Franz Lopez
Borden Ladner Gervais LLP
Expropriation and environmental law intersect most sharply when the property being taken is contaminated.
In matters involving contaminated lands, the central question that arises is often:
Should contamination reduce compensation payable to the owner, and if so, by how much?
For practitioners, files involving the expropriation of contaminated property demand close collaboration between legal counsel, appraisers, and environmental consultants. The valuation question cannot be answered in isolation. Environmental conditions that exist before the expropriation/effective date influence highest and best use, remediation obligations, redevelopment risk, and ultimately market value. The strongest cases are those supported by evidence demonstrating not only the existence of contamination, but also its practical effect on what a prudent purchaser would actually pay.
- TRIBUNAL AND COURT DECISIONS
Recent decisions from the Ontario Land Tribunal (“OLT”), the courts, and related jurisprudence suggest that a principled framework be followed, whereby the significance of contamination either known, or likely known, to exist is acknowledged, but only where it would affect what a knowledgeable and prudent purchaser would pay in the marketplace.
The starting point remains the same as in any expropriation claim. Compensation for market value is determined from the perspective of a willing buyer and willing seller. If contamination would influence a purchaser’s decision-making, then it may properly affect market value. Ontario Tribunals have repeatedly accepted that environmental remediation costs can be deducted from market value where a prudent purchaser would account for those costs in negotiating the purchase price.
However, contamination does not automatically justify an environmental holdback or reduction in compensation. The critical question is whether there is a legal obligation to remediate. The leading authority on this issue is Simone Group Properties Ltd. v. Toronto (City),[1] where the Ontario Superior Court of Justice (Divisional Court) rejected a reduction where there was no demonstrated risk to human health or environmental health that would invoke a legal obligation to address the contamination. The Divisional Court held that remediation costs borne from hypothetical or voluntary scenarios would not justify a reduction in market value. This decision signals that mere contamination, stigma, or a desire to improve environmental conditions is not enough. Rather, there needs to be a legal obligation to address the pre-existing environmental contamination to support a market value reduction.
By contrast, where contamination creates a legal obligation, the result is different. In 1353837 Ontario Incorporated v. Stratford (City),[2] the OLT accepted evidence that off-site migration of contaminants created uncertainty regarding future remediation liability. The Tribunal concluded that a knowledgeable purchaser would discount the purchase price to reflect the risk of future cleanup obligations and potential legal action. The Divisional Court subsequently upheld that approach.
- PRACTICAL LESSONS
The practical lesson is that expropriating authorities and claimants alike should focus on whether the land’s highest and best use as of the valuation date triggers a legal requirement to remediate.
In Ontario, two common scenarios emerge. First, remediation may be required where the highest and best use involves a redevelopment scenario from a less sensitive to a more sensitive use that necessitates the filing of a Record of Site Condition (“RSC”) pursuant to O. Reg. 153/04, promulgated under Ontario’s Environmental Protection Act (“EPA”). Second, remediation may be required to prevent adverse effects on human health or the natural environment, including situations involving off-site contaminant migration, in accordance with the EPA. Where either circumstance exists, environmental liabilities become highly relevant to market-value.
2.1 Evidence is Needed
Even where a deduction is warranted, the amount must be grounded in evidence. The Tribunals have shown little tolerance for speculative remediation estimates. In 1255870 Ontario Limited v. Metrolinx,[3] the OLT accepted that environmental remediation costs should influence value but rejected portions of the expropriating authority’s estimate as excessive and unsupported. After reviewing competing environmental evidence, the Tribunal substantially reduced the proposed deduction and determined that only $1 million (from ~$2 million) represented the proper adjustment as being representative of the amount to address the environmental risks associated with the expropriated property.
Similarly, albeit a non-binding and merely persuasive authority, in Tanex Industries Ltd. v. Greater Vancouver Water District,[4] the British Columbia Superior Court of British Columbia confirmed that remediation may appropriately reduce compensation where those costs affect market value. The Court rejected the proposition that contaminated property should always be valued as though it had been remediated. As such, contamination is not presumptively an irrelevant consideration in determining the value of expropriated lands. Instead, the Court held that the reduction, if any, depends on the evidence and on how contamination affects the property’s highest and best use.
2.2 Early Due Diligence
Perhaps the most practical takeaway is that environmental due diligence should occur as early as possible. Adjustments to market value in the form of environmental holdbacks based solely on assumptions, neighbouring properties, or theoretical risks are vulnerable to challenge. Tribunals consistently prefer deductions supported by environmental investigations and reports, which often involve an assessment of the soil and groundwater conditions of the expropriated property or surrounding properties, where appropriate. Tribunals have also favoured evidence that sufficiently characterizes the environmental risks by way of a higher degree of delineation and remediation estimates supported by actual quotations or market rates.
Expropriating authorities face practical due diligence constraints that may not ordinarily arise in negotiated real estate transactions. Unlike a private purchaser, who can address environmental uncertainty through extended investigation periods, additional sampling, and contractual representations, warranties, and covenants, an expropriating authority may have limited time and access rights to investigate the property before having to finalize a statutory offer of compensation. This creates a greater risk of mischaracterizing subsurface conditions, particularly where contaminant distribution is influenced by seasonal groundwater fluctuations. For example, light non-aqueous phase liquids (LNAPLs), such as light to middle distillate petroleum hydrocarbons (“PHCs”), generally float on the water table, while dense non-aqueous phase liquids (DNAPLs), like chlorinated volatile organic compounds (cVOCs) such as those commonly associated with dry-cleaning solvents, may migrate downward below the water table and accumulate above low-permeability soil layers (see Figure 1). Properly characterizing these contaminants may require repeated or seasonal sampling that the expropriation timetable does not permit.
Figure 1: Release and Distribution of NAPLs in Porous Media, L. Lihua and S. Haderlein,
“A review on the aging phenomena of organic compounds and their mass transfer through the
NAPL interfacial phase”, Geochemistry 32(3):252-260 .
- CONCLUDING REMARKS
In short, contamination does not eliminate compensation, nor does it automatically justify an environmental holdback. The governing principle is whether the pre-existing contamination creates a real and quantifiable liability that would influence a reasonable purchaser as of the valuation date. Where it does not, expropriating authorities risk overreaching by seeking a deduction from the property value that is not supported by market evidence. Both expropriating authorities and claimants need to be aware of the technical, practical, and legal implications of subsurface contaminants any time an expropriated property could be subject to environmental liabilities.
[1]Simone Group Properties Ltd. v. Toronto (City), 2013 ONSC 341 (CanLII).
[2]1353837 Ontario Incorporated v. Stratford (City), 2021 CanLII 101820 (ON LT).
[3]1255870 Ontario Limited v. Metrolinx, 2025 CanLII 50810 (ON LT).
[4]Tanex Industries Ltd. v. Greater Vancouver Water District, 2019 BCSC 74 (CanLII).