On May 10, 2024, Justice Sheilah Martin allowed the City of St. John’s appeal from a 2022 decision below by the Newfoundland and Labrador Court of Appeal in favour of the Lynch family, the respondent landowners, and restored a 2020 decision of the Supreme Court of Newfoundland and Labrador, which held that their compensation should be assessed based on their land’s existing zoning — meaning that the city will have to pay thousands of dollars less than under the appeal court’s ruling: St. John’s (City) v. Lynch, 2024 SCC 17.
“Compensation for the expropriation of the Lynch Property should take into account the Watershed zoning and its discretionary uses of agriculture, forestry, and public utility,” Justice Martin held.
Departing from the usual rule that the “loser pays” some of the “winner’s” legal costs, however, the judge also ordered the city and the Lynch litigants to bear their own legal costs in the Supreme Court and the courts below, given that “this judgment is the result of protracted litigation on the compensation owed to the respondents that escalated when the City asked the Board [of Commissioners of Public Utilities] to state a case to the Supreme Court of Newfoundland and Labrador. It will provide guidance to the Board and the City in future compensation disputes,” she explained.
Justice Sheilah Martin
Since at least the 1990s, the Lynch family has tried to get permission to develop the property and in 2013 the city rejected their application to develop a residential subdivision on it, citing its authority under the City of St. John’s Act and the property’s designation as part of the watershed zone. The family sued the city for compensation, arguing its land had been constructively expropriated.
The long-running litigation included a previous trip to the top court when the city tried to appeal (leave was denied) a Newfoundland and Labrador Court of Appeal decision ruling that the Lynches’ land was constructively expropriated when the St. John’s city manager decided in 2013 to prevent any development on their land: Lynch v. St. John’s (City), 2016 NLCA 35.
The Court of Appeal referred the issue of compensation to the Board of Commissioners of Public Utilities, which tribunal in turn referred a legal question, as a special case under the Expropriation Act, to the Supreme Court of Newfoundland and Labrador, asking whether the Lynch’s 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 question required the application judge to consider the application of the principle from Pointe Gourde, which stipulates that any change in the value of the expropriated property that was caused by the expropriation scheme itself is to be ignored in assessing the property’s value for compensation purposes.
(The principle is incorporated into many jurisdictions’ expropriation statutes, including s.27(1)(a) of Newfoundland and Labrador’s Expropriation Act. It means that an authority cannot downzone or freeze a property’s development in anticipation of the need to acquire the property, thereby depreciating the value of the property in order to reduce the compensation payable.)
The question before the application judge therefore became whether the watershed zoning was made with a view to expropriating the Lynch property. The Lynch family argued that the zoning of the property as watershed was an integral part of the city’s pollution prevention scheme, which gave rise to the expropriation and, as such, should be ignored pursuant to the Pointe Gourde principle. However, the application judge disagreed, finding that the watershed zoning was an independent enactment and not part of the expropriation scheme and accordingly could operate to influence the property’s market value and should not be ignored for the purpose of determining compensation: Board of Commissioners of Public Utilities - Re: Expropriation Act, 2020 NLSC 92.
The Newfoundland and Labrador Court of Appeal reversed, holding that the watershed zoning was connected to the city’s expropriation and ordered the board to determine the compensation without reference to the land’s watershed zoning — resulting in a higher market value for the Lynch property: Lynch v St. John’s (City), 2022 NLCA 29.
For seven judges, Justice Martin agreed with the application judge’s finding that the watershed zoning was an independent enactment and not made with a view to expropriation and, as such, the market value assessment for the property had to take into account the fact that the watershed zoning limits use of the property. To ignore the watershed zoning would compensate the Lynch family for something they would never have had absent the expropriation: unencumbered land to develop residential housing.
Justice Martin’s reasons for judgment explain how zoning regulations and other land use restrictions affect the compensation due to owners of expropriated property and provide a legal framework for land valuation in constructive expropriation cases. Her judgment also settles the debate over the proper causation analysis to be applied in determining the loss to the landowner, i.e. what caused the property to be constructively expropriated? The city took a narrow approach to the question — i.e. only the city’s determination not to allow the Lynch family to pursue any of the three discretionary uses theoretically permitted by the city’s development regulations caused the constructive expropriation while the Lynch family’s position was broader in scope and time, arguing that it was the underlying development regulations, which gave the city a beneficial interest in the property and which prevented development that caused the constructive expropriation.
The appellant city argued at the Supreme Court that “the difference in the two approaches has profound implications for municipalities across Canada charged with regulating zoning and land use in the public interest in today’s complex world,” and that the respondents’ “broad approach “essentially eviscerates a municipality’s power to enact zoning regulations in the public interest.”
Justice Martin ruled that while there must be a connection between the regulation and the expropriation for the effects of the regulation to be excluded, “causation does not drive the inquiry and is of limited assistance in determining the scope of the expropriation scheme.”
“Asking whether there is a causal connection between the imposition of the planned use restriction and the expropriation which subsequently occurs is inconsistent with the jurisprudence, which affirms that zoning regulations properly bear on the compensation for expropriation,” she wrote. “It would also risk including as part of the expropriation scheme decisions that neither contemplated nor required a taking, and it would emphasize form over substance as measures closely related to the expropriation that lower the property’s value may not be links in the chain that enabled the taking to occur.”
Conversely, Justice Martin reasoned, “focusing on the act or decision that caused the taking and hence the loss is too narrow. Excluding that act or decision, and nothing further, would permit a state actor to progressively downzone or freeze a property in anticipation of acquiring it in an attempt to reduce the compensation payable.”
She said some relevant factors when making the required determination include: whether the land use restriction was enacted as part of a citywide or provincewide policy, whether it targets specific properties or whether it was enacted by a different public authority than that which expropriated the property.
However, a government’s knowledge of another level of government’s development plans “is not conclusive,” Justice Martin stipulated. “Neither bad faith nor a ‘scheme’ in any nefarious connotation need be proved.”
Justice Martin said that in determining whether a regulation’s effect on a property value should be ignored for compensation purposes, “the key question is whether the enactment was made with a view to the expropriation or, conversely, was an independent enactment.”
This is normally a factual determination to be made by the board or other authority tasked with determining compensation. Courts reviewing such determinations “must accord deference to first-instance decision‑makers,” she said.
“The inquiry involves examining the purposes and effects of the enactment,” Justice Martin explained. “As every land use enactment may impact property values, ignoring their purposes would render each a source of potential liability, impairing the ability of governments to regulate in the public interest. It would also fail to achieve proper economic reinstatement, and it would distort the property’s true market value.”
The judge said the purposes of an enactment can be discerned by considering debates, deliberations and statements of policy that give rise to the regulation, the preamble or the terms of the enactment and the rationale for a municipal by-law found in the municipality’s long-term plans and correspondence involving officials.
Justice Martin concluded that there was no basis to interfere with the application judge’s conclusion that the watershed zoning was part of an independent zoning regulation and not part of the expropriation scheme to be disregarded under s.27(1)(a) of the Expropriation Act.
“While the enactment of the 1994 Development Regulations was a link in the chain of events culminating in the expropriation, they were not enacted at the time with a view to the expropriation,” Justice Martin held. “To ignore the watershed zoning would compensate the family for something it never would have had absent the expropriation: unencumbered land to develop residential housing.”
Ian Kelly, Curtis Dawe
“The decision is an important sequel to the court’s 2022 decision in Annapolis Group Inc. v. Halifax Regional Municipality with respect to the constructive expropriation of property,” he said. “The decision ensures that municipalities and other public authorities are able to enact regulations in the public interest to facilitate matters such as watershed protection, environmental concerns and other issues, without the risk of being required to pay excessive compensation awards.”
Kelly said the court recognized that zoning enactments affect the amount of compensation due to an owner, which is particularly appropriate in cases of constructive expropriation since zoning restrictions, on their own, do not constitute taking.
“The court establishes the test to determine whether a zoning regulation should be ignored or applied for compensation purposes,” he said. “The key question is whether the enactment was made with a view to the expropriation, or conversely, whether it was an independent enactment. This reaffirms the principle from the court’s decision in Kramer v. Wascana Centre Authority in 1967.”
The court rejected “a broad causation approach which would ignore zoning restrictions in assessing compensation even where the zoning restrictions were not enacted with a view to expropriation of the property,” he said. “The court also provides guidance as to the factors to be considered in deciding whether an enactment was made with a view to the expropriation.”
Enactments made for the purpose of expropriating the property will be ignored in assessing compensation, he advised. “Enactments made for the purpose of regulating will be applied.”
Michael Crosbie, McInnes Cooper
Although he and his clients are still reflecting on the meaning of the court’s decision, Crosbie said “the Lynches are the winners of this dispute, not the city.”
“It is to be noted that the Lynches had nothing [before the litigation]. They had land that they were not allowed by the city to use in any manner,” he said. “Constructive expropriation as a remedy has allowed the Lynches to at least obtain farmland value for their property.”
He noted, “The Lynches and I find it hard to understand how discretionary zoning for agriculture, use of which discretion the city had a policy of refusing, is not zoning applied with a view to the expropriation scheme. After all, how can land be farmed without opening the soil and using fertilizers and/or animals that would potentially affect groundwater and watershed quality (i.e. cause pollution, which is why the expropriation occurred)?”
Moreover, the “watershed” zoning “had absolutely no permitted uses and the watershed zone is the only city zone that does not provide a property owner with “Permitted Uses” — with an absolute right to use their land in some reasonable manner,” Crosbie remarked. “Furthermore, ... the city had a policy of not exercising its discretion to allow any uses of watershed land. It is additionally to be noted that the city did not allow the Lynches to farm their property and so, as a result of the constructive expropriation remedy, the City has to at least pay watershed landowners farmland market value.”
Crosbie said his advice to everyone who has land in the city’s watershed zone (there are more than 100 other Crown Grants in that watershed) “is that they should apply to be allowed to farm their land. Farming is at least a use of the land that has market value whereas the city otherwise does not allow any use of a private person’s watershed land. The said lands are of no real use to their owners and so the owners may as well obtain farmland value.”
He added, “The Lynches and I continue to assert that it is not right for the city to refuse to allow an owner of land to use their property in any reasonable manner ... This case is about the city, through use of its zoning authority, using private lands as a natural water filter so that the city does not have to build a full filtration facility on city-owned land,” he said, noting cities like Ottawa and Toronto have built water filtration facilities. “The City of St. John’s instead chose to enact zoning that restricted [the] use of private lands so that the city could use those lands as a natural filter.”
Ecojustice, which was represented at the top court by Randy Christensen and Lindsay Beck, said in a statement that it “welcomes the court’s ruling.”
“The court clearly rejected the respondents’ overly broad characterization of the ‘expropriation scheme’ that must be ignored when valuing land after a finding of constructive expropriation,” the group said. “The court instead set out an analysis focused on the purposes and effects of an enactment. Regulatory measures that function to reduce the value of expropriated land will only be taken into account in valuation if they are made ‘with a view’ to the eventual expropriation. This is an important clarification of the application of the Pointe Gourde principle to constructive takings.”
In the view of the intervener Ecojustice, “the analysis set out by the court will help preclude windfall compensation to landowners whose property has been constructively taken, which was the risk in Lynch had the Court of Appeal’s decision been upheld,” the group explained. “The court emphasized the need to ensure that governments can ‘act in the public interest without paying a premium for doing so,’ at para. 30. Although it remains to be seen precisely how the court’s decision will be applied, Ecojustice is hopeful that it will support governments’ ability to enact and implement progressive environmental protection measures without fear of paying onerous compensation.”
Jonathan Nehmetallah of McCarthy Tétrault LLP in Toronto, who with Brandon Kain and Lauren Weaver appeared at the top court for the intervener Ontario Landowners Association, said the decision reaffirms that landowners are entitled to fair compensation but not more than fair compensation for expropriations, constructive or otherwise.
“Helpfully, what the court is doing is providing much-needed clarity on how to assess compensation payable for the constructive expropriations,” he said. The judgment gives “guidance on how to apply the Pointe Gourde principle in the case of constructive expropriations: changes in value resulting from the expropriation scheme itself are to be ignored in the compensation assessment. In short, an expropriating authority cannot downzone or freeze a property’s development in anticipation of the need to acquire the property, thereby depreciating the value of the property in order to reduce the compensation payable.”
In determining whether a regulation’s effect on a property value should be ignored for compensation purposes (i.e. determining the scope of the scheme), the court “cautioned against a purely causative analysis, stating that while there must be a connection between the regulation and the expropriation for the effects of the regulation to be excluded, causation does not drive the inquiry of what is, and is not the scheme,” Nehmetallah said. “A purely causative approach has the risk of including as part of the expropriation scheme decisions that neither contemplated nor required a taking. Of course, on the flip side, taking an overly narrow view of considering only the act or decision that caused the taking would permit the expropriating authority to progressively downzone or freeze a property in anticipation of acquiring it in an attempt to reduce the compensation payable. It appears that the court sought to strike balance between these two extremes providing decision-makers potential factors to consider when undertaking the factual analysis of what is to be included in the scheme.”
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