The Supreme Court Expands on Test for Constructive Takings

Shane Rayman Awarded the CRE® Credential from The Counselors of Real Estate®
July 20, 2020
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The Supreme Court Expands on Test for Constructive Takings

Case Summary by Leah Cummings

The regulation of private property is a natural and incidental part of governance, particularly municipal governance, in Canada. Land is subject to designations under municipal plans, to zoning by-laws, and to other conditions imposed by regulation. However, as the Supreme Court of Canada recently affirmed, where such regulations go so far as to deprive the owner of the use and enjoyment of its property in a substantial and unreasonable way, the government body must compensate the owner for this constructive taking.

On October 21, 2022, the Supreme Court of Canada released its decision in Annapolis Group Inc v Halifax Regional Municipality, 2022 SCC 36.  This decision granted the appeal sought by the property owner, Annapolis, and affirmed a more expansive definition of constructive takings, also known as de facto expropriations.

In 2006, the Supreme Court affirmed a two-part test for determining whether regulation of private property amounts to a constructive taking for which compensation is owed to the property owner.[1] This test requires

  1. An acquisition, by the government body, of a beneficial interest in the property or flowing from it; and
  2. Removal of all reasonable uses of the property.[2]

Before the Supreme Court, Annapolis argued that the courts, and the Nova Scotia Court of Appeal in the decision under appeal, have impermissibly narrowed the test set out in CPR by taking a narrow view of the term “beneficial interest” that essentially requires that the government body have actually acquired the property owner’s rights to the use and enjoyment of the property. The Supreme Court agreed with Annapolis and concluded that “beneficial interest” should be interpreted as a “benefit or advantage accruing to the state”.[3]

Facts of the case

Since the 1950s, Annapolis had, over time, acquired a 965 acre parcel of land in Halifax which it intended to develop. In 2006, the Regional Municipality of Halifax adopted a Regional Municipal Planning Strategy. This Strategy identified a portion of the Annapolis Lands for possible future inclusion in a park, but zoned the lands as “urban settlement” and “urban reserve”. This zoning contemplates, but does not permit, future residential serviced development.

From 2007 until 2016, Annapolis made several attempts to develop the lands. However, Halifax refused to initiate the planning process. Annapolis sued Halifax alleging a constructive taking, misfeasance in public office, and unjust enrichment.

On its claim for constructive taking, Annapolis argued that Halifax’s measures in refusing to consider its development applications deprived it of all reasonable or economic uses of its land. It argued that Halifax had acquired a beneficial interest in the land by effectively creating a public park by preserving the land in its current state and inviting members of the public to use the land as a park.

Halifax brought a motion for partial summary judgment of Annapolis’ claim for constructive taking. The motion judge dismissed this motion and concluded there were “vast” genuine issues of material fact requiring trial.[4] On appeal, the Nova Scotia Court of Appeal agreed with Halifax that there were no genuine issues of material fact requiring trial and that Annapolis did not have a reasonable chance of successfully establishing a constructive taking claim.[5] The Court of Appeal concluded that for Halifax to have acquired a “beneficial interest” in the Annapolis lands, land must actually be taken from Annapolis and acquired by Halifax.[6]

Analysis of the Majority of the Supreme Court

A 5-4 majority[7] of the Supreme Court concluded that the Court of Appeal erred in applying too narrow a definition of “beneficial interest”. A beneficial interest should include an advantage acquired by the state.

The majority’s opinion was based in an analysis of the history of the law of takings and pre-CPR case law. They emphasized that while property rights are not constitutionally protected in Canada, they benefit from a common law presumption that the state must compensate property owners where it acquires private property.[8] Further, the pre-CPR cases of Manitoba Fisheries and Tener had concluded there had been a constructive taking where there had not been an actual acquisition of the property by the Crown. The analysis, according to the majority, should be about the effect of the regulation, not about an actual acquisition.[9]

The majority identified that in looking to the effects of the regulation, a court should consider, among other things, (a) the nature of the government action; (b) the nature of the land and its historical or current uses; and (c) the substance of the alleged advantage.[10] An assessment of the effects of regulation may also take into consideration the intention of the regulator, however, this is not a separate element of the test for constructive takings.[11]

The majority put a lot of weight in the second prong of the constructive taking test, namely the loss of all reasonable use of the property to the property owner. For there to be a constructive taking, all “private rights in the property must be virtually abolished, leaving the plaintiff with ‘no reasonable use’ of the property.”[12]

The majority found that there were material facts in dispute which were pertinent to both elements of the test for constructive takings. It allowed the appeal.

Dissent

The dissent disagreed with the majority’s expansion of the term “beneficial interest” to include an advantage from the property and disagreed that the intention of the public authority could be taken into consideration.[13] They criticized the majority, stating that the majority was effectively rewriting the test in CPR such that the acquisition requirement becomes “largely superfluous.”[14] They warned that the new test would “dramatically expand the potential liability of municipalities engaged in land use regulation in the public interest”.[15]

They concluded that there were no genuine issues of material fact requiring a trial on either branch of the constructive taking test. The dissenting judges found that Halifax’s adoption of a municipal resolution refusing to up-zone the lands simply preserved the status quo.[16] They stated that a public authority cannot acquire a proprietary interest by encouraging others to trespass.[17]

Take-aways from the case

Despite the dissenting judges’ concern that the majority’s decision will essentially “open the floodgates” of constructive taking claims against public authorities, the newly articulated test for constructive takings remains an onerous one. While the acquisition prong of the constructive taking test is admittedly broadened as compared to recent case law, the second prong remains unchanged.

Both the majority and the dissent in Annapolis emphasized that the second prong requires that private property rights must be “virtually abolished” to meet this prong of the test.[18] As pointed out by the dissenting judges, in CPR the Court concluded this prong of the test had not been met since the appellants could still use the property for its original purpose, namely the operation of a railroad even if they could do nothing else with the property.[19]

Even where the second prong of the constructive taking test can be made out, the scope of what may constitute a benefit or advantage accruing to the state is unclear and untested. The majority seems to have accepted, in principle though not with respect to the Annapolis Lands specifically, that using private land essentially as a public park could be an advantage accruing to the state. This seems to signal a willingness that this prong of the test be interpreted such that benefits or advantages to the public amount to benefits or advantages to the state.

We look forward to seeing how the revised CPR test as set out in Annapolis is used and interpreted in the months and years to come.

Leah Cummings, Conner Harris and Shane Rayman represented the intervener, the Canadian Homebuilders’ Association in this appeal, arguing alongside the appellants for a broadening of the definition of “beneficial interest”

[1] Canadian Pacific Railway Co v Vancouver (City), 2006 SCC 5 [“CPR”).

[2] CPR at para 30.

[3] Annapolis Group Inc v Halifax Regional Municipality, 2022 SCC 36 at para 40 [“Annapolis SCC”)

[4] 2019 NSSC 341.

[5] 2021 NSCA 3.

[6] 2021 NSCA 3 at para 71.

[7] With Justices Brown, Côté, Rowe, CJ Wagner, and Moldaver for the majority and Justices Kasiere, Jamal, Martin, and Karakatsanis in dissent.

[8] Annapolis SCC at paras 21, 24.

[9] Annapolis SCC at para 38.

[10] Annapolis SCC at para 45.

[11] Annapolis SCC at para 53.

[12] Annapolis SCC at para 19, citing Horsman and Morley at (section) 5.13.

[13] Annapolis SCC at paras 85-86.

[14] Annapolis SCC at para 103.

[15] Annapolis SCC at para 115.

[16] Annapolis SCC at para 136.

[17] Annapolis SCC at para 138.

[18] Annapolis SCC at para 19, citing Horsman and Morley at (section) 5.13.

[19] Annapolis SCC at para 144, citing CPR at para 34.