Supreme Court revisits test for constructive taking of private property

On October 21, 2022, the Supreme Court of Canada released its decision in Annapolis Group Inc. v. Halifax Regional Municipality, which revisited the test for constructive taking, also known as de facto expropriation of private property. The decision is important as it broadens and clarifies the circumstances where state regulation of lands may amount to a constructive taking of private property. 

Facts

Annapolis Group Inc. (Annapolis) began acquiring land (the Land) in Halifax during the 1950s with the intention of developing it. In 2006, the City of Halifax (Halifax) adopted a municipal planning strategy, which included the Land, and which zoned the Land as a combination of lands reserved for parks and urban development over the next 25 years and beyond.

Annapolis made several attempts to develop the Land, with a final attempt in 2016. Halifax, however, refused to initiate the planning process. In turn, Annapolis sued Halifax for constructive taking, misfeasance in public office, and unjust enrichment.

At trial, Annapolis argued that Halifax's regulatory measures deprived Annapolis of all reasonable or economic uses of the Land, thus resulting in a constructive taking. Annapolis argued that Halifax acquired a beneficial interest in the Land by exercising dominion over it and treating it as a public park at Annapolis' expense.

As proof of the constructive taking, Annapolis pointed out that Halifax encouraged the general public to use the Land for recreation, and members of the public frequently used it for outdoor activities. Moreover, the Land bore the municipality's logo and phone number.

Halifax brought a motion to strike before the Supreme Court of Nova Scotia. The motion judge, however, refused to summarily dismiss the claim because it raised genuine issues of material fact which required a trial.

On appeal, among other things, the Nova Scotia Court of Appeal found that; (i) constructive taking requires the state to take a proprietary interest in land, and (ii) does not account for the state's intended use of the land.

Issues

1. Does the test for constructive taking require the state to take a proprietary interest in land in order to acquire "beneficial interest"?
2. Are the state's intentions relevant to the constructive taking analysis?

Discussion of the decision

At common law, the taking of property by the state must be authorized by law, and triggers a presumptive right to compensation which can be displaced only by clear statutory language showing a contrary intention. As such, a statutory exclusion only exists where there is a clear intention not to compensate.

The Supreme Court reviewed the test for constructive taking, emphasizing the difference between a constructive taking and a de jure taking, where the state formally expropriates property. For a de jure taking to exist, the state must acquire legal title. In contrast, a constructive taking occurs where private property is effectively appropriated through the state's regulatory powers, and leaves the owner with virtually no ability to use and enjoy their property in a reasonable way.

In Canadian Pacific Railway Co. v. Vancouver (City) (CPR), the Supreme Court set out a two-part test (CPR Test) to establish a constructive taking. A constructive taking exists where:

1. The state obtains a beneficial interest in the property or flowing from it; and
2. The impugned regulatory measures remove all reasonable uses of the private property at issue.

Review of step one of the CPR test

Building on its decision in CPR, the majority in Annapolis focused on the effect of a regulatory measure and the advantage acquired by the state as a result. Relying on its previous decisions in Manitoba Fisheries Ltd. v. The Queen and The Queen in Right of the Provinces of British Columbia v. Tener, the majority noted that in both cases the state never acquired an actual proprietary interest in the property. Instead, the restrictions imposed by the regulations had the effect of denying the property owner the use of their property in any meaningful way. The focus was thus on the effect of the regulations on private property.

Thus, the majority held with respect to step one of the CPR Test that the state need only derive an advantage, as opposed to a proprietary interest in the property. Because the CPR Test focuses on effect and advantage, substance (and not form) is to prevail. With this Finding, the Court effectively broadened the CPR Test, moving away from the requirement that the state take a beneficial, proprietary interest in the land.

In justifying the broadening of the CPR Test, the Supreme Court emphasized that requiring an actual taking in order to find constructive taking would "collapse the distinction between constructive (de facto) and de jure takings – a distinction which CPR explicitly preserves."

Review of step two of the CPR test

Step two of the CPR Test requires courts to consider whether all reasonable uses of the property have been removed by the state's regulation. If the owner of the private property has been left with no real options for land use, and the state has conferred on itself a benefit, the claim of constructive taking is made out.

The majority held that although the public authority's intention is not an element in the test for constructive takings, it is not irrelevant. While the underlying objective pursued by a public authority may provide supporting evidence for a constructive taking claim, it is neither necessary nor sufficient alone. It may therefore be a material fact, but the focus of the inquiry remains the effects of the state action. The Supreme Court reiterated this firmly, as any remaining productive use of the property is enough to defeat a constructive taking claim at step two of the CPR Test.

Outcome

The majority set aside the Court of Appeal's partial summary judgment order, and restored the motion judge's order dismissing Halifax's motion for partial summary judgment.

The Supreme Court held that if Halifax functionally treated the Land as if it were a public park, which caused Annapolis to shoulder the cost of indefinitely holding the Land for that purpose, then that may satisfy the advantage required by step one of the CPR Test.

With respect to the second branch of the CPR Test, the Supreme Court noted that the intention of the state is relevant for determining Annapolis' claim that it lost all reasonable uses of its property. If Annapolis could demonstrate the state's intention to continue to use the Land as a public park, along with its refusal to allow development without compensating Annapolis for this use, then this intention would support establishing the loss of all reasonable uses of the Land.

Takeaway

Annapolis broadens and standardizes the legal approach to constructive taking. The Supreme Court has eliminated confusion about whether constructive taking requires the state to acquire proprietary interest - it does not.  

The Supreme Court highlighted that it is well-established in Canadian law that zoning which effectively preserves private land as public resource may constitute a "beneficial interest" flowing to the state, as such zoning has the effect removing all reasonable uses of that land.

Annapolis suggests that claimants should bring supporting evidence in the form of perceived intentions of the state when making a constructive taking claim. Going forward, public authorities should exercise caution when using regulations that appear to provide advantages to themselves at the cost of depriving private property owners of their property rights.

If you require legal assistance with issues relating to constructive taking or expropriation of private property, BD&P is available to help.