Annapolis Group Inc v Halifax Regional Municipality: Constructing a New Standard for De Facto Expropriation Claims

Gordon Milne, 3L, Volume 82 Senior Editor


In late 2022, the Supreme Court of Canada rendered its decision in Annapolis Group Inc v Halifax Regional Municipality, 2022 SCC 36 (CanLII) (Annapolis SCC). This marked the Court’s first decision concerning de facto expropriation since 2006. As I explain below, the Court was sharply divided over many aspects of the doctrine, from the kind of evidence that may be properly considered in determining whether a property owner is entitled to compensation to what the doctrine itself should be called. Thus, the Annapolis decision promises to be an important precedent on land use regulation in Canada.  

When the state takes property, the common law presumes that the owner is entitled to compensation. This is only negated by clear statutory language indicating the intention not to compensate the property owner.[1] In Manitoba Fisheries Ltd v The Queen, 1978 CanLII 22 (SCC), the Supreme Court applied this principle to de facto expropriation. As a result, state action that has the effect of depriving an owner of their property could give rise to a claim for compensation, even if the owner retained title to the property in law.

Before Annapolis, the leading case on de facto expropriation was Canadian Pacific Railway Co v Vancouver (City), 2006 SCC 5 (CanLII) (CPR), which set out a two-step test. First, the claimant must demonstrate that the government has acquired from the claimant a beneficial interest in the subject property or flowing from it. Second, the claimant must show that they have been deprived of all reasonable uses of that property (CPR at para 30). The CPR decision was consistent with a series of earlier decisions, including Mariner Real Estate Ltd v Nova Scotia (AG), 1999 NSCA 98 (CanLII) (Mariner) and R v Tener, 1985 CanLII 76 (SCC), which illustrated the high standard for grounding a de facto expropriation claim.[1] The Court held that the fact that a Vancouver zoning regulation limited Canadian Pacific Railway (“Canadian Pacific”) to using its land exclusively as a rail corridor did not satisfy either part of the test. That members of the public used the land as a park did not satisfy the acquisition requirement. The Court also noted that Canadian Pacific was not deprived of all reasonable uses of the land. Indeed, Canadian Pacific retained the right to use the land as a rail corridor, as it had for decades. Though Canadian Pacific argued that such a use was not economically viable, this argument did not impact the Court’s conclusion (CPR at paras 27–31).

Having established the doctrine as it existed prior to 2022, I now turn to Annapolis and the Supreme Court’s reasoning in that decision.

Facts

Annapolis Group (“Annapolis”) acquired 965 acres of land within the Halifax Regional Municipality (“Halifax”) over the course of several decades. After Annapolis purchased the land, Halifax imposed a regime of land use regulation, which reserved a portion of the Annapolis lands for the future development of a park, while the rest of the land was zoned for future urban development. However, before Annapolis could develop serviced communities on the land, it required secondary approval from Halifax, which it sought repeatedly beginning in 2007. In 2016, Halifax adopted a resolution refusing to initiate the secondary planning process at that time (Annapolis SCC at paras 1–8, 96).

In response to Halifax’s resolution, Annapolis brought a lawsuit raising three main causes of action: de facto expropriation, abuse of public office, and unjust enrichment (Annapolis Group Inc v Halifax Regional Municipality, 2019 NSSC 341 (CanLII) (Annapolis NSSC)). Annapolis made several factual assertions in support of its de facto expropriation claim. It alleged that Halifax had acquired a beneficial interest in the lands by effectively creating a public park on Annapolis’s land. It claimed that Halifax financially supported organizations that use the lands as a park and that the municipality installed signs with its logo and phone number, suggesting that the municipality regarded the land as a public park (Annapolis SCC at para 9).

Judicial History

Halifax moved for summary judgement on the de facto expropriation claim, arguing that there were no material facts in issue. It argued that, as a matter of law, a constructive taking cannot result from a refusal to amend existing land use regulations. It also asserted that its motive for declining to up-zone the lands was irrelevant to whether it had effected a de facto expropriation of the Annapolis land (Annapolis SCC at paras 11–14).

Case Management

The motions judge declined Halifax’s motion for summary judgment. In his ruling, Chipman J reviewed the statutory and case law governing de facto expropriation. He particularly considered Mariner and CPR, determining that the tests set out in the two cases were consistent (Annapolis NSSC at para 31). He then considered Lorraine (Ville) v 2646‑8926 Québec inc, 2018 SCC 35 (CanLII) (Lorraine), in which the Supreme Court considered the law governing disguised expropriation. Annapolis asserted that this “disguised expropriation” should be equated with de facto expropriation, a proposition which Chipman J was “prepared to entertain.” After reviewing the case law surrounding de facto expropriation, Chipman J concluded that the courts may make “creative interpretations on what may constitute a taking” (Annapolis NSSC at para 42).

In the result, Chipman J dismissed the motion for summary judgment, determining that Annapolis’ claims raised issues of material fact pertaining to the de facto expropriation claim (Annapolis NSSC at para 44).

Nova Scotia Court of Appeal

On appeal, the Nova Scotia Court of Appeal took issue with Chipman J’s interpretation of the law of de facto expropriation. In Halifax Regional Municipality v Annapolis Group Inc, 2021 NSCA 3 (CanLII) at para 37 (Annapolis NSCA), Farrar JA faithfully reproduced the two-step test set out in CPR, which required Annapolis to prove that Halifax acquired from the claimant a beneficial interest in the property or flowing from it and that Annapolis was deprived of all reasonable uses of the land. He then reviewed the jurisprudence and drew general conclusions about what constitutes de facto expropriation. He concluded that “passing… a development plan did not constitute a taking” (Annapolis NSCA at para 71).

Applying this standard, Farrar JA determined that Annapolis’s claims did not show that Halifax acquired a beneficial interest in Annapolis’s land. Annapolis attempted to show the transfer of a beneficial interest by claiming that the municipality effectively acquired a park. But that argument failed because Farrar JA determined that the public’s use of the land was insufficient to establish that the government had acquired a proprietary interest in the land (Annapolis NSCA at para 89). Similarly, Farrar JA concluded that Annapolis’s claims fell short of proving deprivation of all reasonable uses of the land (Annapolis NSCA at para 92).

The Supreme Court Decision

On appeal, the Supreme Court reversed the Court of Appeal’s ruling by a slim 5–4 majority. Though Côté and Brown JJ asserted for the majority that they were not altering the legal standard, some of the language they used and the legal standards they imposed departed significantly from precedent. Kasirer and Jamal JJ, for the dissent, insisted that the majority’s reasons marked an unwarranted departure from precedent.

Majority

Most notably, the majority adopted a new term for what was previously called “de facto expropriation.” Brown and Côté JJ expressed a preference for the term “constructive taking” (Annapolis SCC at para 17). While they preserved the two-step test requiring a government acquisition and a deprivation of reasonable uses of the land, their majority opinion provided new guidance regarding each of those standards.

Throughout its decision, the majority stressed the distinction between actual expropriation through the taking of title and constructive takings. They asserted that constructive taking does not require the acquisition of a property interest, but merely an “advantage” relating to the property (Annapolis SCC at para 27). Moreover, because constructive taking law is concerned with the effects of government action, the analysis must be informed by contextual factors, including the nature of the government action, the nature of the land and its historical or current uses, and the substance of the alleged advantage (Annapolis SCC at para 45).

Acquisition

Following CPR, some argued that requiring “a beneficial interest in the property or flowing from it” was an unclear standard.[2] “Beneficial interest” in the context of property is a term of art which typically signifies rights to the use and enjoyment of land arising out of equitable title.[3] As expressed by Professor Malcolm Lavoie in “Canadian Common Law and Civil Law Approaches to Constructive Takings: A Comparative Economic Perspective,” some courts and scholars inferred that this was the meaning McLachlin CJ intended. Such an interpretation was consistent with the view that, in order to ground a de facto expropriation claim, the claimant must show that the government has acquired something that is cognizable as a property right. Perhaps the most prominent critic of CPR was Russell Brown, then a professor at the University of Alberta. Professor Brown levelled a scathing critique at the Canadian approach to de facto expropriation in which he observed that if we were to interpret “beneficial interest” in the sense of the equitable term of art, then there was effectively no distinction between de facto and de jure expropriation.[4] The majority asserted that the Court of Appeal’s opinion in Annapolis included this error to distinguish actual and constructive takings (Annapolis SCC at para 41).

The majority’s opinion sought to clarify the distinction between de jure expropriation and constructive takings. They specified that a constructive taking claimant need only show that the government had attained an “advantage” flowing to the state in relation to the property. They insisted on this broad interpretation that is grounded not in property rights, but rather in any benefit that accrues to the state in relation to the property. The majority further asserted that this “advantage” standard was simply a clarification of the precedents, not a new standard (Annapolis SCC at para 41). However, Professor Jim Phillips argued persuasively that this advantage standard is an invention which represents a sharp break from precedent in his article “The Invention of Advantage: Annapolis Group v. Halifax Regional Municipality and Canadian De Facto Expropriation Law.”[5]

Deprivation

The majority also concluded that there was a triable issue with respect to the deprivation prong of the test. Here, again, the majority slightly altered the language used to describe the relevant standard. The majority held that to constitute a taking, government action must “[deprive] the claimant of the use and enjoyment of its property in a substantial and unreasonable way or effectively confiscate the property” (Annapolis SCC at para 19). Compare this language to the CPR standard, which prescribed that the property owner must have been deprived of all reasonable uses of the property (CPR at para 30).

Moreover, the majority held that the Court of Appeal had erred in disregarding the intention of the municipality as irrelevant and that the motion judge erred in treating the disguised expropriation doctrine from Québec civil law as equivalent to constructive takings (Annapolis SCC at para 52). Thus, it was improper to treat the government’s ulterior motive as determinative of whether the government acquired the requisite advantage.

The majority regarded Québec disguised expropriation cases as persuasive, concluding that the government’s motive for land use regulation can help to show that the government has acquired an advantage in relation to the property (Annapolis SCC at para 50). While they noted that intention is not directly a factor in determining whether there was an acquisition, intention can be relevant to show that a property owner was deprived of all reasonable uses of the property. Regarding Annapolis’s claim, if the municipality had encouraged the public to use the land as a public park, this could in turn support a claim that the government had tried (and succeeded) to deprive Annapolis of all reasonable uses of the land.

Finally, an important point of contention between the majority and the dissent was whether refusing to up-zone lands could ever give rise to a de facto expropriation/constructive taking claim. The majority held that precedents like CPR did not preclude finding that a refusal to up-zone was a constructive taking (Annapolis SCC at paras 73–79).

Application

In light of these determinations about the relevant legal standard, the majority held that the case disclosed factual disputes that were relevant to the constructive takings test. As a result, the motion judge’s order was restored, and the case was allowed to proceed to trial (Annapolis SCC at para 80).

First, there was a question regarding the actual conduct of the government. If Annapolis was able to show that the municipality had treated the lands as a park, then this would be evidence relevant to whether the case disclosed the requisite acquisition and corresponding deprivation of an advantage. That Halifax did not acquire any proprietary rights in law did not preclude finding the acquisition of a beneficial interest in effect. (Annapolis SCC at para 68). Brown and Côté JJ also rejected the Court of Appeal’s determination that encouraging and supporting the public in trespassing can never amount to an acquisition of an advantage for the purposes of a constructive taking claim, citing a Québec disguised expropriation claim for authority (Annapolis SCC at para 65).

The second relevant fact to be determined at trial was whether the conduct of the municipality deprived Annapolis of any reasonable uses of the land. Annapolis alleged Halifax never intended to provide secondary approval for serviced development. The majority indicated that if the municipality in fact did not intend to ever provide that approval, then this would be evidence to support Annapolis’s claim that it had lost all reasonable uses of the property (Annapolis SCC at para 72). Brown and Côté JJ stressed that it was not dispositive that the municipality’s action was merely a refusal to up-zone the land, as constructive taking is concerned with the “actual application of the regulatory scheme” to the property (Annapolis SCC at para 71, emphasis in original). They further considered the claim that Halifax had effectively transformed the lands into a park and concluded that if Annapolis could prove Halifax would never provide approval for serviced development, such a finding could establish that Annapolis was deprived of all reasonable uses of the land (Annapolis SCC at paras 75–76).

Dissent

Kasirer and Jamal JJ for the dissent disagreed sharply with the majority on several points. Notably, they rejected the majority’s use of the term “constructive taking,” and continued to refer to the doctrine as de facto expropriation. The dissenting justices also insisted that the majority’s standard for acquisition was a departure from precedent. They argued that the CPR test clearly called for a proprietary interest, not merely an advantage as asserted by the majority. They further argued that the majority failed to point to any factors that would justify such a departure from precedent (Annapolis SCC at paras 100–118).

The dissenting justices also disagreed that intention was a relevant consideration for the de facto expropriation test. Instead, they would have restricted such considerations to establishing that the government acted with an improper purpose or in bad faith under an administrative law claim (Annapolis SCC at paras 100–129). As a result, the dissent concluded that Annapolis’s arguments with respect to acquisition could not succeed. First, the municipal resolution merely preserved the existing land use restrictions. Second, the municipality had not acquired any proprietary interest in the lands, and encouraging members of the public to trespass on the land could not result in the acquisition of such an interest (Annapolis SCC at paras 135–140).

Finally, Kasirer and Jamal JJ opined that Annapolis could not satisfy the deprivation element of the test. In their view, Annapolis could not have been deprived of all reasonable uses of the land simply because there had been no change to the zoning or uses of the land. They would have held that CPR stands for the proposition that a refusal to alter existing land use regulations cannot constitute a de facto expropriation (Annapolis SCC at paras 144–151).

Based on these legal conclusions, the dissenting justices would have held that there were no material facts in issue. In their view, Annapolis’s allegations were incapable in law of supporting either step of the de facto expropriation test (Annapolis SCC at para 152).

Policy Implications

It is unclear whether or how much the legal standard has changed. For its part, the majority argued that it was merely clarifying the standards set out in precedents like CPR. However, the dissent persuasively argued that the majority’s standard would regard a much wider range of government conduct as constructive takings. Similarly, Professor Jim Phillips has suggested that the “advantage” standard is a marked departure from CPR in his case comment “The Invention of Advantage: Annapolis Group v. Halifax Regional Municipality and Canadian De Facto Expropriation Law”. That said, because the majority’s reasons cite many of the precedents favourably, those earlier decisions may still be relied upon. Thus, an important question to be answered going forward is what distinguishes the claims in Annapolis from earlier land use regulation cases like CPR and Mariner, which were held not to disclose a de facto expropriation.

The resolution of these questions will have important implications. In Mariner, Cromwell JA (as he then was) stressed the context of the case, observing that extensive land use regulation is the norm in Canada and that the government generally faces no obligation to compensate land owners (Mariner at para 49). Indeed, Professor Douglas C Harris in “Tending Gardens, Ploughing Fields, and the Unexamined Drift to Constructive Takings at Common Law” argued that prior to CPR, only a statute could create a right to compensation related to land use regulation. Such regulations serve to balance personal and communal interests, and under parliamentary supremacy the legislature must be allowed to act on its policy interests. In contrast, American regulatory takings law, analogous to Canadian de facto expropriation, imposes a lower standard to ground a claim, which often considers economic harm to the plaintiff. This lower standard has served to hinder important regulations that aim to preserve public safety and protect the interests of one property owner from harm caused by the owner of adjacent property.[6]

By setting a high standard for de facto expropriation claims, Canadian courts have also avoided disincentivizing certain forms of land use regulation which benefit all members of the community. Altius Royalty Corporation v Alberta, 2021 ABQB 3 (CanLII) (Altius) exemplifies this concern. In Altius, an Alberta judge struck a claim that a federal law limiting the carbon intensity of electricity constituted a de facto expropriation (at para 47). Though the regulation effectively shortened the useful life of the plaintiff’s royalty interest in a coal mine, the judge was not satisfied that either stage of the de facto expropriation test would be met on the facts alleged (Altius at paras 9 and 40). Considering the important role land use regulation will play in reducing carbon emissions, the proper role of the courts is not to tighten limits on government action and thereby impede legislative solutions to issues like climate change.

On the other hand, there is nothing preventing governments from imposing such regulations. Rather, the doctrine merely requires that property owners be reasonably compensated for the loss of their property rights. If the compensation for constructive takings is small, then the risk of liability for a constructive taking will be less likely to deter government conduct that may trigger a right to compensation. The question of how to calculate these damages is slated to be addressed by the Supreme Court in Lynch v St John’s (City of), 2022 NLCA 29 (CanLII), leave to appeal to SCC granted, 40302 (16 March 2023). The quantum of damages related to constructive takings under the arguably lower standard set out in Annapolis will be an important factor in determining the impact of the Supreme Court’s new guidance on government and legislative initiatives.

Conclusion

Going forward, the implications of Annapolis SCC are not immediately clear. Clearly, the majority specified new language and terms to be used when applying the test for what we now call a “constructive taking.” Moreover, courts will look to see whether the government has acquired an “advantage” in respect of a property, as opposed to a beneficial interest in the property or flowing from it. It is also clear that whether the government has revealed an intention to acquire an advantage in relation to a property will be a relevant consideration. However, it remains to be seen whether Annapolis SCC will, as the dissenting justices claim, make it easier for property owners to sue for compensation in response to restrictive land use regulations.

 

[1] Attorney-General v De Keyser’s Royal Hotel Ltd, [1920] AC 508 at 542 (HL).

[2] Russell Brown, “The Constructive Taking at the Supreme Court of Canada: Once More, Without Feeling” (2007) 40:1 UBC L Rev 315 at 321.

[3] Ibid at 323.

[4] Ibid.

[5] For an opposing view, see Malcolm Lavoie, “Property Rights, Takings, and the Rule of Law: Assessing Annapolis Group v. Halifax Regional Municipality” (forthcoming) SCLR.

[6] In Pennsylvania Coal Co v Mahon, 260 US 393 (1922), the Supreme Court of the United States held unconstitutional an act which prevented coal miners from causing private homes to subside. The Court reversed course somewhat in Keystone Bituminous Coal Association v DeBenedictis, 480 US 470 (1987), seemingly recognizing those shortcomings. See Susan J Krueger, “Keystone Bituminous Coal Association v DeBenedictis: Toward Redefining Takings Law” (1989) 64:4 NYU L Rev 877.