Supreme Court talks de facto expropriation again

 AS PREVIOUSLY PUBLISHED IN THE RURAL VOICE:

The concept of “de facto” expropriation was the focus of another decision of the Supreme Court of Canada in 2024.  In certain cases, government action outside of expropriation legislation may effectively result in a taking of property, which may entitle a property owner to compensation for the taking.  This is known as a “constructive” or “de facto” taking.  There is a presumption that there will be no expropriation without compensation.  If government action (often in the form of regulation) removes all reasonable uses of a property, then the property has been effectively expropriated and compensation may be payable.

Importantly, though, “compensation for the compulsory acquisition of land cannot include an increase in value which is entirely due to the scheme underlying the acquisition.”  This “Pointe Gourde principle”, taken from a 1945 case of the same name heard before the Judicial Committee of the Privy Council in the UK, flows from the rule that compensation is to be based on the value of property to the owner, not the value to the taker.  An owner who suffers expropriation, de facto or otherwise, is entitled generally to be compensated for the market value of the property based on its highest and best use before the taking.  If the expropriating authority’s reason for taking the property actually enhances the market value of the property, the property owner does not get to rely on the enhanced value in the calculation of compensation payable.

The Pointe Gourde case involved the expropriation of land in Trinidad for use as a quarry from which stone would be taken to construct a nearby naval base.  The compensation owing to the owners was to reflect the “value of the quarry as a going concern”.  The quarry owners argued that the value of their quarry should include consideration of the higher profits they would make because their stone was to be used for the naval base.  The Judicial Council, which was the highest court for cases from Trinidad (as it was at one time the highest court for Canadian cases), decided against the quarry owners.  The increase in the market value of the property was due entirely to the expropriating authority’s plan to build the naval base.  The expropriating authority benefitted from a nearby and accessible source of a large quantity of stone, but without the plan for the naval base construction this did not increase the value of the quarry to the owners.  Value to the owner, not value to the taker.

The Supreme Court of Canada addressed similar issues in the recent Canadian case, which originated in Newfoundland.  In 1917, a landowner was issued a Crown grant for the purposes of harvesting trees to produce barrels and for firewood.  The grandchildren of the original grantee still own a 7.36-acre portion of the original Crown grant.  This remaining land is in a natural state, covered in trees and shrubs, and is located within a watershed area that drains into a river used by the City of St. John’s for its local water supply.  For decades, the land has been made subject to a series of by-laws and regulations prohibiting development in the watershed area.

Since the 1990s, the grandchildren landowners have attempted to obtain permission to develop their property.  In 2011, they asked the City about the possibility of residential development and also other activities such as tree harvesting, farming, saw milling, and the installation of solar panels and wind turbines.  The City advised that those uses were not permitted and that the land must be kept “unused” in its “natural state”.  The landowners went ahead in spite of this and applied for permission to develop a 10-lot residential subdivision.  Their application was rejected, in part on the basis of the watershed zoning that prohibited most if not all forms of development on the landowners’ property.

The landowners sued the City of St. John’s in court and obtained a declaration (upheld by the Court of Appeal of Newfoundland and Labrador and not contested before the Supreme Court of Canada) that their property had been “constructively expropriated”.  The Court of Appeal ruled that the City had acquired a “beneficial interest” in the land that consisted of “the right to a continuous flow of uncontaminated groundwater downstream to the City’s water facilities”.  While the grandchildren landowners had acquired the land their grandfather had received through the Crown grant, all they had now was a right to keep the land “unused in its natural state”.  The Court of Appeal concluded that this was a taking of “virtually all of the aggregated incidents of ownership” and that the landowners had no remaining reasonable use of the property.

The case that came to the Supreme Court arose from a legal question posed to the lower court in Newfoundland by the Board of Commissioners of Public Utilities, the authority tasked with determining the amount of compensation owing to the landowners.  The landowners were arguing that compensation should be based on land value as if the watershed regulations were not in place and a medium-density residential development were possible.  The City contended that value should be based on a highest and best use of agriculture and forestry that would be acceptable to the City and would not cause adverse impact to the watershed (something possible within the watershed zoning).  The lower court in Newfoundland relied on the Pointe Gourde principle and sided with the City.  The Court of Appeal in Newfoundland reversed this decision. 

The Supreme Court of Canada restored the decision of the lower court on the basis of the factual finding that the watershed zoning “was an independent enactment and not made with a view to expropriation”.  If the City had enacted the zoning specifically for the purpose of reducing the value of the landowners’ land so that it could then take the land for a public use, the value of the land could be determined as if the land were not subject to the zoning and was eligible for subdivision development.  However, as it was found that the zoning was enacted independent of any plan to “take” (constructively) the land, the landowners were only entitled to compensation based on the value of the land with the watershed zoning regulations in place.

Read the decision at: 2024 SCC 17 (CanLII).

Supreme Court of Canada digs up the dirt on the Sale of Goods Act

AS PREVIOUSLY PUBLISHED IN THE RURAL VOICE:

The Supreme Court of Canada issued a decision at the end of May, 2024 in a case about topsoil.  Of course, the case was not only about topsoil.  Topsoil just happened to be the subject matter of the contract at the heart of the dispute between the parties.  The Supreme Court chose to hear the case because it involved important questions about contracts for the sale of goods and the statutory conditions that are implied through legislation to form part of those contracts.

With the exception of Quebec, all Canadian provinces and territories have a statute governing the sale of goods that is modelled on a 19^th-century law from the United Kingdom – the Sale of Goods Act, 1893.  That UK legislation codified common law (judge-made, non-statutory) that had developed in the English courts throughout the 19^th century.  Passed down to Canadian law were three implied obligations that certain sellers of goods can owe to buyers related to the characteristics or properties of the goods sold even though the contract between seller and buyer might not mention the obligations: 1) fitness for purpose (that where the buyer makes known to the seller the particular purpose for which the goods are to be used, the goods will be reasonably fit for the purpose); 2) merchantability (that the goods sold by description will be of “merchantable” or reasonable quality and fit for sale in the usual course of trade); and, 3) correspondence with description (that goods sold by description will match the seller’s description of the goods). 

According to the Supreme Court in its recent decision, those implied obligations were likely imposed by judges to relieve buyers from the harsh effect of the law of “caveat emptor” (buyer beware) that left all of the risk related to the characteristics or properties of the goods on the buyer where the contract was silent on those matters.  In Ontario, the Sale of Goods Act contains the three implied obligations of fitness for purpose, merchantability and correspondence with description and makes them implied “conditions” rather than “warranties”.  Contractual terms are “conditions” where they are fundamental to the contract: breach of a condition would give the buyer the right to reject the goods from the seller.  Contractual terms that are not fundamental to the contract are “warranties”: breach of a warranty would give the buyer a claim for damages but would not entitle the buyer to reject the goods.  Where a condition is breached, the buyer would actually have the option to reject the goods or keep the goods and sue for damages (as if a warranty had been breached).

In the case that went to the Supreme Court, the issue was whether or not the parties to a contract for the supply of topsoil had “contracted out” of the implied condition in the Sale of Goods Act that the goods sold by description correspond with the description.  Parties don’t have to leave the implied conditions in place – they can use express language in their agreement to say that the implied conditions will not apply.

The buyer in the case was engaged by a municipality to remediate flooding in an area, which involved the removal and replacement of topsoil.  The buyer needed topsoil with a specific composition in order to provide the drainage required to solve the flooding problem.  The topsoil was sourced from the seller on the basis of the seller’s description, which included laboratory reports based on topsoil samples taken six weeks prior to the eventual delivery of the soil.  Although the seller warned that updated test results should be obtained, the buyer had missed project deadlines and wanted immediate delivery of the soil to avoid paying damages to the municipality.  The seller and the buyer agreed to go ahead with the transaction and delivery of the soil, but with exclusions of implied conditions.  The buyer would have the right to test and approve the topsoil before it was shipped to the site, but if the buyer waived that right the seller would not be responsible for the quality of the topsoil once it left the seller’s facility.

It turned out that the topsoil delivered had substantially more clay content than indicated by the earlier test results.  The soil didn’t drain the way it was supposed to and ponding developed on the project site, forcing the buyer to remove the topsoil and replace it with new topsoil that would drain properly.  The buyer sued the seller for damages claiming that the seller failed to deliver topsoil that had the composition of the soil shown in the test results that had been provided.

The majority of the members of the Supreme Court (there was one dissenting opinion) sided with the seller, finding that the parties had contracted out of the implied “correspondence with description” condition in the Sale of Goods Act.  Although the exclusion language used by the seller and buyer in their contract referred to “quality”, which is arguably something different than the matching of “identity” between the description of the soil (the test results) and the soil as delivered, the Supreme Court found that the buyer had chosen deliberately to assume the risk of not having further testing carried out on the topsoil before delivery.  The use of the word “quality” in the exclusion clause didn’t allow the buyer to avoid the objective intention of the exclusion clause – that the seller was not to be held liable for any claim relating to the topsoil.

Read the decision at: 2024 SCC 20 (CanLII).

 

Who will clean up when the tenant walks away?

AS PREVIOUSLY PUBLISHED IN THE RURAL VOICE:

When a residential tenant vacates a farmhouse, they may leave behind personal items; they may leave behind a mess.  The landlord might succeed in requiring the former tenant to clean up, or the landlord himself or herself might have to clean up.  When there’s a change in a farm land tenancy, the landlord or the new tenant may need to apply fertilizers or pesticides, pick stones, or conduct extra tillage to transition from the previous tenant’s cropping practices to new ones.  But what happens when an industrial tenant or occupant of a farm property walks away or goes bankrupt?  What happens when an oil well, a pipeline, or a wind turbine is abandoned in place?

The Supreme Court of Canada very recently addressed this question in the context of orphaned oil wells in Alberta.  An orphan well is one for which the cost of remediation required for abandonment of the well exceeds the actual monetary value of the well.  The Supreme Court was tasked with deciding whether a bankruptcy trustee, in administering the estate of a bankrupt oil and gas company, can renounce or disclaim the company’s interests in orphan oil wells (and walk away from remediation obligations) while at the same time selling off the company’s other valuable wells and assets in order to maximize the recovery by creditors. 

The case involved Redwater Energy Corporation, a publicly traded oil and gas company. In 2015, Redwater's principal secured creditor, the Alberta Treasury Branches ("ATB"), commenced enforcement proceedings after Redwater couldn't meet its financial obligations.  On May 12, 2015, Grant Thornton was appointed Receiver for Redwater under the Bankruptcy and Insolvency Act ("BIA").  In July, 2015, Grant Thornton told the Alberta Energy Regulator (“AER”) that it would be taking control of only 20 of the 127 Redwater oil and gas licences.  The AER responded by issuing orders "for environmental and public safety reasons" requiring the abandonment and remediation of the 107 wells that the Receiver was looking to “disclaim”.  In October, 2015, a bankruptcy order was issued for Redwater.  In November, 2015, Grant Thornton, now trustee in bankruptcy for Redwater, disclaimed the assets it had previously renounced in its capacity as Receiver, and indicated to the AER that it did not intend to comply with the environmental remediation orders.

The AER and the Orphan Well Association ("OWA") brought court applications for declarations that the disclaimer was void.  They also sought an order compelling Grant Thornton, as trustee, to comply with the abandonment and remediation orders issued by the AER.  Grant Thornton brought a cross-application for approval of the sale of certain assets, and a ruling on the constitutionality of the AER's position.  At first instance, the Chambers Judge sided with the trustee in bankruptcy.  On appeal before the Alberta Court of Appeal, two of three judges sided with the Trustee, while one judge would have ruled that a portion of the sale proceeds from the viable wells must be set aside to meet the expected cost of remediating the orphan wells.

The Supreme Court of Canada was also split on the case (5-2), but this time in favour of the AER position.   The majority found that the AER’s use of its regulatory powers to require remediation of the environment was not in conflict with the BIA, so that the doctrine of federal paramountcy (which would resolve the conflict in favour of the federal bankruptcy legislation and against the provincial energy and environmental legislation) was not triggered.  The Court found that the BIA did not empower the bankruptcy trustee to walk away from the environmental liabilities of the estate it was administering.  Also, as the AER was not asserting any claims provable in the bankruptcy, the AER’s exercise of its authority did not upend the priority scheme established by the BIA.  The AER regulatory scheme and the federal bankruptcy scheme co-existed with and applied alongside each other.

As Chief Justice Wagner wrote:

Bankruptcy is not a licence to ignore rules, and insolvency professionals are bound by and must comply with valid provincial laws during bankruptcy. ... The Abandonment Orders and the LMR requirements are based on valid provincial laws of general application — exactly the kind of valid provincial laws upon which the BIA is built. … End-of-life obligations are imposed by valid provincial laws which define the contours of the bankrupt estate available for distribution.

Leases, easement agreements, and other similar land use agreements can and often do contain clauses requiring the tenant or occupant to remove its facilities and to restore the land to previous conditions once the tenant or occupant ceases operations and vacates the land.  However, the protection afforded to landowners in such clauses is only as good as the tenant or occupant – if operations have ceased, and there is no money left, the promise to clean up and restore the property is an empty one.  Wherever possible, landowners should require additional security to guarantee fulfillment of contractual clean-up and restoration obligations by tenants and occupants.  Landowners should not assume that government funds for orphaned and abandoned facilities will be sufficient or even available.

Read the Supreme Court's decision at: Orphan Well Association v. Grant Thornton Ltd.

Supreme Court dismisses First Nation's appeal of Enbridge Line 9 Reversal

The Supreme Court of Canada released its decision today in the Chippewas of the Thames First Nation (COTTFN) appeal of the National Energy Board ("NEB") approval of the Enbridge Pipelines Inc. Line 9 Reversal Project.  The Court has dismissed the appeal on the basis that a federal board or tribunal can, under certain conditions, provide the process through which the federal Crown discharges its duty to consult with First Nations.  In this particular case, the Court found that the NEB process, in which the COTTFN participated, was sufficient to discharge the Crown's duty.

Read the decision at: COTTFN v. Enbridge and NEB et al.

Court of Appeal confirms inconsistent use requirement for adverse possession in Ontario

In a recent post, I wrote about a B.C. adverse possession case that made it all the way to the Supreme Court of Canada - Nelson v. Mowatt.  The Ontario Court of Appeal has now released a decision in which it comments on the Mowatt decision and the question of whether an Ontario adverse possession claimant must satisfy the "inconsistent use requirement" (by demonstrating that his or her use of disputed lands was inconsistent with the intended use of the "true owner").  Here is what the Court says:

A note on Mowatt

[29]      After this appeal was heard, the Supreme Court released Mowatt, a decision concerning the law of adverse possession in British Columbia. We refer to Mowatt in para. 20, above. In Mowatt, the Supreme Court also noted, citing Masidon and other cases, that the inconsistent use requirement appears in the jurisprudence of Ontario.  It held that the law of British Columbia governing adverse possession does not require a claimant to demonstrate that his or her use of disputed lands was inconsistent with the intended use of the “true owner”. At para. 27, Brown J., for the court, wrote: “Whether the requirement is properly applicable in other provinces remains an open question subject to examination of their respective legislative histories, the wording of their particular limitation statutes, and the treatment of these matters by the courts of those provinces.”  

[30]      In supplemental submissions following the release of Mowatt, the appellants effectively urge this panel to overrule Masidon and eliminate the inconsistent use requirement in Ontario, without regard to whether there is mutual or unilateral mistake.  However, this panel is not in a position to overrule Masidon.

So, it seems that the question left open by the Supreme Court has (relatively) quickly been answered by the Ontario Court of Appeal: inconsistent use remains a requirement of the law of adverse possession in Ontario (see Masidon Investments Ltd. v. Ham).

Read the Ontario Court of Appeal's decision at: Sipsas v. 1299781 Ontario Inc.