Treatment of Environmental Contamination in Expropriations

Treatment of Environmental Contamination in Expropriations Wednesday, April 9, 2014 Overview Evidence of environmental contamination, or "impairment", can have significant ramifications in the marketing and sale of real estate. For example, the presence of contamination could attract the requirement for clean up costs to be incurred, impact or alter the highest and best use of part of all of a site, affect the ability of an owner or purchaser to obtain financing, building permits or redevelopment approvals, create civil liability to adjoining landowners, or result in regulatory orders or charges under provincial legislation. All of these potential issues may impact the market value of a contaminated site. In order to assess the impact on market value, if any, of evidence of contamination, a myriad of variables must be examined and weighed. Such a task is challenging even when undertaken in the context of an open market sale. The task is even more challenging when the "sale" in question is one that results from an expropriation - defined in Ontario as the "taking of land without the consent of the owner by an expropriating authority in the exercise of its statutory powers." 1 The Ontario Expropriations Act, R.S.O. 1990, c. E.26 (the "Act") directs the adjudicator to ascertain the market value of the expropriated land as of the valuation date. Market value is defined as "the amount that the land might be expected to realize if sold in the open market by a willing seller to a willing buyer." 2 Understanding how market participants factor evidence of contamination into their buy/sell decisions is complex and evolving. As information about the sources and physical impacts of contaminants expands, the decision making process becomes increasingly complex. Proving how willing buyers and sellers would factor evidence of environmental contamination into the market value equation in an expropriation claim, where evidentiary and legal rules apply, introduces a whole host of unique issues. As the case law demonstrates, mere evidence of contamination alone may be insufficient to warrant a reduction in the compensation otherwise payable to the expropriated owner. Some of the issues that arise in the expropriation claim process where contamination is alleged to have impaired market value include: Does the prohibition against considering the impact of the expropriation scheme (s.14(4)(b)) preclude the adjudicator from taking clean up costs into account? If expropriated land is contaminated, how and to what extent could clean up costs impact the award of compensation? Are there other categories of impact, beyond clean up costs, that could reduce market value? Who bears the onus of proving that environmental contamination or impairment impacts market value, and what are the evidentiary challenges in advancing such a case? This paper will review the case law in Ontario and in other Canadian jurisdictions to assist the reader in understanding how Courts and tribunals have approached these issues in the

context of expropriation claims. We will then look at what we have learned from the case law to date, and what the future may hold for these types of claims. First Principles Every paper on expropriation must begin with a recitation of the principles of the Supreme Court s decision in Dell Holdings Ltd. v. Toronto Area Transit Operating Authority 3 : 1. The primary policy considerations must be to indemnify the expropriated party for losses suffered. 2. The Act is a remedial statute enacted for the specific purpose of adequately compensating those whose lands are taken to serve a public interest. 3. Taking all or part of a person's property constitutes a severe loss and a very significant interference with a citizen's private property rights. It follows that the power of an expropriating authority should be construed strictly in favour of those whose rights have been affected. 4. The Act must be given a broad and liberal interpretation consistent with its purpose. 5. The Act should be read in a broad and purposive manner in order to comply with its aim to fully compensate a landowner whose property has been taken. The foregoing principles guide all administrative and Court level decisions under the Act and, in essence, require an expropriated owner to be made whole. Thus, any consideration of environmental contamination must take these principles into account. The threshold question is of course whether, as a matter of law, tribunals and courts ought to even consider the impact of clean up costs on market value claims in expropriation proceedings. Typically, citing the principles in Dell Holdings enunciated above and s. 14(4)(b) of the Act, owners counsel commonly argue that, since the clean up costs would not have been incurred but for the expropriation, it is improper to penalize expropriated landowners by deducting clean up costs in determining compensation claims. Relevance of Clean Up Costs There are scant few reported decisions in Ontario which directly address the treatment of clean up costs in determining market value in expropriation claims. Many of the cases deal with the relevance of clean up costs not from a compensation perspective, but from an access to land perspective. For example, in a 1994 case entitled Le Goyeau Holdings 4, the Board granted the expropriating authority access to confirm whether the lands were contaminated from previous use. In reaching its decision, the Board made the following finding: The Board finds that as environmental audit of the subject properties is germane to market value and access to determine this is necessary to fulfil the intent of Section 10(3) and to complete a full report appraising the market value of the lands as required under Section 25. 5 The Board did not elaborate on how environmental testing could impact market value. Nevertheless, this case is often cited as evidence of the Ontario Municipal Board s willingness to consider the issue of contamination when assessing market value under the Act. Access for purposes of conducting environmental testing was again reviewed by the Board in a series of decisions in Melancthon Investments Ltd. v. City of Owen Sound. 6 In 2005, the City of Owen Sound applied under s. 10(3) of the Act for access to property to test for environmental contamination. The owner had refused the City access on the basis that the

City had not made a section 25 offer and that there was no evidence of contamination. The City argued that it needed to test the lands for contamination in order to prepare and serve a meaningful offer. In approving the testing subject to terms, the Board made the following finding: The Board is mindful of the relevant jurisprudence applicable to the case at hand, in particular, 690346 Ontario Inc. v. Town of Markham (2002) OMBD No. 600 whereby the Board, pursuant to the same provision, authorized entry and permitted the authority to perform environmental testings. To the extent that it makes good sense to have some idea whether the lands in question has been contaminated or not and that whether remedial actions may be required and that the value of the lands taken may be affected by such possible remedial measures, the Board sees little distinction between this case and the Markham case. 7 The claimant appealed the decision to the Ontario Divisional Court. In dismissing the appeal, the Court stated the following: The Act provides exclusive jurisdiction to the Board in establishing compensation based upon the market value of the expropriated land, which 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...contamination of the land can affect the market value and thus the compensation. 8 Melancthon was brought before the Board again in 2007 and 2009 and the Board s decisions affirmed the importance and relevance of obtaining full and proper information about the environmental condition of the site. In 2007, the owner argued that the City should post $15,000 in security before its environmental expert entered the property. The owner also sought an order alternating the location of some of the boreholes proposed by the expert for testing. The Board rejected both arguments. 9 In 2009, the owner requested that the Board permit its own environmental expert to conduct the testing on the expropriated land. The owner argued that testing was needed to determine the highest and best of the land because, as it contended, different levels of remediation might be required for different uses. The Board granted the owner s request. The weight of authority supports the proposition that clean-up costs are a factor that may be considered and weighed, but the more important and difficult question is how to take this information into account in determining compensation. We turn now to a discussion of the case law in Ontario and in other jurisdictions to assess how tribunals and courts have responded to this challenge. Impact of Clean Up Costs i) The Ontario Decisions The first case dealing with the impact of clean-up costs on market value in Ontario was the 1992 Board decision in Masae Ltd. v. Municipality of Metropolitan Toronto. 10 In that case, the owner had purchased land in 1986 which it proposed would be redeveloped with office and industrial space by 1990. The City of Toronto expropriated the land, comprising 4.87 acres, on June 30, 1988. In responding to the claim for almost $15 million in market value, the City sought to reduce the market value by $465,000, representing estimated soil remediation costs. In the absence of any case law about how the cost of soil clean up should affect the market value of expropriated land, the Board concluded that it should be deducted as clean up costs would have had to be incurred to obtain a building permit. 11 Clearly, the Board s conclusion was influenced by the evidence about the imminent redevelopment of the site. The issue was subsequently considered by the Ontario Superior Court in 2004 in Toronto (City) v. Bernardo. 12 The property being expropriated by the City had been used by the

owners as a scrap metal yard. After undertaking environmental testing, the City concluded that the costs to remediate the property exceeded its market value and offered the owner $1 pursuant to section 25 of the Act. The owner refused to vacate the premises arguing, in part, that the offer of $1 did not comply with the Act. The Court reluctantly concluded that the City had complied with section 25 of the Act. In other words, that a $1 offer of compensation pursuant to section.25 was sufficient to entitle the City to take possession of the land. That said, the Court struggled with whether it would be appropriate to deduct clean up costs from market value. While noting, based on Masae, that full deduction of clean up costs was one possible outcome, the Court observed that it was not convinced that in the absence of orders under the Environmental Protection Act, clean-up costs should be deducted from market value in all circumstances. 13 The most recent Ontario case to consider the treatment of remediation costs is a decision of the Ontario Municipal Board in Simone Group Properties et al v The City of Toronto and affirmed by the Divisional Court. 14 In that case, the Board declined to deduct remediation costs from the market value of expropriated land. Prior to the expropriation in 2005, the land had been used for the owners soft drink manufacturing and bottling business. According to the Board s decision, all appraisers were of the opinion that the highest and best use of the property was a continuation of its existing use as an industrial property. The City s environmental consultant s evidence assumed two scenarios: Scenario 1, in which the building would be removed, and Scenario 2, which assumed the building would remain in place. Since the highest and best use was agreed to be for continuation of existing uses, and no building permits were required, the Board focussed its decision on the Scenario 2 evidence of the City s witness. The evidence at the hearing was that there were exceedances of various chemicals and metals scattered over the site, but that two substances in particular merited attention: tetrachloroethylene, a possible carcinogen, and vinyl chloride, a known carcinogen. These substances were found in only two isolated locations, and there was some dispute about the extent of the exceedances (whether using the 2004 MOE guidelines in place at the time of expropriation, or using the 2009 MOE guidelines that came into effect four years after the valuation date). According to the Board s decision, the witness for the City testified that, assuming the building would remain in place, a Risk Assessment (RA) would likely be required to determine the extent, if any, of the risk to human health and the environment due to the presence of contaminants. Thereafter, a risk management plan would be developed and implemented to address the results of the RA. The Board found that the City s witness had not completed an RA, and that the risk management estimate of $335,000 was premised on broad based assumptions that contradicted his own recommendations. Based on undisputed evidence, the Board found that there was no requirement for filing a Record of Site Condition under O. Reg. 153/04 and, further, that there was no legal requirement to remediate the property to MOE 2004 guidelines because the existing use and building would have been maintained. The Board heard evidence from the Claimant s witnesses that the harmful substances posed no risk to human safety. The Board concluded that the City had not discharged its burden of showing that the market value should be reduced by any amount for environmental remediation or risk management. In fact, the Board criticized the City s witness for failing to conduct a proper risk assessment despite his own evidence that one would be required as a precursor to the risk management step. The Divisional Court dismissed the City s appeal and on the question of whether the Board had erred in refusing to make a deduction for the presence of environmental contaminants it concluded that the Board s decision not to reduce market value was within a range of reasonable outcomes. 15

Although not an expropriation case, the recent Ontario Court of Appeal decision in Smith v. Inco Limited 16 provides further insight about how courts and tribunals will treat evidence about contamination in assessing claims for diminished market value. From approximately 1920 to 1985, Inco Limited operated a nickel refinery in Port Colborne. During this time, nickel particles were emitted from smoke stacks and deposited on properties in the area, eventually becoming part of the soil. Significant health concerns with respect to the levels of nickel in the soil emerged in 2000 when MOE samples revealed higher nickel levels than previously recorded. This news created public concern, which found its way into media reports. In 2005, MOE ordered Inco to remediate 25 properties. Claims were commenced against Inco by way of a class action for damages arising from depressed property values. The plaintiffs were enormously successful at trial, being awarded $36 million dollars in damages for private nuisance. The trial judge accepted that nickel emissions caused damage to property and, consequently, decreased property values. The case was appealed by Inco and the Ontario Court of Appeal reversed the trial judge s decision. The Appeal Court concluded that the plaintiffs had failed to establish Inco s liability in nuisance because they did not attempt to show that there was actual, substantial, physical ongoing harm to their properties or their use of the properties. No actual harm to health was proved. The Court also reversed the trial judge s finding on property value, holding that the expert evidence did not demonstrate that the claimants property values were depressed as a consequence of the refinery. 17 Leave to appeal to the Supreme Court of Canada was denied. 18 Looking Forward: What have we Learned? Clearly, evidence of environmental impairment is relevant to the valuation exercise in the expropriation context. However, mere evidence of contamination may not justify a reduction in market value. The challenge is to demonstrate how market participants would view the presence of contamination as of the valuation date. The type of property (industrial, residential, service station), the tolerance for risk, the proposed use and the anticipated timing to address clean up costs are all factors that must be accounted for. A threshold issue to grapple with is whether, as of the valuation date, the circumstances of the property at issue would have caused willing market participants to account for (in terms of price or other concessions) the impact of environmental impairment. In other words, was there a "trigger" that would have made the issue relevant in negotiating the value of the site in question as of the valuation date. "Triggers" may include, but are certainly not limited to, the potential for and timing of redevelopment, a change in utility or limitation in highest and best use brought about by contamination, the requirement to satisfy lenders for financing purposes, the existence of clean up orders pursuant to applicable legislation, evidence of migration of contaminants off site, or demonstrated risk to human health or safety. The absence of a demonstrated trigger may have been the deciding factor in Simone (supra). Conclusion The Expropriations Act requires that the market value of expropriated land be determined as the amount that the lands might be expected to realize if sold in the open market by a willing seller to a willing buyer. 19 In discharging its duty under the Act, the Board is required to determine how prudent market participants would react to evidence of contamination in the circumstances. As the law stands now, the onus rests with the expropriating authority to justify any reduction in value resulting from environmental contamination with clear and persuasive evidence.

As expropriating authorities come under increasing pressure to protect tax payer dollars from being expended to remediate properties contaminated by private owners and acquired for public purposes, we can expect to see more sophisticated and creative arguments about the impact of contamination on the market value of expropriated lands in Ontario. With ever evolving science, pressure to contain urban sprawl, and well informed investors forming part of this complex equation, the law is only beginning to develop in this area. 1 Ontario Expropriations Act, R.S.O. 1990, c. E.26 (The Expropriations Act ), s. 1(1) 2 Ibid, s. 14(1) 3 [1997] 1 S.C.R. 32 (S.C.C.). 4 Le Goyeau Holdings Ltd. v. Windsor (City), [1994] O.M.B.D. No. 641 5 Ibid, p. 2 6 City of Owen Sound v. Melancthon Investments Ltd. (2005), Ontario Municipal Board Decision/Order No. 2658, October 6, 2005. 7 Ibid, p. 2 8 Melancthon Investments Ltd. v. Owen Sound (City), [2006] O.J. No. 2926 (Ont. Div. Ct.), p. 2 9 Melancthon Investments Ltd. v. Owen Sound (City), 2007 CarswellOnt 4542. 10 49, L.C.R. 1. 11 Ibid, p. 45 12 [2004] O.J. No. 3258. 13 Ibid, p. 7 14 Simone Group Properties Ltd. v Toronto (city) (2012), 106 L.C.R. 101 (OMB); aff d (2013), 108 L.C.R. 12 (Div. Ct). 15 Ibid, para: 44 16 2011 ONCA 628. 17 For a commentary on the Ontario Court of Appeal s decision, please see Collier, Aimee & Kramer, Gabrielle, $36 Million Dollar Class Action Award Goes Up In Smoke: Ontario Appeal Court Finds Port Colborne Residents Not Entitled To Damages From Inco's Nickel Emissions, Borden Ladner Gervais LLP Environmental, Municipal, Expropriation and Regulatory Group Alert, October 2011, available online at:http://blg.com/en/home/publications/documents/publication_1975.pdf. 18 2011 S.C.C.A. No. 539. 19 Expropriations Act, R.S.O. 1990, c. E.26, section 14(1). AUTHOR Frank J. Sperduti T 416.367.6243 FSperduti@

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