments and any change in value caused will be included for compensation purposes.
