We recognize that most people find expropriation to be an upsetting and bewildering process. The purpose of these FAQ’s are to provide you with some general information concerning the law of expropriation in Ontario, and to also provide you with some insight into expropriation procedures and the issues and choices you may face during this process. These FAQ’s are not intended to constitute legal advice or to be a substitution for such legal advice and must not be relied upon as such. You should consult a lawyer concerning your specific fact situation.
I’VE LEARNED THAT MY PROPERTY MAY BE EXPROPRIATED. WHAT DOES THIS MEAN?
Expropriation is the compulsory taking of real property from a private owner by a statutory authority. Expropriation law did not exist at common law and is entirely a creature of federal and provincial statutes.
The power to expropriate may be exercised by governments as well as by many other bodies and institutions, including municipalities, hospitals, universities and public utilities, all of which have expropriation powers delegated to them by legislation. In addition, privately owned pipeline companies may acquire expropriation powers under the National Energy Board Act. All expropriating bodies are referred to as the “Expropriating Authority.”
The power to expropriate encompasses all types of interests in land, some of which fall short of complete ownership. Interests in land which may be expropriated include not only the fee simple interest, but also mortgage interests, interests in tenancies, registered and unregistered easements and licenses. In other words, almost any interest in land is capable of being expropriated.
An expropriation has the effect of transferring ownership of the expropriated property to the Expropriating Authority effective on the date of registration of the Plan of Expropriation. However, as stated above, the Expropriating Authority need not expropriate the fee simple interest (i.e. the entire ownership interest) in the owner’s property. Often, the interests which are expropriated are less than the fee simple interest in the land. Pipeline expropriations are an example, where the pipeline company normally expropriates an easement or right-of-way under the National Energy Board Act or other provincial pipeline expropriation legislation. Another common example is the expropriation of Hydro easements and rights-of-way. All persons having legal interests in land (including tenants) are referred to as “Statutory Owners”.
CAN I DO ANYTHING TO STOP THE EXPROPRIATION OF MY PROPERTY?
The Expropriations Act, R.S.O. 1990, c. E. 26, permits Statutory Owners facing expropriation to object to the expropriation and to require a “hearing of necessity”. However, in many cases a Statutory Owner cannot successfully challenge the fact of an expropriation. Therefore the issue for the Statutory Owner often comes down to one of receiving adequate compensation for the interests which are being expropriated.
THE EXPROPRIATING AUTHORITY HAS TOLD ME THAT IT WOULD LIKE TO “BUY” MY PROPERTY. WHAT HAPPENS IF I DON’T WANT TO SELL IT TO THEM?
Expropriating Authorities must first attempt to negotiate the purchase of the required property before resorting to expropriation. If the Statutory Owner and the Expropriating Authority are unable to negotiate the purchase of the required property interests the Expropriations Act requires the Expropriating Authority to proceed with a formal expropriation by obtaining approval for the proposed expropriation and by registering a Plan of Expropriation. The Expropriating Authority must serve all Statutory Owners with a Notice of Intention to seek approval for the expropriation. It is at this stage that a Hearing of Necessity can be requested by a Statutory Owner which has the effect of halting the approval process until the necessity of the proposed exproration has been decided by a Board of Inquiry. If such a Hearing is not requested or if the Board rules that the proposed expropriation is fair, sound and reasonably necessary in the public interest, the proposed expropriation then proceeds to the approval stage. Once approval is obtained, a Plan of Exproration respecting the property is registered with the Land Registry Office which vests title to the property with the Expropriating Authority. A Notice of Expropriation is then served by the Expropriating Authority upon all Statutory Owners, being all those who have an interest in the property.
IF I DON’T AGREE TO SELL AND MY PROPERTY IS EXPROPRIATED, WILL I BE PAID FOR MY PROPERTY AND IF SO, HOW MUCH WILL I BE PAID?
Within 90 days of registration of the Plan of Expropriation and prior to taking possession of the expropriated property or interests, the Expropriating Authority must serve a “statutory offer” upon all Statutory Owners, which is referred to as a Section 25 Offer. The Section 25 Offer is a “without prejudice” offer of compensation, which the Statutory Owner is entitled to accept on a without prejudice basis while still exercising his or her right to dispute the amount offered and to claim further compensation under the Expropriations Act. The Section 25 Offer must be accompanied by the Expropriating Authority’s formal appraisal of all property interests expropriated showing how the amount of the Section 25 Offer has been calculated. The Expropriations Act requires that the Section 25 Offer be based upon the full and fair market value of the property and interests taken plus the amount of any injurious affection. The Section 25 Offer is not required to include any amounts for the Statutory Owner's business losses, disturbance and other damages.
WHAT IF I DISAGREE WITH THE AMOUNT BEING OFFERED BY THE EXPROPRIATING AUTHORITY?
Unfortunately, the section 25 appraisals prepared for Expropriating Authorities are frequently found to understate the market value of the property and interests taken and the extent to which the Statutory Owner’s remaining lands have been injuriously affected. As a result many Statutory Owners are dissatisfied with the amount of the Section 25 Offer received from the Expropriating Authority. However, as stated above, the Section 25 Offer is a without prejudice offer of compensation, which means that the expropriated owner is entitled to accept the Section 25 Offer while disputing the amount of the compensation.
After receipt of the Section 25 Offer, the Statutory Owner may commence legal proceedings against the Expropriating Authority by filing a Notice of Arbitration and Statement of Claim with the Ontario Municipal Board (“OMB”) which has jurisdiction to decide compensation issues under the Expropriations Act. As a permanent compensation tribunal the members of the OMB have acquired considerable expertise in dealing with expropriation compensation claims.
The Expropriating Authority is entitled to defend the Statutory Owner’s claims by filing a Reply, and the compensation claim will then proceed very much in the same manner as a regular law suit in the Superior Court of Justice. The Ontario Rules of Civil Procedure apply to the proceedings with some changes and full document production and examinations for discovery must be completed before the claim can be listed for a hearing by the OMB.
IS THE EXPROPRIATING AUTHORITY LIABLE TO PAY MY COSTS?
When a Statutory Owner proceeds to litigation before the OMB and the Board makes an Order determining the amount of compensation payable, the Statutory Owner’s legal, appraisal and other costs are recoverable by the Statutory Owner from the Expropriating Authority so long as the amount awarded by the Board is at least 85% of the amount of the Section 25 Offer of compensation. The costs must be reasonable and must have been actually incurred by the Statutory Owner to determine the amount of the compensation. The costs may be assessed at the request of the Expropriating Authority, but the assessment will be as between a solicitor and his own client and therefore provides the highest level of indemnification available at law, which is referred to a “Full Indemnity”. Where a settlement of the Statutory Owner’s claim is reached without the requirement of an OMB hearing, the Expropriating Authority will almost invariably agree to reimburse the owner for his or her legal, appraisal and other costs. In any other case costs may be awarded at the discretion of the OMB.
WHAT TYPES OF COMPENSATION AM I ENTITLED TO CLAIM ?
There are four different types of claims that may be advanced under the Expropriations Act:
1) Fair market value for the property taken.
2) Injurious affection, meaning severance damage or diminution in value to the expropriated owner’s remaining property, including diminution in value caused by the construction or other public work flowing from the expropriation. Claims for injurious affection are also available in cases where no land or other interest was expropriated but where the construction of a public work has diminished the value of the owner’s property.
3) Disturbance damages, meaning the losses, costs or expenses involved in the dislocation and inconvenience which the Statutory Owner has suffered due to the expropriation of his property.
4) Business losses where a business is affected by the expropriation including compensation for the loss of goodwill.
HOW WILL THE MARKET VALUE OF MY PROPERTY BE DETERMINED?
As stated above, an Expropriating Authority must firstly compensate the expropriated owner for the fair market value of the property taken. Over the years there has been a great deal of dispute between Expropriating Authorities and owners concerning the meaning of the phrase “market value”. An often quoted definition was provided by the New Brunswick Court of Appeal in the case of Henderson v. Minister of Tourism:
“Market value is defined herein as being the highest price in terms of money which a property would bring if exposed for sale on the open market, allowing a reasonable time to find a prudent, fully informed purchaser, buying with knowledge of all the uses to which the property could be adapted or is capable of being used, and purchasing from an equally prudent and informed vendor, with neither party acting under duress.”
Under the guidelines which govern professional real estate appraisers in Ontario, the phrase “market value” is defined as:
“the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
1. Buyer and seller are typically motivated;
2. Both parties are well informed or well advised, and acting in what they consider their best interest;
3. A reasonable time is allowed for exposure in the open market;
4. Payment is made in terms of cash in Canadian dollars or in terms of financial arrangements comparable thereto;
5. The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.”
WHAT IS INJURIOUS AFFECTION?
Injurious affection claims include claims for damages caused by the construction or use of the public work where part of the expropriated owner’s land is taken. Where no land is taken, a claim may be made for the reduction in market value of the expropriated owner’s land and for personal and business damages arising from the construction of the public work only.
In regards to market valuation principals, injurious affection claims are generally governed by two sets of rules, each with a different rationale, depending on whether some land or no land was taken:
1. Partial taking – deemed to be a willing buyer and seller acting freely in a notional market setting.
2. No land taken – the loss is limited to construction only, but not the use. These claims are based on tort principles (i.e. trespass, nuisance and negligence). These claims are not based upon principles of vendor and purchaser, but deal with the interference by the public authority with the owner’s use and enjoyment of his or her land. Compensation is awarded as a substitute for damages at civil law.
The courts have set out the legal requirements which must be met for such a claim to succeed, meaning that the expropirated owner must prove the following:
“(1) The damage must result from an act rendered lawful by statutory powers of the authority performing the act;
(2) The damage must be such as would have been actionable under the common law, but for the statutory powers exemption;
(3) The damage must be an injury to the land itself and not a personal injury to its owner or an injury to a business or trade;
(4) The damage must be occasioned by the construction of the public work, and not by its use.”
WHAT IF THE EXPROPRIATION RESULTS IN A LOSS OF ACCESS TO MY REMAINING PROPERTY?
Loss of access claims are a form of injurious affection and are based upon the impairment of the expropriated owner’s common law right of access to his or her property. It is considered as an actual loss of an incident to property ownership, but need not be the loss of a registerable right. Therefore, there need not be a formal expropriation proceeding taken by the Expropriating Authority. The loss can be very serious, including land-locking the property, or bypassing and re-routing traffic past a commercial property.
WHAT IF THE EXPROPRIATION DIVIDES MY FARM OR COMMERCIAL PROPERTY?
In another common form of injurious affection, the severance of a farm or commercial property by the construction of a highway or right-of-way may cause excess operating costs associated with increased travel distances for machinery and equipment. These excess operating costs may be claimed from the Expropriating Authority as damages for injurious affection.
WHAT ARE “DISTURBANCE DAMAGES”?
Disturbance loss claims generally refer to those losses suffered by an Statutory Owner by reason of having to vacate the expropriated property, including a claim for goodwill if a business operated from the property cannot be relocated. The types of disturbance claims are unlimited, ranging from the costs of moving an entire factory to the purchase of new contents for a home. If the loss is created as a direct result of the expropriation or in anticipation of the expropriation, it is recoverable from the Expropriating Authority.
WHAT HAPPENS IF MY EXPROPIRATED PROPERTY IS SUBJECT TO A MORTGAGE?
Normally, security holders such as mortagees are entitled to be paid out according to the terms of their security agreement or to be paid a “bonus” for early repayment of their loan. Where the expropriation involves a partial taking only, a mortgagee is paid an amount out of the compensation for market value and injurious affection which is equal to the ratio which the amount outstanding on the mortgage bears to the value of the entire property as at the date of expropriation. Registered judgment creditors are not considered to be security holders and are therefore not entitled to be paid directly.
WHAT HAPPENS IF I AM A TENANT OF PROPERTY TO BE EXPROPRIATED?
Tenants are considered to be Statutory Owners and are entitled to be compensated for injurious affection, disturbance and relocation costs, and loss of income. They are also entitled to be paid for the loss of their tenancy, i.e., the difference between the present value of the remaining term of the lease and the current market value for the lease of a similar property.
WHAT ARE THE INCOME TAX AND PROPERTY TAX IMPLICATIONS OF AN EXPROPRIATION?
Under the Income Tax Act, an expropriation is a deemed to be disposition of property. Either on a fair market basis or an equivalent reinstatement basis, there is likely to be some adjustment of the undepreciated capital cost of the fixed assets, and income tax implications related to the recovery of any business losses. Taxes are payable on recapture of capital cost allowances. Business losses recovered as part of the compensation paid are taxable as income.
While corporate taxes payable on expropriation compensation are not normally claimable, there may be a claim made for tax liabilities which have been accelerated because of the expropriation.
As well, if the tax liability arising out of business loss recovery is greater than that arising out of the recapture of capital cost allowance, it may be in the owner’s interest to allocate the proceeds of the claim to asset values instead of income values, to the extent that this is possible. The advice of an accountant or tax lawyer should be sought.
In addition to income tax implications, there may also be property tax implications where the business or home is relocated from a property with a lower property tax rate to a replacement property with a higher property tax rate. The increased property tax payable in the new location can be claimed as disturbance damages.
WHAT IF I HAVE ANY FURTHER QUESTIONS?
These FAQ's are intended to provide you with only a general overview of the law of expropriation in Ontario as it effects property owners and tenants facing the prospect of expropriation. Not all of the principles discussed above may apply to your case and some specific issues peculiar to your case may not have been addressed. We invite you to contact us to discuss any questions you might have arising out of your specific situation.