747926 Ontario Limited et al. v. Upper Grand District School Board (formerly known as Wellington County Board of Education)

[Indexed as: 747926 Ontario Ltd. v. Upper Grand District School Board]

56 O.R. (3d) 108

[2001] O.J. No. 3909

Docket No. C35671

Court of Appeal for Ontario

Osborne A.C.J.O., Finlayson and Weiler JJ.A.

October 10, 2001

Expropriation -- Compensation -- Determination of market value -- Injurious affection -- Disturbance damages -- Developer's profit not recoverable as disturbance damages -- Interest -- Interest on disturbance damages not recoverable -- Expropriations Act, R.S.O. 1990, c. E.26

The claimants purchased land to develop a residential subdivision, and the Upper Grand District School Board expropriated 7.86 acres of it for a school site. The claimants sought compensation under the Expropriations Act, and there was a hearing before the Ontario Municipal Board ("OMB"). The OMB awarded $2,478,000 as the market value for the expropriated land. In determining the market value, the OMB employed a before-and-after methodology and the "cost-of-development" approach, which involves identifying the gross retail value of similar already subdivided and serviced lots and then deducting the estimated servicing and other costs that would not yet have been incurred in relation to the expropriated lands. The expert witnesses for both parties agreed that lost developer's profit is to be deducted. The Board applied the calculation to the number of lots lost from the expropriation to determine the market value of the lands taken. The OMB dismissed a claim for damages for injurious affection base d on the reduced value of lots adjacent to the school site as not having been roven. It dismissed a claim for lost developer's profit, and held that this claim was not recoverable as disturbance damages under the Act or at all.

The claimants appealed, and the School Board cross-appealed to the Divisional Court. The Divisional Court purported to apply the Supreme Court of Canada's decision in Dell Holdings v. Toronto Area Transit Operating Authority and ordered that the lost developer's profit of $437,000 was recoverable along with interest. It dismissed the School Board's cross appeal, which had asserted that the OMB had erred in applying a before- and-after land value methodology in calculating the market value of the land.

Leave to appeal having been granted, the School Board appealed to the Court of Appeal.

Held, the appeal should be allowed with costs.

The claimants were not entitled to compensation for developer's profit. The decision in the Dell Holdings case was distinguishable. In the Dell Holdings case, a developer was seeking compensation for business losses that arose because the expropriating authority delayed in determining what land it needed, and business losses that were a natural and reasonable consequence of the expropriation flowed from the development delay. In the immediate case, the claimants were not seeking compensation for business losses that arose before the expropriation. Rather, they claimed their anticipated prospective profit that they would have received sometime after the valuation date upon the sale of the expropriated lands. The Divisional Court erred in adding the developer's profit back into the compensation award as disturbance damages. This profit was not recoverable under the guise of disturbance damages.

The Divisional Court, however, did not err in rejecting the School Board's appeal about the use of the before-and-after methodology to determine market value. This methodology is expressly provided for in s. 14(3) of the Act, which concerns partial takings where the part taken is of a size, shape or nature for which there was no general demand or market. While s. 14(3) did not apply to the immediate case, the before-and- after methodology could be employed.

The determination that there was no basis for the award of lost developer's profit as disturbance damages made the question of interest on the award moot. However, as this was a matter of controversy, the question should be addressed, and the answer was that there was no authority in the Act for interest on disturbance damages.

APPEAL and CROSS-APPEAL from an order of the Divisional Court (MacFarland, Lang and Ground JJ.) (2000), 2000 CanLII 29057 (ON SCDC), 51 O.R. (3d) 25 overturning an award of the Ontario Municipal Board proceedings under the Expropriations Act, R.S.O. 1990, c. E.26

Toronto Area Transit Operating Authority v. Dell Holdings Ltd., 1997 CanLII 400 (SCC), [1997] 1 S.C.R. 32, 31 O.R. (3d) 576n, 142 D.L.R. (4th) 206, 206 N.R. 321, 36 M.P.L.R. (2d) 163, 7 R.P.R. (3d) 1 (sub nom. Dell Holdings v. Toronto Area Transit Operating Authority), distd Other cases referred to Blatchford Feeds Ltd. v. Board of Education for the City of Toronto (1974), 6 L.C.R. 355 (Ont. L.C.B.); Judson v. University of Toronto (Governors), 1971 CanLII 25 (SCC), [1972] S.C.R. 553, 23 D.L.R. (3d) 80; LaFleche v. Ontario (Ministry of Transportation and Communications) (1975), 8 L.C.R. 77 (Ont. Div. Ct.); Selo Bouf v. Metropolitan Toronto (Municipality) (1987), 37 L.C.R. 367 (O.M.B.); Van den Elzen v. Ministry of Transportation and Communications (1985), 1985 CanLII 1988 (ON SC), 52 O.R. (2d) 261, 12 O.A.C. 29, 22 D.L.R. (4th) 317, 33 L.C.R. 289 (Div. Ct.) Statutes referred to Expropriations Act, R.S.O. 1990, c. E.26, ss. 13(2), 14, 18(1), 33(1)

Marc J. Somerville, Q.C., and John S. Doherty, for respondents (appellants). Stephen F. Waqué and Gabrielle K. Kramer, for appellant (respondent).

The judgment of the court was delivered by

[1] FINLAYSON J.A.: -- The appellant, the Upper Grand District School Board ("School Board"), appeals the decision of the Divisional Court dated October 5, 2000, allowing the appeal of the respondents, 747926 Ontario Limited and The Realty Group Corporation ("claimants"), and awarding their claim for lost developer's profit together with interest on that award. Further, the School Board appeals the dismissal of its cross- appeal with respect to the determination of market value by the Ontario Municipal Board ("OMB") based on a method that it submits had no application in fact and law to the Claimants' property.

[2] The appeal arises out of the expropriation by the School Board of a 7.86 acre parcel of land for a school site from the claimants. The claimants are developers and had purchased land in January 1988 for purposes of developing a residential subdivision. The OMB conducted a hearing to determine the amount of compensation owing to the claimants under the Expropriations Act, R.S.O. 1990, c. E.26 ("Act") and held that the claimants were entitled to $2,478,000 as compensation for the expropriation.

[3] Subsection 13(2) of the Act sets out the compensation to which an owner is entitled and provides as follows:

13(2) Where the land of an owner is expropriated, the compensation payable to the owner shall be based upon,

(a) the market value of the land;

(b) the damages attributable to disturbance;

(c) damages for injurious affection; and

(d) any special difficulties in relocation,

but, where the market value is based upon a use of the land other than the existing use, no compensation shall be paid under clause (b) for damages attributable to disturbance that would have been incurred by the owner in using the land for such other use.

[4] Subsection 18(1) of the Act deals with disturbance damages and provides as follows:

18(1) The expropriating authority shall pay to an owner other than a tenant, in respect of disturbance, such reasonable costs as are the natural and reasonable consequences of the expropriation, including,

(The three sub-clauses deal with expropriation of an owner's home, replacement costs, and relocation costs and are not applicable to this case.)

[5] The claimants sought compensation for: (a) the market value of the expropriated land; (b) damages for injurious affection based on the reduced value of lots adjacent to the school site; and (c) lost developer's profit as disturbance damages. The OMB adopted the evidence of the claimants' experts regarding the market value of the expropriated land and ordered $2,478,000 as market value compensation. However, the OMB denied the claimants' claim for lost developer's profit as disturbance damages, ruling that such profit is not compensable under the Act as disturbance damages or at all.

[6] The claimants appealed to the Divisional Court and argued against the OMB's refusal to award lost developer's profit as damages attributable to disturbance. The parties agreed that the quantum of the lost developer's profit was $437,000. The Divisional Court allowed this appeal and ordered compensation for lost developer's profit in the amount agreed upon and awarded interest on this award. The School Board cross-appealed on the basis that s. 14(3) of the Act precludes the application of the before-and-after methodology that the claimants' experts used to determine market value. The Divisional Court dismissed the cross-appeal on the basis that it related to factual and evidentiary matters and that the School Board failed to establish any manifest errors or misapprehension of the evidence by the OMB.

Issues

[7] The School Board appeals with leave of this court and raises four issues in the appeal:

(a) Did the Divisional Court err in finding that a loss of developer's profit is compensable as disturbance damages under the Act?

(b) Did the Divisional Court err in concluding that Dell Holdings v. Toronto Area Transit Operating Authority, 1997 CanLII 400 (SCC), [1997] 1 S.C.R. 32, 142 D.L.R. (4th) 206 resolves this matter?

(c) Did the OMB err in applying s. 14(3) of the Act?

(d) Did the Divisional Court err in allowing interest on the award for lost developer's profit?

Decisions below

OMB

[8] The OMB, in its reasons for judgment, first assessed the market value of the expropriated land pursuant to s. 13(2)(a) of the Act. Preliminary to its market valuation analysis, the OMB determined the number of lots that the claimants could have developed but for the expropriation. The OMB observed that the planners for the claimants and the School Board each adopted a similar planning analysis of mapping out hypothetical lot patterns in order to determine the number of lost lots. However, each planner used a different land base, with the result that each arrived at a different number of lost lots. The claimants' planner mapped out hypothetical lots on the larger piece of land from which the School Board carved out the school site and then subtracted the number of lots remaining after expropriation. She concluded, based on this calculation, that there were eighty lost lots. In contrast, the School Board's planner mapped out how many lots the school site alone could have yielded. He concluded that there were 64 lost lots.

[9] The OMB held that it must ignore the expropriation in order to arrive at a market value and that this requires determining the most efficient and realistic lot pattern that could have existed if the school site was integrated with the rest of the development. The OMB found that the number of lost lots was 76. In making this finding, the OMB adopted the claimants' calculation of the number of lost lots with one small correction that is not important for purposes of this appeal.

[10] The OMB then continued with its analysis of the market value of the expropriated land. It observed that there was agreement that a "cost-of-development" approach was appropriate for this valuation. The first stage of the cost-of-development approach involves identifying the gross retail value of similar but already subdivided and serviced lots. The expert witnesses called by the parties presented different comparables to establish gross retail values. The second stage of the cost-of- development approach involves deducting the estimated servicing and other costs included in the gross retail values that would not yet have been incurred in relation to the expropriated land. The expert witnesses for both parties agreed that lost developer's profit is to be deducted at the second stage of the cost-of-development approach. However, the expert witnesses differed significantly in their opinions about the total amount of the development costs; in part because the claimants' expert used a "before-and-after" methodology to determine total development costs whereas the School Board's witness did not.

[11] The OMB accepted the claimants' evidence regarding the appropriate comparables to establish gross retail values and regarding the total development costs to be deducted from the gross retail values. Based on this evidence, subject to the minor adjustment regarding the number of lost lots, the OMB concluded that claimants were entitled to $2,478,000 compensation for the market value of the expropriated land.

[12] The OMB next considered the claim for damages for injurious affection under s. 13(2)(c) of the Act. The claimants claimed $39,000 that it alleged represented the loss in the value of the unexpropriated property adjoining the school site. The OMB found that there was no strong evidence that a school reduced the value of adjacent lots and denied this claim.

[13] The OMB last considered the claimants' claim to recover, as disturbance damages under s. 13(2)(b) of the Act, the lost developer's profit that was deducted when calculating market value using the cost-of-development approach. The OMB denied this claim, stating as follows:

It is clear from textual and other evidence that the normal, conventional and accepted practice among appraisers and valuators is to consider the loss due to the taking of the land to be the value of the land only, to which may be added injurious affection and disturbance damages. The texts clearly indicate that, in arriving at the net loss to be compensated, developer's profit is considered akin to all the other foregone costs of production and should be deducted to arrive at the net value. Both appraisers did this. The appraiser for the [claimants] calculated what he considered to be the loss of profit and included it as an "additional loss".

The Board agrees with what it regards as the conventional approach to valuation and to compensation for loss of value. It is appropriate to reduce the retail value of the land to arrive at its "raw value" by deducting the profit that would have been made, since the land was not developed and no profit is to be justifiably realised where no development has taken place. The Board can see no convincing basis to restore anticipated profit on development that does not take place, even if the fact that it does not take place is the result of the taking. Nor is this a disturbance damage in the sense in which it is used in the Expropriations Act.

Divisional Court

[14] In oral reasons, now reported at 2000 CanLII 29057 (ON SCDC), 51 O.R. (3d) 25, MacFarland J. stated that the issue regarding lost developer's profit is resolved by applying the general expropriation principles in Dell Holdings, supra, and concluded that disturbance damages can include lost developer's profit. She pointed out that the Supreme Court of Canada in Dell Holdings cited with approval LaFleche v. Ontario (Ministry of Transportation and Communications) (1975), 8 L.C.R. 77 (Ont. Div. Ct.); which awarded disturbance damages based on lost profit.

[15] MacFarland J. noted that the claimants' lands were at a stage of imminent development at the time of the expropriation; and that there was a strong market for subdivision lots in the area so that a sell-out of the claimants' lots was virtually guaranteed. She ordered the School Board to compensate for lost developer's profit; stating as follows [at p. 28 O.R.]:

In order to fully and fairly compensate the owner on the facts of this case, the profit, which was a virtual certainty, had to be brought back into the equation as disturbance damages. To do otherwise would be to unfairly deprive the land developer of the money he would have had but for the expropriation.

[16] MacFarland J.'s handwritten endorsement includes an award of interest on the lost developer's profit. However, she did not address interest in her oral reasons.

Analysis

[17] In my opinion, the decision of the Supreme Court of Canada in Dell Holdings, supra, has little application to this case. In Dell Holdings, the claimant was a developer which owned 40 acres of land that were suitable for development. The Toronto Area Transit Operating Authority ("Authority") announced that it intended to erect a GO Transit station on a portion of the claimant's property and submitted its plans for the station to the City of Mississauga. At the time that the Authority made its announcement, the claimant was negotiating with the City for the municipal approvals required to develop the lands. The City approved the Authority's station plans but withheld consideration of the development approvals sought by the claimant until the expropriation of the claimant's lands took place. The Authority took three years to expropriate the claimant's land; eventually taking only nine of the claimant's 40 acres. The OMB found that during this three-year delay, the claimant suffered actual business losses due to its inability to proceed with the development of its lands that were not expropriated. The OMB concluded that these business losses were recoverable by the claimant as disturbance damages. The Supreme Court of Canada upheld the OMB's award. The court stated that the City had no choice but to refuse all development approvals until the Authority determined what land it needed; and that it followed that it was the expropriation that caused the delay. The court held that the business losses flowing from the development delay were therefore the natural and reasonable consequences of the expropriation and, as such, compensable as disturbance damages.

[18] The claimants rely upon the following language of Cory J. in his interpretation of provisions of the Act dealing with disturbance at p. 47 S.C.R.:

The words of the section should be given their natural and ordinary meaning in the context of the clear purpose of the legislation to provide fair indemnity to the expropriated owner for losses suffered as a result of the expropriation.

[19] The claimants' problem is that there is no evidence in this case that the claimants suffered actual damage as a result of the expropriation. They had asserted that the unexpropriated land suffered damage by way of injurious affection but the OMB rejected this on a factual basis. I can conceive that in a proper case, an expropriation might reduce the profitability of the lots developed from the unexpropriated lands to a figure that is less per lot than would have been available if such developed lots were part of the larger pre-expropriation holding, but that is not what is being put forward here. Further, unlike the claimant in Dell Holdings, the claimants are not seeking compensation for business losses that arose before expropriation. Rather, the lost developer's profit claimed is the prospective profit that the claimants anticipate they would have received sometime after the valuation date upon the sale of the expropriated lands. Having failed, properly in my view, to obtain compensation for the loss of a prospective profit on the expropriated segment of the intended development, the claimants attempted to recover this same prospective profit under the guise of disturbance damages.

[20] This argument by the claimants illustrates the confusion that inevitably seems to arise when parties rely on a cost-of- development approach to establish market value. Subsection 13(2)(a) of the Act is clear that the compensation payable to the owner for a compulsory taking shall be the market value of the land. Absent any application of s. (b) "damages attributable to disturbance", (c) "damages for injurious affection", and (d) "any special difficulties in relocation", this is the entire compensation package. Market value does not include damages. It is defined in s. 14(1) as follows:

14(1) The market value of land expropriated is the amount that the land might be expected to realize if sold in the open market by a willing seller to a willing buyer.

[21] This definition makes no reference to any concept of profit because the market adjusts for the potential of the land for future development. A willing seller does not refuse to sell unless he gets the profit he anticipates will result when the land is subdivided into serviced lots. Rather, a willing seller takes what the market, in the form of a willing buyer, is prepared to pay. Where the seller has expended time and money to bring the land close to development by obtaining the required changes in zoning and by obtaining the necessary approvals for the installation of services, the market value of the land has been enhanced because the buyer will recognize that much of the work required of a developer to exploit the land for its residential potential has already been done. The market pays more for land that is close to subdivision.

[22] The parties appear to have agreed that establishing market value in this case through a direct comparison approach was difficult given the lack of suitable comparables for residential development land. The claimants' appraiser used the cost-of-development approach to establish the market value of the expropriated land. The School Board's appraiser used a combination of the cost-of-development approach and the direct comparison approach. However, the School Board's appraiser made the following cautionary remarks regarding the market value estimates derived from the direct comparison approach:

In the appraisal of residential development land, there are usually few sales that are truly comparable in terms of development timing, stage of completion, and exhibiting similar external market characteristics.

The estimate derived from the Direct Comparison Approach was weakened by the lack of truly comparable land sales.

[23] In my view, the cost-of-development approach is an unsatisfactory means to determine market value. However, it is not prohibited by the Act. Further, I do not think that my opinion as to the proper approach to determining market value justifies putting the parties to the expense of sending the matter back to the OMB for a new hearing. The expertise of the OMB merits deference in the market valuation process. The OMB accepted the cost-of-development approach by considering it and preferring the market valuation of the claimants' appraiser. I can only take from this that the OMB was not satisfied with the testimony of the School Board's appraiser who relied on a combination of the cost-of-development approach and the direct comparison approach. I accept that the OMB was satisfied that it had arrived at the market value of the subject site after removing the developer's profit in the calculation put forward by the claimants.

[24] From the reasons I have developed above, it follows that the Divisional Court was in error in adding the lost developer's profit back into the compensation award as disturbance damages. The court below seemed to approach this case as if it was presented with a personal injury matter, where the injured party is entitled to be made as whole as a money judgment can achieve. The Divisional Court circumvented the statutory framework of compensation set out in the Act by extracting lost developer's profit from a methodology directed to the market valuation of expropriated land and characterizing this lost developer's profit as disturbance damages.

[25] Disturbance damages are not intended to supplement the market value that s. 14(1) of the Act proscribes: they are directed to damages that are a consequence of the expropriation and are not addressed by the compensation for market value as described in s. 14(1). Relocation expense is a classic example of disturbance damages. Business disruption is another: see Blatchford Feeds Ltd. v. Board of Education for the City of Toronto (1974), 6 L.C.R. 355 (Ont. L.C.B.) and LaFleche v. Ontario (Ministry of Transportation and Communications), supra. If the loss of land means the loss of a business operated on the land, even a farming business, the expropriating authority may well be obliged to pay damages for the loss of the business. But these claimants were not operating a farm; they were in the process of converting farmland into residential housing. They may have been operating, as they maintain, a business. But it was a development business and, even looking at it from this perspective, the claimants were not put out of business. They lost inventory. More realistically, the claimants' development project was reduced in size by the loss of the school site. By receiving the market value of the school site, the claimants could replace their lost inventory by purchasing land elsewhere at market value.

[26] The complainants called as an expert Professor Lawrence B. Smith, a professor of economics at the University of Toronto with extensive practical experience in real estate development, to give evidence about developer's profit. Dr. Smith described developer's profit as the return for a developer's entrepreneurial talent and risk-taking. He argued that a developer's expected profit that is not realized because of expropriation must be included in the expropriation compensation paid to a developer if the developer is to be made whole. Stressing this testimony, the complainants sought to employ the purposive language of Dell Holdings, supra, to argue that the loss of developer's profit in certain cases is a natural and reasonable consequence of the expropriation, and therefore compensable as disturbance damages under s. 13(2)(b) of the Act. In my view, while there is no denying Professor Smith's qualifications, to the extent that his economic theory is used to advocate a method of compensation for compulsory taking that is not authorized by the Act, it is not admissible in evidence.

[27] The School Board also appeals from the Divisional Court's dismissal of its cross-appeal relating to s. 14(3) of the Act. The School Board submits that the OMB erred in accepting the claimants' use of the before-and-after methodology to calculate the number of lost lots and the market value of the expropriated land. The claimants submit that the before-and-after methodology is what is described in s. 14(3) of the Act:

14(3) Where only part of the land of an owner is taken and such part is of a size, shape or nature for which there is no general demand or market, the market value and the injurious affection caused by the taking may be determined by determining the market value of the whole of the owner's land and deducting therefrom the market value of the owner's land after the taking.

[28] I have some difficulty with this issue. I agree with the School Board that s. 14(3) is not of general application. This provision is directed to the taking of strips of land for road widening or easements for public utilities across large tracts of land. In those circumstances, the property expropriated has no sale value or, in some cases, no value whatsoever except to the expropriating authority. Subsection 14(3) of the Act has no application to a 7.86 acre parcel of land that may be viewed as a stand-alone subdivision, the taking of which, in the contention of the claimants, deprived them of a developer's profit of $437,000. That being said, the claimants' appraiser did not regard this section as the only authority for the use of a before-and-after methodology. Subsection 14(3) was put briefly to the claimants' appraiser in cross-examination. But the transcript excerpt that was filed on this appeal as well as the appraisal report makes it clear that the claimants' appraiser relied on the before-and-after methodology because the direct comparison approach couldn't be used and because, in his opinion, the before-and-after methodology best screened out the expropriation from the valuation process. The OMB accepted this methodology for similar reasons. In my view, s. 14(3) is simply one permitted use of the before-and-after methodology. I would leave to another time any discussion as to when a before-and-after approach is appropriate.

[29] Having determined that there is no basis for the Divisional Court's award of lost developer's profit as disturbance damages, the question of interest on the award is moot. However, since it appears to be a matter of some controversy, I would hold that there is no authority in the Act for interest on disturbance damages. Subsection 33(1) of the Act provides:

33(1) Subject to subsection 25(4), the owner of lands expropriated is entitled to be paid interest on the portion of the market value of the owner's interest in the land and on the portion of any allowance for injurious affection to which the owner is entitled, outstanding from time to time, at the rate of 6 per cent a year calculated from the date the owner ceases to reside on or make productive use of the lands.

Accordingly, there is no authority under the Act to award interest on disturbance damages: see Van den Elzen v. Ministry of Transportation and Communications (1985), 1985 CanLII 1988 (ON SC), 52 O.R. (2d) 261 at p. 264, 22 D.L.R. (4th) 317 (Div. Ct.); Judson v. University of Toronto (Governors), 1971 CanLII 25 (SCC), [1972] S.C.R. 553 at p. 563, 23 D.L.R. (3d) 80; and Selo Bouf v. Metropolitan Toronto (Municipality) (1987), 37 L.C.R. 367 at p. 370 (O.M.B.).

[30] Reverting to the four issues in this appeal, I would answer them as follows: (a) the Divisional Court erred in finding that a loss of developer's profit is compensable as disturbance damages under the Act; (b) the Divisional Court erred in concluding that Dell Holdings, supra, resolves this matter; (c) the OMB did not err in relation to s. 14(3) of the Act; and (c) the Divisional Court erred in awarding interest on the award for lost developer's profit.

Disposition

[31] I would allow the appeal, set aside the decision of the Divisional Court, and restore the award of the OMB. I would dismiss the cross-appeal. The parties are invited to submit written argument on the subject of costs.

Appeal allowed; Cross-Appeal dismissed.