ANTICIPATED VALUE IN EXPROPRIATION COMPENSATION CLAIMS OF RESOURCE PROPERTIES Normally, conventional appraisal principles require that aggregate resource property be valued on a discounted cash flow basis.1 There are a number of issues that arise, however, when the government or other authority expropriates a resource property, especially one containing resources that find their way into the work or project giving rise to the expropriation. First, there is a statutory prohibition under most current Canadian legal regimes against the landowner being compensated the so-called "anticipated value". This restriction is in fact a creature of expropriation law and is not part of conventional appraisal or valuation principles. Its scope and meaning are matters of judicial interpretation by the courts. The Nova Scotia statutory provision is typical of other jurisdictions. It provides: "Not To Be Considered In Land Valuation 33. In determining the value of land expropriated, no account shall be taken of (a).. any anticipated or actual use by the expropriating authority of the land at any time after the depositing of the expropriation document in the registry of deed..." Second, there may be inequity in that the expropriated owner may not be able to benefit from anticipated value, while his unexpropriated neighbour may do so. The authority must pay full current market price to the unexpropriated owner (subject, perhaps, to a volume discount) while the expropriated owner is offered, at most, the value of his property on a discounted cash flow basis for aggregate that is to be consumed immediately in the project. Third, there is the situation where the expropriating authority appears to be the sole or a principal market for the resource. The tendency is to treat any increase in value as anticipated value and not as a change in the fair market value. This may ignore the fact that the government is often a substantial player in the market, able to influence the market. Finally, one must read carefully the cases decided under the old "value to the owner" statutes (where there were no anticipated value provisions) and those decided under modern or "fair market value" regimes (most do have such a provision). Nevertheless, some of the older cases prohibited the recovery of anticipated value, even in the absence of an express statutory provision. The "common law" principle of anticipated value was established in the case of Pointe Gourde Quarrying and Transport Company Ltd. v. Sub-Intendent of Crown Lands, (1947) A.C.565.2 The Privy Council in that case said that compensation for the compulsory acquisition of land could not include an increase in value that is entirely due to the scheme underlying the acquisition.3 The prohibition of anticipated value was incorporated into modern expropriation statutes to ensure that there was not an unjust enrichment when there was an escalation in value as a result of the project, or, in the reverse situation, an inappropriate loss where property values decreased as a result of the development.4 This principle became known as the Pointe Gourde Principle, which says: "It is well settled that compensation for the compulsory acquisition of land cannot include an increase in value which is entirely due to the scheme underlying the acquisition." Notwithstanding this legislative and judicial restriction, the cases indicate that the courts will not allow governments to do by compulsory acquisition what they could not do privately, i.e., gain access to valuable resources on less than fair terms. Essentially, the methodology used by the courts is to consider what the government would do, absent expropriation powers, if it had to go into the market-place to acquire the resource for the construction of the government project. For this purpose, it does not matter that the government is a special purchaser, a principal purchaser or even the sole purchaser in the market-place.5 In one of the earliest cases to deal with this issue, Fraser v. The Queen6, the Supreme Court of Canada said: "By giving cabinet approval to the plan to construct a causeway, the Crown made it known that there was a probable rather than a possible market for the appellant's rock at the price which a willing purchaser would pay to a willing vendor..." Further, the Court said: "If the special adaptability of the lands is to be measured in terms of the value of the rock in situ, the quantity involved must, in my opinion, be treated as being the amount of the requirement estimated by the Crown before expropriation...this constituted an immediate market for a substantial amount of the appellant's rock and the unprecedented opportunity to dispose of such a quantity of his supply at one time must, in my view, be treated as a circumstance which would induce a prudent man to willingly accept less than he might expect to receive if he was required to sell the commodity piecemeal, with all respect, it does not, in my opinion, mean that such a man should be required to accept less than one-tenth of the amount which an experienced contractor would have been prepared to pay if he had to include the rock in his tender for the contract, and this appears to me to be the effect of the value fixed by the learned trial judge." In Fraser, the Court was dealing with the valuation of the potential use created by an expropriating authority when the Federal Crown decided to build a causeway over the Strait of Canso. It expropriated a piece of land with 9 million tonnes of rock, which was intended to be used to construct the causeway. The Crown was trying to expropriate the land for $50.00 per acre. There was evidence from a contractor who offered $450,000.00 for a comparable amount of rock. The Court concluded that land was being taken from the Appellant, not to be used as land, but as a source of building material for which there was an ascertainable market price. In the majority decision, the Supreme Court posed the following question: "Why, it may be asked, should a citizen who happens to own material suitable for use in the building of a public work and in a most convenient location, but of which there are ample available supplies in the hands of other owners, be required to make a gift of his property?" In fixing compensation, the Court said it must not reflect in any way the value the property will have to the acquiring authority after expropriation and as an integral part of the scheme devised by that authority. Nevertheless, the Court concluded the Appellant was entitled to [the] then current price for the quantity of rock taken from the expropriated land. The Court also said that, where the only possible purchaser of the land's potentiality is the expropriating authority, the arbitrator awarding compensation must ascertain to the best of his ability the price that would be paid by a willing purchaser to a willing vendor for the land with its potentiality in the same way he would in a case where there are several possible purchasers. In Nova Scotia, the case of Dickson v. Nova Scotia7 involved the expropriation of land containing aggregate resources, for the purpose of constructing the Pictou causeway. At the time of expropriation, the owner was leasing the property to local farmers for agricultural purposes. The property was known to contain substantial aggregate deposits, and this was one of the reasons why the property was expropriated. The Court determined that the existence of the causeway project established the immediate market for aggregate products. The question then was: what would a prospective purchaser (including the authority, even if the only prospective purchaser) pay to get access to the aggregate to be used in the construction of the project?8 The Court relied upon the evidence of contractors involved in the construction of major projects such as this, and asked what they would pay to get access to the quantities that were ultimately used in the causeway construction. The Court then fixed the value of the owner's aggregate based upon the price per ton multiplied by the tonnage used in the causeway project. The Court also considered the "bare land" value, absent any aggregate. These two sums added together amounted to the fair market value of the property expropriated, and this amount was awarded as compensation for the expropriation. As the Court said in the Dickson case: "For these reasons, Their Lordships have come to the conclusion, even where the only possible purchaser of the lands' potentiality is the authority that has obtained the compulsory powers, the arbitrator in awarding compensation must ascertain to the best of his ability the price that would be paid by a willing purchaser to a willing vendor of the land with its potentiality in the same way that he would ascertain it in a case where there are several possible purchasers...". With respect to anticipated value, the Court also said: "It must, of course, be conceded that the existence of the scheme must not be allowed to enhance the price, if by 'scheme' is meant the fact that compulsory powers of acquisition have been obtained for the purpose of carrying into effect a particular scheme for the profitable use of the potentiality. The valuation must always be made as though such powers have been acquired, and the only use that can be made of the scheme is as evidence that the acquiring authority can properly be regarded as possible purchasers." As the cases show, the compensation payable is not necessarily the market value of the whole of the aggregate obtainable. It is the market value of the aggregate required in the project. In Friesen v. Saskatchewan (1968), D.L.R. (2d) 171, the owner argued that the amount of compensation payable in the expropriation of a quarry or gravel pit was the fair market price for the quantity of material capable of being taken from the expropriated land. The Saskatchewan Court of Appeal rejected this contention and said: "The determination of the value of the land by reference to the market value of the rock in situ, required for the construction of the causeway was probably the only practical method of valuation under the particular circumstances there prevailing. Certainly, in my respectful opinion, the judgement of the Supreme Court [in Fraser] cannot be construed as establishing the principle that when the property expropriated is a quarry or gravel pit, the value to the owner is the market value of all the commodity attainable therefrom at the time of expropriation. Compensation so fixed would reflect the total potential value which the property will have to the expropriating authority after expropriation. It is clear from the judgement of Ritchie, J. (in Fraser), and from the authorities to which the learned judge refers, that the amount fixed by way of compensation must not in any way reflect the value which the property will have to the acquiring authority." In Golby v. Nova Scotia (1979), 34 N.S.R. (2d) 300, a post-modern Nova Scotia case which considered Section 33 of the Nova Scotia Act, the land fronted on an ice-free harbour of exceptional depth. The Nova Scotia Expropriations Compensation Board said: "It must be said that the Board has great difficulty in giving a strict application to the section in the peculiar circumstances of these cases because of the nature of the background anticipation which reduced the matter of eventual industrial and commercial use to a mere question of time." In short, the imminence of the governmental project can itself influence the market value of the resource. In Ontario, with similar wording, the following cases may be of assistance. In Disposal Services Limited v. Municipality of Metropolitan Toronto (1980), 19 L.C.R. 123, (also post-modern) the Ontario Board considered S. 14(4)(a) and (b) of the Expropriation Act and said at p. 148: "The Board was advised that Section 14(4)(a) and (b) completely prohibited the consideration by the Board of Metro's use of lands as a garbage disposal site. The "special" use to which the authority has put the land is obviously such use. It would appear that this prohibition is not absolute. E.C.E. Todd in The Law of Expropriation and Compensation in Canada (1976), at p. 129, states: 'However, it should not be assumed that the scheme is to be disregarded completely in the determination of compensation. On the contrary, there are three different situations in which the scheme may be relevant ... (c) in considering special adaptability or potential.' The circumstances in this case are somewhat unique in that the "special" use for which the land was taken is the same use for which the owners acquired the land, and to which it would have been put if expropriation had not taken place. The Board, therefore, considers that it can, in fact, take into consideration its potential as a garbage disposal site in these circumstances. In our opinion, this is not an assessment of value to the owner but an assessment of market value based on the highest and best use. The owner or claimant was in the business of garbage disposal, it had the experience and it had operated other sites outside Metro. The site was ideal for garbage disposal and, looking at the situation practically, there was no other logical use, certainly for many years to come. Both the owner and the authority recognized the potential and both moved to acquire the site at almost the same period of time." See also St. Catharines Crushed Stone Limited v. City of St. Catharines (1978), 15 L.C.R. 363. Prior to the publication of the expropriation, the purchaser cancelled an agreement of purchase and sale. The Ontario Land Compensation Board considered the purchase price in the agreement as an important and valid indication of the value on the property. The Board also looked at market value in terms of valuation based on the use for which the authority expropriated the land. This use was equally open to the claimant as a private owner and he was entitled to market value based on such a use. In determining the market value, the Board said at p. 379: "Section 14(4)(a) of the Expropriation Act was put forward as a prohibition to the Board giving consideration to this method of valuation in these circumstances. The Board is of the opinion that it is entitled to consider the value of the subject land as a garbage or landfill disposal site, despite the fact that this was the "purpose" or "scheme" for which expropriation occurred. The Board can and ought, in these circumstances, to consider the special adaptability or potential of the site for this particular use. The evidence confirms that physical adaptability of the site for this specific purpose. The fact is that garbage disposal of both domestic and industrial waste created by urban municipalities throughout Ontario constitute a serious problem." In the more recent case of McPhail's Equipment Company Limited v. City of Surrey (1995), 57 L.C.R. 57, the British Columbia Expropriation Compensation Board said that, in determining market value, factors to be considered included the suitability of the materials for use as fill or otherwise, accessibility to alternative markets for materials and the expropriating authority's availability as a potential purchaser of the materials. The Board considered that the only value to the claimant of the materials lay in the possible purchase by the expropriating authority. The Board said at p. 76 that: "... (t)he present case varies from those discussed above in that, in those other cases, it was to acquire the particular attributes of the lands (fresh water, rock, gravel) that the authorities expropriated them, whereas in this instance, it was to gain access to the competitive cover material that the respondent took a portion of the claimant's lands. Whereas the authority's intended use of those other lands gave value to them which they would not otherwise have possessed, in this case the respondent's use of the expropriated portion to access Woodin's pit had the effect of rendering essentially worthless the materials on the CNR lands which, prior to expropriation, already had potential value by way of sale to the respondent. (Emphasis added). A second proposition which can be drawn from the above cited cases is that the valuation of the date of taking is to be the value determined in the open market between a willing buyer and a willing seller who have entered into "friendly negotiations" and where the willing buyer is deemed not to have the power of expropriation." In other words, the valuation is to be based upon what the parties as willing buyers and sellers would have prudently done, had there been no power of expropriation. The Board in McPhail found the claim was not so remote or speculative and at p. 78 said: "...On the contrary, the Board concludes that, but for the respondent's exercise of its power of expropriation, the respondent would likely have been forced to reach some financial accommodation with the claimant to obtain either the desired access to Woodin's pit or the claimant's own materials. The possibility that the respondent would not have entered into a contract with the claimant but would have pursued other options instead constitutes, in the Board's opinion, an element of risk that figures in the final valuation of the claim. However, the Board is persuaded that, considering both the political and economic costs to the respondent of pursuing those alternatives, that risk was not high. The decisions in the Indian case, Fraser and Agnew, are persuasive against any view that an owner, to found a claim for reduction in value to the remaining land, must have been in the business of actively exploiting its potential for financial gain prior to expropriation." The expropriation may well create an immediate market. For that reason, the Court has said the authority must pay the current market price for the amount of aggregate acquired for use in the project. The holding period or absorption rate of the aggregate tends to be rather longer if one excludes consideration of the public project or the immediacy of the need that has been created. It is clear, however, from these cases that it is proper to consider the imminence of the public project in determining the existence of the market. Otherwise, the authority gets a "free ride" insofar as the compensation on discounted cash flow principles allows the authority to finance the acquisition over a substantial period of time while enjoying the immediate use of the aggregate. There are no principles in the cases cited that would conflict with the present statutory provisions of the Expropriation Act regarding anticipated value. Here is a summary of the main points of the review of the case law: 1. The aggregate must be one of the recognized potential uses of the property. 2. For the purposes of valuation, it makes no difference whether the owner is exploiting that potential or not at the time of expropriation. 3. Where the authority expropriates the property to get access to the aggregate to be used for the purposes of construction of the public project, it thereby establishes an immediate market for the amount of aggregate required in the construction (this can be tested, for example, by reference to the tender specifications). 4. The valuation of the aggregate is based upon the price a willing purchaser (including a contractor or government) would pay to acquire that volume of aggregate for the purposes of the construction. 5. The market price for that aggregate is to be established by evidence, especially the evidence of contractors and others who are active in the market.9 6. The value of the aggregate required in the construction is to be valued at current market prices as if a direct sale had taken place, i.e., undiscounted. The balance of aggregate unused in the construction will be valued on a discounted cash flow basis, based on the market's rate of absorption. - Douglas A. Caldwell, Q.C., Patterson Palmer Hunt Murphy, (Truro, Nova Scotia, 4 May, 2000). REFERENCES: 1. This valuation technique has been approved by the Supreme Court of Canada in International Corona Resources Ltd. v. Lac Minerals Ltd., 61 D.L.R. (4th) 14 as the proper way to derive the fair market value of aggregate resources. 2. There is in fact no "common law" of expropriation, which is said to be entirely a creature of statute. 3. Applied by the English Court of Appeal in Wilson et al v. Liverpool (1971), 1 ALL.E.R. 628 (per Denning, M.R.). 4. See also Pfundt v. Ministry of Government Services (1970), 20 L.C.R. 283 (Ont. L.C.B.). 5. See "The Indian Case", [1939] 2 ALL.E.R. 317 (P.C.). 6. (1963) S.C.R. 455, 40 D.L.R. (2d) 707 (S.C.C.) (a case pre-dating the "anticipated value" legislation). 7. (1971), 5 N.S.R. (2d) 89 (N.S.S.C.). This case was decided under the old "value to the owner" regime (subsequently replaced in Nova Scotia in 1973 by the market value regime). Copy of the Dickson decision attached. 8. In taking this approach, the Court ruled out any notion of value to the owner. Indeed, the Court recognized the owner was not using the gravel at all. It was merely an unrealized potential attribute that added market value to the property. 9. Presumably, expert appraisers and valuators may refer to such sources in formulating their own opinions of value.

This article is published in the OEA Newsletter, Spring 2002.

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