Quantifying Losses Under the Ontario Expropriation Act: Construction Delays

Introduction

The Ontario Expropriations Act, R.S.O. 1990, c. E.26 (the “Act”) provides a legislative framework to ensure that property owners are fairly compensated when their property is expropriated for public purposes. This requirement gives rise to the need to quantify business losses. This can be a particularly difficult task when the expropriation process causes a construction project to be delayed. In this article, we describe the approach use by Chartered Business Valuators (CBV) (referenced as “Valuators”) to quantify such loses for business owners, authorities, and legal counsel (claimant or respondent) who need to assess and quantify such losses.

Overview of the Ontario Expropriations Act as it Relates to Construction Delay Claims.

The Act mandates compensation for not only the market value of a property but also any other damages resulting from the expropriation. This includes, but is not limited to, disturbance damages, injurious affection, business losses, and costs related to the delay of construction projects.

The Act contains several sections that may be applicable to this discussion including, but not limited to:

• Section1 : defines injurious affection to include personal and business damages;
• Section 13(2):  outlines how market value is determined;
• Section 18: focuses on additional compensation for loss of business or other financial impacts arising from the expropriation; and
• Section 21:  identifies compensation available for loss or damage caused by injurious affection.

Compensation: Quantifying Losses Related to Construction Delays and Non-Commencement

When an expropriation process or the works for which the lands were expropriated causes delay to a property owner’s planned construction project, there are several components of possible compensation that may be available, including direct and indirect financial impacts.[1] Valuators can be used to assist in quantifying the following potential areas of financial loss:

1. Loss of Income/Profit
2. Increased Hard and Soft Costs
3. Loss of Opportunity

With respect to the above, there may be various legal hurdles and burdens of proof that may be required to be successful with a claim. This article is not intended to discuss the legal aspects or burdens of proof required. Rather, the purpose of this article is to discuss the approach to determining the loss for the various heads of damage a business may suffer as a result of delayed construction arising from an expropriation. 

There are many scenarios in which an expropriation or expropriation related activity can impact the development of a property, including: full or partial taking, an easement, or even an authority’s planning/approval process. Unless specifically identified, this article discusses delays where the construction ultimately proceeded.

This discussion mainly applies to businesses that own land with the intention of completing a construction project on a parcel of land for their own use[2], as opposed to building developers who are planning on developing a property for the purposes of selling constructed units[3]. 

Businesses impacted by expropriation often have the option and are able to find an alternative location. However, a business location may have been selected for specific reasons by a business for their construction project. Unless otherwise identified, for the purposes of this article, it is assumed that the business has no option to relocate from the planned location of the construction project.

1. Loss of Income/Profit

Quantifying the impact on income/profit due to construction delays requires a detailed financial analysis. Valuators will assess the projected revenue and expenses that the operating business would have generated/incurred had the project commenced at the planned time. The approach to this analysis will depend on several factors, including:

• Construction timelines;
• Nature and industry of the business;
• Reason for the construction;
• Duration (long term or short-term) of the investment;
• The owner’s historical experience with similar operations;
• Availability of financial projections and other supporting documents (e.g., business plans, forecasts, financing structure, and comparable operating locations);
• Industry information/benchmarks that may be publicly available; and
• Market conditions.

Calculation

Lost business income/profit during the delay period is calculated as follows: 

• Projected Revenue
• Less: Actual Revenue (including mitigation efforts)
• Add: Extra Expenses incurred
• Less: Expenses saved
• Equals Lost Income/Profit 

The period to consider will be, at a minimum, the period of the construction delay. However, should there be a ramp-up period for operations, this period will also have to be considered in the calculation. If available, Valuators can use the actual post-delay ramp-up of operations as the basis to project the ramp-up but for the expropriation. 

 The result being that the period to consider in the calculation would have to be extended until the business reaches its normal operating capacity (see example and Figure 1 below). 

Example: 

A business was expected to generate the following income after construction of a new operating location:

• Year 0 - Construction
• Year 1 - $1 million
• Year 2 - $2 million
• Year 3 - $2 million
• Year 4 - $2 million

But the actual results were as follows:

• Year 0 - Delay
• Year 1 - Delay
• Year 2 - Construction
• Year 3 - $1 million
• Year 4 - $2 million
• Year 5 - $2 million
• Year 6 - $2 million

The construction was delayed for two years (Year 0 and Year 1). However, the calculation of the loss should consider a three-year period (Year 1 to Year 3), as follows and noted in Figure 1 below:

Lost Income:

• Year 0 - $nil
• Year 1 - $1 million ($1 million - $Nil)
• Year 2 - $2 million ($2 million - $Nil)
• Year 3 - $1 million ($2 million - $1 million)
• Year 4 - $nil ($2 million - $2 million)

Figure 1

Note that although consideration is given to the lost income over a three-year period, the total income lost, $4 million, represents two full years of normal income after ramp-up. 

To adequately quantify the loss of income/profit, supporting documentation to the extent available, should be considered. As mentioned above, there are a variety of scenarios that can result in a delay claim. The documentation and information available may depend on the specific circumstances. The following documents, if available, can help substantiate the claim:

• Historical and Post-Delay Financial Data: Profit and loss statements, income statements, and balance sheets to establish revenue trends before the delay and once operations have commenced;
• Revenue Forecasts: Projections made before the delay, showing anticipated revenues and expenses based on market conditions and planned business activities; and
• Market Analysis: Industry benchmarks and comparable sales from similar/comparable business operations.

Valuators can assess the reasonability of projected revenue streams and operational expenses, by testing the inputs utilized for the projections and, to the extent possible, considering factors such as market conditions, industry performance, and comparable projects.

2. Increased Costs (Hard Costs and Soft Costs)

Construction delays often lead to increased hard and soft costs, which result in a loss to the business owner. These increased costs can be significant over extended periods. The claimant may seek compensation for any additional expenditures incurred as a result of the delay.

Hard costs refer to tangible, physical expenses. Examples of hard costs include (among others): 

• Material Price Inflation: Fluctuating costs of materials (e.g., lumber, steel) due to extended project timelines;
• Labour Cost Overruns: Overtime, additional workforce requirements, or extended employment contracts;
• Storage and Logistics Costs: Holding fees for equipment or materials that cannot be utilized due to the project delay; and
• Delays: Construction delays often lead to increased costs, including storage, labor, and material price inflation. 

Example of increased Hard Costs: A construction project would have been completed prior to COVID but was delayed and only completed during COVID when material and labour costs had surged. The difference between the costs of labour and materials at the time of the planned construction and the actual cost will be an incremental cost to the business owner as a result of the delay. 

Soft costs are indirect expenses not directly related to labour or materials for the physical construction. Examples of soft costs include:

• Architectural or Engineering fees related to redesigning the project as a result of an expropriation related event;
• Extension of construction related costs such as permits and insurance costs;
• Other professional fees such as legal, or accounting costs related to the construction[4];  
• Increase in financing costs:
  • Extended Loan Repayment Periods: the delay lengthens the time during which interest accrues on loans;
  • Increased Interest Rates:  fluctuations in interest rates can lead to additional financing costs over time; and,
  • Re-financing Costs:  delays may necessitate re-negotiation or extension of loans, often at less favorable terms.
• Delays in construction may cause financing terms to change, leading to higher interest rates or extended periods of interest accumulation. These financial impacts may be quantified and included in the claim for compensation.

Example of increased Soft Costs: As a result of an expropriation of part of a parcel of land, additional architectural fees were incurred to redesign the project. These additional architectural fees, required as a result of the expropriation, may be considered as an increased cost to the business. 

In general, the claimable increased cost is the difference between the specific cost that would have been incurred had there been no expropriation-induced delay and the actual cost incurred as a result of the delay. 

In addition, a valuator will also need to consider offsetting any saved costs as a result of the delay (for example, if some material prices decreased during the delay period). However, as costs generally increase over time, offsetting savings are less likely to occur.

Calculation 

Increased costs can be calculated by comparing the estimated project costs before the delay with actual costs incurred due to the delay. This can be represented as:

Increased Costs = Actual Project Costs – Original Estimated Costs

Example: If the original cost of materials was expected to be $1 million based on the unit costs at the original construction schedule date, but during the delay period the price of materials increased by 10%, leading to a total cost of $1.10 million, the increased cost would be $100,000.

The supporting documentation utilized to estimate increased costs as a result of expropriation event will be determined based on the specified cost that is being claimed as extra. The following supporting documents are typical supporting information submitted for the specific costs identified:

• Quotes, Invoices, Purchase Orders, Material Pricing Sheets: Evidence of material cost both pre- and post-delay showing cost increases over time;
• Payroll Records: Documentation of labor costs, including any overtime or additional staffing required due to the delay;
• Contractor Agreements: Proof of any changes in contractor costs, extensions of time, or penalty fees related to the delay;
• Loan Agreements: Original loan terms, including interest rates and repayment schedules;
• Bank Statements: Showing interest payments made before and after the delay; and
• Re-financing Documents: Evidence of any re-financing agreements or additional financing costs incurred as a result of the delay.

3. Loss of Opportunity

The loss of opportunity represents the financial value of potential profit that could have been earned if a project had proceeded on schedule. This differs from the loss of profits noted above, which is directly correlated to a specific delay period, while the loss of opportunity could extend beyond the delay period and as such, have a much greater impact. In both cases, the scenarios discussed are meant to reflect losses that represent a natural and reasonable consequence of the expropriation.

Quantifying this loss requires a speculative analysis, including forecasting potential earnings and estimating the value (and present value where applicable) of lost business opportunities. Valuators need to take into account both the missed market conditions and competitive advantages that may have been lost. 

Loss of business opportunities can be as a result of:

• Missed Market Opportunities: The delay may cause the project to miss favorable economic or market conditions;
• Loss of long-term customers or a specific project/product; and
• Competitive Disadvantage: Delays may result in competitors gaining a larger market share, diminishing future opportunities for the project.

Example: A business with expansion plans related to specific customer/contract purchases a parcel of land that meets specifications for the requirements of their operations. As a result of the delay, the customer/contract was lost. In addition to the delay period loss, the total loss may include the lost profit that would have been generated from the lost customer, quantified as the present value of the profit from the lost customer for an indefinite period of time (or until it is deemed reasonable that the business could have replaced this customer). 

Calculation

The value of lost opportunity can be calculated by estimating the potential profits that would have been realized had the project commenced and was completed as planned. This can be calculated as:

Lost Opportunity = Projected Profit (Before Delay) – Adjusted Profit (Post-Delay Market Conditions)

Additionally, a lost opportunity could effectively result in the value of the business being permanently impaired. This may require a calculation of the lost business value (i.e. present value calculation of perpetual losses). 

To quantify the loss of opportunity, the following supporting documentation is essential:

• Feasibility Studies: Pre-delay analyses showing the financial viability and projected profitability of the project.
• Market Research: Reports and market data showing anticipated market conditions at the time the project was scheduled to commence, versus the conditions after the delay.
• Business Plans / Project Plans and Contracts: Forecasts made before the delay, demonstrating expected revenue streams and profit margins related to lost opportunities.

A crucial aspect of compensation is the lost opportunity or profit from a project due to the expropriation. Industry experts may be needed to assess the value of the foregone opportunity and establish a direct connection to the expropriation, which can be challenging as it often involves significant revenue projections.

Case Law and Precedents

Several cases have examined the issue of compensating property owners for construction delays in the context of expropriation:

Toronto Area Transit Operating Authority v. Dell Holdings Ltd. (1997): This Supreme Court of Canada case remains one of the leading authorities on delay damages in expropriation. The court ruled that compensation for the business should include all reasonable losses resulting from the delay, including lost profits and increased costs.

747926 Ontario ltd. v. Upper Grand District School (2001): The Ontario Court of Appeal differentiated between circumstances of certain market value of land approach and when the Act can include developer profits as injurious affection. The court ruled prospective profit that would have been received from selling the expropriated lands sometime after the valuation date as not applicable to injurious affection. 

Antrim Truck Centre Ltd. v. Ontario (2013): While not directly related to construction delays, the case comments on injurious affection in a situation of no land taken that emphasizes the need for a comprehensive evaluation of business losses and impacts of nuisance-based claims, regardless of direct expropriation.

Expert Testimony and Forensic Accounting in Expropriation Cases

Valuators can provide expert testimony in expropriation cases involving delayed or abandoned construction projects. As demonstrated above, there is a variety of potential heads of damages dependent on the particular situation and case facts which may require a Valuator's expert opinion. 

Conclusion

Quantifying losses under the Act requires a multifaceted approach, particularly in cases involving delayed construction projects, to provide a detailed, data-driven analysis of the financial impact of expropriation delays to ensure that claimants receive the fair compensation they are entitled to under the law.

Williams Meaden & Moore
Forensic Accountants Inc.

[1] For the primary example of compensation for this type of losses, see Toronto Area Transit Operating Authority v. Dell Holdings Ltd., [1997] 1 SCR 32 

[2] For example, a company that owns and operates a chain of hotels purchases a parcel of land to develop into a new hotel to add to their existing portfolio.

[3] As decided in 747926 Ontario ltd. v. Upper Grand District School (2001), the determination of market value of land may impact potential ability to claim a profit loss for building developers.

[4] As opposed to Section 32 costs related to professional fees incurred for the purposes of determining compensation payable.