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Caselaw Review: Subsurface Allocation Rates in Lin and Linthorne

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Metrolinx has recently expropriated a high number of properties for the Ontario Line subway project. These takings, many of which involve subsurface interests, have prompted significant debate over methodologies for the valuation of below-grade interests. One major point of contention is what “discount” ought to be applied to account for the fact that an expropriated interest is below grade.

The Local Planning Appeal Tribunal had its opportunity to address this question in two recent decisions: Lin v. Metrolinx, 2019 CanLII 96162 (ON LPAT) and Linthorne v. Metrolinx, 2019 CanLII 96155 (ON LPAT). Both of these decisions were issued by Gerald S. Swinkin on October 10, 2019. While the topic of subsurface allocation rates was considered at length, the Tribunal stopped short of providing a clear framework to guide future valuations.

Background

    These cases were very similar, and much of the Tribunal’s reasoning appears verbatim across both decisions. The properties in Lin and Linthorne neighboured one another and backed up onto a GO railway corridor. Each property was subject to pre-existing encumbrances related to the railway, including a 30-metre setback from the rear lot line.[1]

    In November 2012, Metrolinx expropriated permanent subsurface easements to facilitate the installation of tieback anchors related to railway operations. The easements each began approximately 30 metres below grade, extending up to 30.5 metres into the property in Lin and 20.7 metres in Linthorne.[2]

    In summary, the easements at issue were deep underground, subject to pre-existing encumbrances, and were to be used for the installation of inert tieback anchors.

    Issues

      There was no dispute over the general valuation approach. The parties in each case agreed that subsurface easements typically start at 50% of the fee simple land value at grade, with adjustments applied based upon the characteristics of each particular easement. The main point of contention was the specific allocation rate to be applied.[3]

      The Evidence

        • The Claimants

        The Tribunal expressed reservations about the allocation rates opined by the claimants’ experts, being 30% in Linthorne and 15% in Lin. The Tribunal noted that in each case, the claimants’ expert focused primarily on the proportion of the lot area affected, with more limited discussion of how the depth and specific characteristics of the easements informed the selected rates.[4]

        • Metrolinx

        In contrast, the Tribunal preferred the evidence of the expert retained by Metrolinx. Metrolinx’s expert considered common allocation rates for two similar subsurface easements: natural pipeline easements, typically valued within the 5 – 25% range; and shoring wall tiebacks, typically valued within the 1 – 2% range, although these easements are most often temporary in duration. The expert then performed a paired sales analysis to assess typical market reactions to similar easements on comparable properties.[5]

        Based on this analysis, the expert concluded that there was no market demand for the requirements, and thus no clear basis for compensation on account of the expropriation. Metrolinx’s expert nonetheless reasoned that Metrolinx had “acquired an interest which [was] of value to it and should be obliged to pay compensation for that benefit.” He therefore opined that a 10% allocation rate would be reasonable in the circumstances, being towards the higher end of the potential range.[6]

        The Tribunal’s Analysis

          The Tribunal agreed with the analysis of Metrolinx’s expert, and identified the following determinative factors:

          1. Non-Intrusive: The easements were non-intrusive and did not affect the owners’ use and enjoyment of their properties.
          2. Pre-Existing Encumbrances: The requirements were already encumbered and subject to restrictions related to the rail corridor.
          3. Lack of Market Impact: The paired sales analysis conducted by Metrolinx’s expert indicated that there would be no injurious affection to the remainder property.[7]

          The Tribunal noted that, under Section 14(3) of the Expropriations Act, these factors might support nil compensation for the taking. However, the Tribunal also concluded that there ought to be some compensation, and on this basis accepted the 10% allocation rate advanced by Metrolinx’s  expert. The Tribunal’s conclusion, repeated in each decision, was that:

          “The application of 10% as the appropriate factor to reflect the characteristics of this particular easement on this particular property appears consistent with field practice for this emerging easement type and eminently reasonable to the Tribunal.”[8]

          The Tribunal ultimately ordered compensation to be paid out accordingly.[9]

          Key Takeaways

          The Tribunal’s treatment of the allocation rate was not expressed as a definitive statement of appraisal or valuation principle. Rather, the decision appears to reflect an acceptance of Metrolinx’s evidence in the circumstances of the case. While the Tribunal accepted that the market evidence did not demonstrate clear demand giving rise to compensable loss, it nonetheless accepted the opinion of Metrolinx’s appraiser that some compensation was appropriate where an interest of value had been acquired by the expropriating authority.

          It remains unclear whether the 10% allocation rate was intended to represent:

          • A general benchmark for subsurface permanent easements,
          • A default allocation rate where compensation would otherwise be nil, or
          • A minimum allocation rate which may increase where more significant impacts (e.g., noise, vibrations, stigma, etc.) have been established.

          Given the characteristics of the easements in these cases, it may be inferred that 10% represents the lower to mid-range of potential allocation rates for subsurface easements of any kind. However, any such inference should be approached with caution, given the Tribunal’s fact-specific analysis and the absence of any express intention to establish a broader valuation framework.

          Conclusion

          While Lin and Linthorne can provide some insight into the methodologies preferred by the Tribunal in subsurface valuations, they can likely be considered fact-specific decisions rather than definitive statements of principal. The significance of the 10% allocation rate may further be examined as additional subsurface takings, such as those associated with the Ontario Line Project, proceed to adjudication.

          Future subsurface expropriation claims, including those arising from the Ontario Line, may also be influenced by findings of injurious affection (i.e., a potential diminution in the value of the property as a whole). This issue is most likely to arise where underground transit infrastructure, though relatively deep, passes beneath existing improvements such as residential homes, raising questions about impacts extending beyond the market value of the subsurface interest.

          [1] Lin v. Metrolinx, 2019 CanLII 96162 (ON LPAT) [Lin] at para 31; Linthorne v. Metrolinx, 2019 CanLII 96155 (ON LPAT) [Linthorne] at para 27.

          [2] Lin, supra note 1 at paras 24 – 26; Linthorne, supra note 1 at paras 20 – 23.

          [3] Lin, supra note 1 at paras 56 and 73; Linthorne, supra note 1 at paras 35 and 53.

          [4] Lin, supra note 1 at paras 79 and 83; Linthorne, supra note 1 at paras 54 and 57.

          [5] Lin, supra note 1 at paras 57 – 59; Linthorne, supra note 1 at paras 36 – 38.

          [6] Lin, supra note 1 at para 69; Linthorne, supra note 1 at para 45.

          [7] Lin, supra note 1 at paras 84 – 86; Linthorne, supra note 1 at paras 58 – 60.

          [8] Lin, supra note 1 at para 89; Linthorne, supra note 1 at paras 63.

          [9] Lin, supra note 1 at para 90; Linthorne, supra note 1 at paras 64.