“Constructive Taking”: Consequences for municipalities from the Supreme Court of Canada decision in Annapolis Group Inc. v. Halifax Regional Municipality
A new decision from the Supreme Court of Canada, Annapolis Group Inc. v. Halifax Regional Municipality, 2022 SCC 36 (“Annapolis”), has changed the law of constructive expropriation across the country, and could have big implications for municipalities in this province.
In a 5-4 decision, the Court has expanded the situations in which governments and municipalities can be held liable for zoning decisions which significantly restrict the use of private property. Prior to Annapolis, property owners could only successfully claim against municipalities if the municipality obtained some sort of proprietary interest in the property being regulated. Now, it is sufficient for a property owner to prove that the municipality obtained an “advantage” from the regulation of the property – even where the municipality gained no proprietary interest in the land.
The plaintiff, Annapolis, is a real estate development company. Starting in the 1950s, Annapolis began to buy up areas of unserviced, forested land in the Halifax area for use in a future development project.
In 2006, Halifax adopted a “Regional Municipal Planning Strategy,” the rough equivalent of a Municipal Plan under the Urban and Rural Planning Act, 2000. Like a Municipal Plan, the Planning Strategy set out policy statements and priorities for the growth and orderly development of Halifax, but did not commit Halifax to any particular development or policy.
Under the Planning Strategy, approximately 1/3 of Annapolis’ property was designated “Urban Settlement,” which contemplated development within 25 years; the remaining two thirds were designated “Urban Reserve,” which contemplated development only after 25 years. It is important to keep in mind that the Planning Strategy is a statement of broad policy and not a zoning scheme – even though development was contemplated in part of Annapolis’ lands by the Planning Strategy, Annapolis would still have to convince Halifax to amend the zoning by-law to allow residential development.
In 2016, Halifax adopted a municipal resolution stating that it would not upzone Annapolis’ lands to permit residential development “at this time.” Annapolis sued Halifax, alleging that its property had been constructively expropriated by Halifax. Annapolis also alleged that Halifax encouraged the public to use Annapolis’ lands as a public park, including by installing signage.
Constructive Taking Generally
This case involves the doctrine previously known as constructive expropriation, though the Court has indicated that it should now be called “constructive taking” going forward.
Constructive taking is different than a formal expropriation – in a constructive taking, the government or municipality does not become the formal or legal owner of the subject property, but instead imposes regulation that has the practical effect of depriving an owner of the use and enjoyment of its property in a substantial and unreasonable way.
No further need to prove that a “beneficial interest” has been taken
The previous approach to constructive taking was last restated by the Supreme Court of Canada 15 years ago in Canadian Pacific Railway v. Vancouver (City), 2006 SCC 5 (“CPR”). Under the CPR approach, the property owner must prove two elements:
- the municipality or government acquired a beneficial interest in the property, or flowing from it; and
- there was a removal of all reasonable uses of the property.
It is the first step of this test that has explicitly changed following Annapolis.
Prior to Annapolis, a property owner had to prove that by regulating the property, the municipality or government took some sort of proprietary interest in it. Courts have generally applied a significant degree of flexibility to what constitutes a proprietary interest depending on the facts. Some of the situations in which the courts found a proprietary or beneficial interest had been taken are as follows:
- Denying a permit for mineral exploration in a park, which enhanced the value to the park. The court held that this “took value from the respondents and added value to the park… It clearly enhanced the value of its asset, the park.”
- Denying any opportunity to develop in order to ensure a continuous flow of groundwater to a municipality’s lower level land. In this case, the municipality gained a “tangible benefit of that continuous flow of groundwater by taking away the [owners’] beneficial interest in the groundwater.”
In Annapolis, the majority of the SCC held that there is no further need to prove that a municipality gains any type of proprietary interest in the property. Instead, the claimant need only prove “a benefit or advantage accruing to the state” as a result of the regulatory activity.
What kind of advantage can create a constructive taking?
The majority of the SCC did not precisely define what kind of advantages could satisfy the new test for constructive taking.
A broad definition of “advantage” could result in significant exposure for municipalities. It is obvious to say that municipal councils generally make zoning decisions based on what they think would be “advantageous” for the municipality, and avoid zoning definitions that they believe would disadvantage the municipality.
The majority did provide examples of suitable advantages which could constitute a constructive taking. For example, the majority suggested an advantage could flow from “confining the uses of private land to public purposes, such as conservation, recreation, or institutional uses such as parks, schools, or municipal buildings.” In the same vein, the majority suggested that “[p]reserving a park in its natural state may constitute an advantage accruing to the state.”
However, the majority also appeared to indicate that an “advantage” will not include all zoning decisions made in the public interest, stating that “in most cases, a public authority will not benefit from a refusal to up zone vacant land.”
Issues to consider
The majority also highlighted three factors to consider in a constructive taking claim, which appear to be relevant throughout the analysis:
- 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.
- 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
- 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 an owner 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 effect of Annapolis on conservation zoning
Municipalities can expect to receive constructive taking demands flowing from conservation zoning, which often imposes onerous development restrictions on private property owners. Prior to Annapolis, the main barrier to constructive taking lawsuits arising from conservation zoning was establishing that the municipality obtained a proprietary interest in the conservation area.
Now, the owner need only establish an advantage flowing from the conservation zoning. In future lawsuits involving conservation areas, owners of lands subject to conservation zoning will almost certainly rely on the majority’s statement that an advantage could flow from “confining the uses of private land to public purposes, such as conservation…”
However, it is not clear from the majority’s decision whether all conservation zoning creates a suitable advantage. In discussing previous decisions that supported their new approach to constructive taking, the majority favourably cited a previous decision of the Nova Scotia Court of Appeal in Mariner Real Estate Ltd. v. Nova Scotia (Attorney General), 1999 NSCA 98 (“Mariner”). In Mariner, Nova Scotia designated privately-owned land as a beach under provincial conservation legislation, imposing onerous development restrictions (including prohibiting the building of houses).
Using the previous language of proprietary interest, the Court of Appeal held that the zoning did not meet either leg of the test. With respect to the first step, the Court of appeal held that “the freezing of development and strict regulation of the designated lands did not, of itself, confer any interest in land on the Province.”
Despite the language used and outcome reached by the Nova Scotia Court of Appeal, the majority in Annapolis approved the analysis in Mariner, indicating that Mariner constitutes a correct application of the test for constructive taking approved by the majority. The majority observed that “Mariner does not stray from focussing on both the effect of the taking and the advantage acquired by the government.”
If Mariner does indeed remain good law in Canada, it is apparent that some onerous conservation zoning, despite using private lands for a public good, will not convey a suitable advantage to a municipality, and not all conservation zoning will constitute a constructive taking. However, it is not clear where the line will be drawn.
Is intention relevant?
Annapolis also confirms that the intentions of the municipality or government in regulating the property could be a relevant consideration. Specifically, if there is evidence that the municipality intended to constructively take the property from its owner, that intention may be evidence that the landowner has lost all reasonable uses of their land. The majority cautioned, however, that this type of evidence is neither necessary nor dispositive. The primary focus remains on the effects of the municipality or government’s regulation, not on their intention in enacting it.
Implications for municipalities
Some of the questions arising from Annapolis which will have to be answered in litigation are as follows:
- What can be an “advantage” sufficient to trigger a constructive taking? As noted above, generally all regulatory decisions are based on what municipal councils believe will be “advantageous” for their municipality.
- What types of conservation zoning will confer an advantage on municipalities? Is it enough that conservation is a “public purpose,” or was Mariner correctly decided and a useful authority going forward?
- What is the correct way to treat a loss of economic value? Is the loss of all economic value in a property still insufficient to prove the loss of all reasonable uses? And what did the majority mean by “notional” uses of a property which has lost all economic value?
Depending on how Annapolis is interpreted by other courts, municipalities could already be subject to significant liabilities as a result of their past, current, and future zoning decisions. The dissenting justices cautioned that the new approach “dramatically expands the potential liability of municipalities engaged in land use regulation,” and if courts adopt an expansive definition of “advantage,” it is difficult to see how this will not be the case.
In the absence of a legislative response, Annapolis will not be the last word on constructive taking in this province or elsewhere in Canada, as courts grapple with the ambit of the SCC’s new approach.
This update is intended for general information only. If you have any questions on the above we would invite you to contact the authors or any other member of our Municipal Group.
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