Determining Market Value in Expropriation Compensation Claims: Highest and Best Use
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Property owners facing expropriation can be entitled to significantly higher compensation when the highest and best use of land both before and after the expropriation is examined. This is critical in determining the appropriate and fair amount of compensation to which the property owner is entitled.
The Supreme Court of Canada has correctly noted that the expropriation of land is one of the ultimate exercises of governmental authority. The Expropriations Act provides protection for property owners and aims to fully compensate the owner of the expropriated lands.
Section 13 of the Expropriations Act provides that compensation payable to the owner shall be based on:
- The market value of the land;
- The damages attributable to disturbance;
- Damages for injurious affection; and
- Any special difficulties in relocating.
This article focuses solely on the concept of the highest and best use of land in determining the fair market value of lands. Very often, the fair market value of lands comprises the largest portion of overall compensation the property owner is entitled to.
In many cases, the highest and best use of the lands is based on the current use of the lands (i.e. lands containing residences within a plan of subdivision); however, this is not always true.
Highest and Best Use
The highest and best use is the reasonably probable and legal use of the land which is also physically possible, financially feasible and will result in the highest market value.
The Local Planning Appeal Tribunal (“LPAT”), the Ontario administrative tribunal with exclusive jurisdiction over expropriation compensation matters, will consider the highest and best use of the land before the expropriation, as well as the highest and best use after the expropriation, to assess compensation for market value.
Typically, the expropriating authority and the property owner will retain their own respective experts such as land use planners and real estate appraisers, and present evidence regarding the highest and best use of the expropriated lands.
The greatest weight is usually given to the evidence of real estate appraisers when determining highest and best use. However, real estate appraisers will often, in turn, rely on opinion evidence of land use planners for certain aspects of the legal analysis with heavy land use planning components. This is because the calculation is complex and involves significant investigative work.
Appraisers must assess what uses are reasonably probable for the lands, and must go through the following legal tests when determining highest and best use:
- Legally Permissible;
- Physically Possible;
- Financially Feasible; and
- Maximally Productive.
These steps are looked at sequentially, although the order that the first 2 steps are looked at can be interchanged. Simple reasoning dictates that financially feasible or productive options are not relevant when they are not legally or physically possible in the first place.
Appraisers consider the following factors:
- Legally Permissible: the possible use must be compliant with municipal by-laws, current zoning, potential for a zoning change, building codes, restrictive covenants and environmental regulations.
- Physically Possible: the size, shape, topography, ease of access, availability of public utilities and risk of natural disasters of the lands are considered to determine which potential uses are compatible with the lands.
- Financially Feasible: the cost, price trends, timing and whether the use is income producing helps determine the viability of the proposed highest and best use.
- Maximally Productive: the highest and best use must accord to land value and costs of improvements required. Of the potential uses that meet the first three tests, the one that results in maximum productivity will be selected as the highest and best use.
Recent Case Law
In Down v Ontario, the expropriating authority expropriated 20.96 acres of land from a 72.37 acre property. Prior to the expropriation, most of the subject lands were cultivated farm land used for agricultural purposes. The Tribunal determined, using the four-step test, that the highest and best use before the taking would have been as Living Area and after the taking would be for Employment Area, and used the market value from these uses to calculate compensation. The Tribunal awarded $1,484,094 to be paid to the claimant based on the market value of the expropriated land, amongst other areas of compensation.
It is critical to seek the advice of a lawyer if your lands are subject to an expropriation. Lawyers can provide advice regarding the various areas of compensation, the expropriation process and strategies for framing and presenting evidence. Lawyers experienced in expropriation often have a vast network of experts with experience providing written and verbal evidence before the LPAT. Building a team of qualified experts is essential in an expropriation compensation hearing. In addition, the expropriating authority is obligated to pay your legal, appraisal and other fees pursuant to the Act.
Please contact Michael Paiva for more information, or if you require assistance with an expropriation matter.