331 What Happens When Developers Can't Develop
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WHAT HAPPENS WHEN DEVELOPERS CAN’T DEVELOP 331 WHAT HAPPENS WHEN DEVELOPERS CAN’T DEVELOP: CAN AND SHOULD RESOURCE DEVELOPERS BE COMPENSATED WHEN THEY CAN’T DEVELOP THEIR ASSETS? SHAWN H.T. DENSTEDT* AND RYAN V. RODIER** This article considers the question of whether Cet article examine la question de savoir si les agents resource developers are entitled to compensation when d’exploitation des ressources sont admissibles à une their ability to exercise proprietary rights is effectively indemnisation lorsque leur capacité d’exercer leurs sterilized by government action, a phenomenon known droits de propriété, dans les faits, sont éliminés après as “de facto expropriation.” It sets out the legal une action du gouvernement, phénomène appelé principles that have been applied by courts in Canada, « expropriation de fait ». L’article énonce les principes the U.K., the U.S., and Australia. It discusses how juridiques que les tribunaux du Canada, du Royaume- courts have considered entitlement to compensation in Uni, des États-Unis et de l’Australie ont appliqués. Il this context, and how the quantum of compensation can examine de quelle manière les tribunaux ont considéré be determined. It concludes that, absent some le droit à l’indemnisation dans ce contexte, et comment overriding public interest, the law supports on peut déterminer le montant de cette indemnité. Il compensating a party whose rights have been conclut qu’en l’absence d’un intérêt dérogatoire du confiscated. public, la loi est en faveur de l’indemnisation d’une partie dont les droits ont été confisqués. TABLE OF CONTENTS I. INTRODUCTION ............................................. 331 II. PROPERTY RIGHTS AND EXPROPRIATION ......................... 332 III. THE DE FACTO EXPROPRIATION OF NATURAL RESOURCE ASSETS ................................. 335 A. THE CANADIAN EXPERIENCE .............................. 336 B. THE U.K. EXPERIENCE ................................... 342 C. THE U.S. EXPERIENCE ................................... 343 D. THE AUSTRALIAN EXPERIENCE ............................ 349 IV. COMPENSATION FOR THE DE FACTO EXPROPRIATION OF NATURAL RESOURCE ASSETS ............................... 352 A. ENTITLEMENT TO COMPENSATION .......................... 352 B. DETERMINING THE AMOUNT OF COMPENSATION ............... 353 V. A PRINCIPLED APPROACH TO ESTABLISH COMPENSABLE DE FACTO EXPROPRIATIONS .................................. 357 I. INTRODUCTION The right to property is notably absent from Canada’s Constitution, yet our market-based economy and legal system are based on the premise that property rights, including natural resource interests, have value and deserve legal protection. Property rights are protected by both the common law and legislation. When property is expropriated by government, regulatory schemes and legislation often provide for a right to compensation. * Q.C., Partner, Osler, Hoskin & Harcourt LLP, Calgary, Alberta. ** Associate, Osler, Hoskin & Harcourt LLP, Calgary, Alberta. The authors wish to extend a special thanks to Jessica Ng of Osler, Hoskin & Harcourt LLP for her extensive and exceptional assistance in preparing this article. 332 ALBERTA LAW REVIEW (2010) 48:2 Increased regulatory oversight may give rise to situations where government takes an action that, while not a formal acquisition of a proprietary interest equating to expropriation, nevertheless regulates a proprietary interest to such an extent that a developer’s ability to exercise its rights is effectively sterilized. That is, there is a point at which government regulation is tantamount to expropriation. This phenomenon is known as “de facto expropriation,”1 and raises the question of whether resource developers are protected from such government action and entitled to compensation for de facto expropriation. To determine if resource developers have a remedy against de facto expropriation, the nature of property rights and the basics of expropriation law must first be explored. Within that context, the legal principles underpinning de facto expropriation are set out, as well as how these principles have been applied in Canada, the U.K., the U.S., and Australia. Included in this discussion is how courts have considered entitlement to compensation in the context of de facto expropriation, and how the quantum of compensation can be determined. Finally, this article concludes that a principled application of the criteria articulated in court decisions should support credible compensation claims arising from the sterilization of natural resource interests due to government regulation. This conclusion is based on the premise that natural resource rights have value, and that parties have a reasonable expectation that those rights can be exercised. Absent some overriding public interest, the law supports compensating a party whose rights have been confiscated. II. PROPERTY RIGHTS AND EXPROPRIATION To understand what rights attach to property, the very nature of property must be considered. Every day we encounter property and the rights that come with it in different guises and forms. Property can be defined in a number of ways, but essentially it is “[t]he right to possess, use, and enjoy a determinate thing” such as a tract of land or a chattel.2 Property is also referred to as a “bundle of rights,” which is a collection of entitlements created by law enforceable against others. These bundles of rights have value, which is why they can be bought and sold. The fact that property has value is also why it represents a loss to the property interest owner when the bundle of rights cannot be exercised. Different types of natural resource interests support different bundles of rights. A licence is not an interest in land and is merely the permission to do what is otherwise wrongful, and typically does not bind subsequent purchasers of the land over which the licence is exercised.3 A lease, which is an interest in land, provides for a greater entitlement involving a grant of exclusive possession.4 It is a well-established common law principle that a right to mines and minerals includes the right to do all things necessary to work and recover the minerals. The extent of the rights of a mineral owner to enter, win, and work minerals depends on the terms of the instrument 1 Depending on the jurisdiction the terms “constructive expropriation,” “regulatory taking,” or “de facto taking” are also used to describe the same concept. Canadian courts have used the term “de facto expropriation” and that is the term used in this article. 2 Black’s Law Dictionary, 9th ed., s.v. “property.” 3 Bruce Ziff, Principles of Property Law, 4th ed. (Toronto: Carswell, 2006) at 293. 4 Ibid. at 270. WHAT HAPPENS WHEN DEVELOPERS CAN’T DEVELOP 333 of severance.5 Where the rights of access and work are uncertain or absent in the instrument of severance, they will be implied. In Rowbotham, the House of Lords stated: “Prima facie, it must be presumed that the minerals are to be enjoyed, and, therefore, that a power to get them must also be granted or reserved, as a necessary incident.”6 This was subsequently adopted by Borys v. Canadian Pacific Railway,7 which remains the leading authority in Canada for this proposition. The Alberta Court of Appeal confirmed that an implied right to work minerals arises from reservations, grants, and leases — including Crown leases — in Alberta Energy Co. v. Goodwell Petroleum Corp. Ltd.8 An oil and gas lease in Alberta, whether private or Crown, is not “a lease in the normal sense of the term,” but a profit à prendre.9 The holder of the profit à prendre does not own the natural resources in situ, but owns natural resource claims and “the right to exploit them through the process of severance.”10 A profit à prendre is “a right to enter on the land of another person and take some profit of the soil such as minerals, oil [or] stones … for the use of the owner of the right.”11 This includes the right to use the surface, search for, and win the substances as is necessary and convenient to exercise the profit.12 However, this does not preclude the surface owner from exercising their own rights and the mineral owner may be liable for damages to the surface owner’s crops, orchards, buildings, and fences caused by their operations.13 The common law principles governing the right to access mines and minerals were succinctly summarized by the Alberta Court of Appeal in Goodwell: 1. A right to mines and minerals includes the right to work, dig and use all reasonable means to recover the minerals. 2. If mining and recovering the minerals results in a known and inevitable consequence, that consequence is construed to be an implied term, and holders of lands or other mineral rights affected by that consequence cannot enjoin mining and recovery of the minerals. 3. These principles apply to reservations of mineral title, as well as grants and leases, including crown leases. Otherwise, the mineral right would be useless, and, as a general rule, deeds should not be construed to be without effect if other equally defensible interpretations are available. 4. While a bare right to a mineral conveys a right to win, work and carry away the mineral, that power can be expanded or restricted by express wording in the deed. … 5 Rowbotham v. Wilson (1860), 11 E.R. 463, 8 H.L. Cas. 348 at 360 [Rowbotham]. 6 Ibid. 7 [1953] A.C. 217 (P.C.). 8 2003 ABCA 277, 399 A.R. 201 at para. 64 [Goodwell]. 9 Berkheiser v. Berkheiser, [1957] S.C.R. 387 at 391-92; ibid. at para. 63, citing Bank of Montreal v. Enchant Resources Ltd., 1999 ABCA 363, 255 A.R. 116 at para. 53. 10 R. v. Tener, [1985] 1 S.C.R. 533 at para. 13 [Tener]. 11 Cherry v. Petch, [1948] O.W.N. 378 at 380 (H.C.J.) [Cherry]. 12 Tener, supra note 10 at para. 12; Hamilton Brothers Corp. v. Royal Trust Corp. of Canada (1991), 113 A.R. 321 at para. 27 (Q.B.), aff’d on other grounds, 117 A.R.