Business Losses and Professional Fees in Expropriation.

This blog will discuss the various types of business losses that a business owner is entitled to in the context of an expropriation of a property whereby a business operator will be forced to close their business or relocate on account of an expropriation.  We will also touch on the obligation of an expropriating authority to pay all reasonable fees incurred by the business and property owner in the context of an expropriation, in order to ensure they are “made whole.”

Business Losses arising out of Land Expropriation

s.19 of the Expropriations Act sets out the provisions for awarding business losses. s.19(1)
contemplates compensation for temporary business losses arising out of a business relocation and s.19(2) contemplates compensation for permanent business losses by way of the loss of the entire goodwill. Claims under ss.19(1) and 19(2) are mutually exclusive: Klopp v. London (City) 15 LCR 347, 1978 CarswellOnt 1716 (LCB).

Claims Under Subsection 19(1) – Relocation 

Where an owner is able and opts to relocate its operation following an expropriation, s.19(1) sets out the basis for compensation on account of relocation. Business loss means a loss of net profits due to the relocation i.e., after expropriation, during the move, and at the new location. Relocation expenses also includes

    • Moving expenses
    • Advertising expenses
    • Losses on the sale of inventory
    • Leasehold improvements
    • Reasonable interest costs paid on borrowing funds to finance a new operation
    • Gross profit losses for 6-months post relocation, or an amount to be negotiated.
    • Any other losses that are a natural and reasonable consequence of the expropriation.

Claims Under Subsection 19(2) – Goodwill

Where it is not feasible to relocate, the owner would be entitled to a “termination allowance” reflective of the market value of their business. Lack of feasibility to relocate can be on account of 1) age or infirmity; or 2) the absence of a suitable location or premises within the proprietor’s existing marketing which he or she will be able to retain existing goodwill.

The termination allowance is typically calculated based on the “maintainable earnings of a business” capitalized by an appropriate multiple with consideration given to the idiosyncrasies of the business, the industry it operates, its historical performance, and the current economic environment along with industry outlook.

The maintainable earnings of a business would typically be quantified by adjusting the financial statements (i.e., 3 years of income statements) to add-back non-cash (i.e., depreciation) or non-normal items (one-time or personal use expenses recorded through the business).  Once a level of maintainable earnings is established, a three-year average is typically used. Thereafter, an appropriate multiple is applied to obtain the capitalized value of the company.

Calculating Business Value – Example:

Business earns an average level of maintainable cash flows in the amount of $300,000 for the three years prior to the expropriation.  The business has been long-established in its location and is a well-known brand in a steady industry.  The appropriate multiple to apply would be between 4 to 6 earnings.  The business value in this example would range from $1,200,000 to $1,800,000.

Memo on Costs in Expropriation

Expropriation Act
Costs

32 (1) Where the amount to which an owner is entitled upon an expropriation or claim for injurious affection is determined by the Tribunal and the amount awarded by the Tribunal is 85 per cent, or more, of the amount offered by the statutory authority, the Tribunal shall make an order directing the statutory authority to pay the reasonable legal, appraisal and other costs actually incurred by the owner for the purposes of determining the compensation payable, and may fix the costs in a lump sum or may order that the determination of the amount of such costs be referred to an assessment officer who shall assess and allow the costs in accordance with this subsection and the tariffs and rules prescribed under clause 44 (d). 2017, c. 23, Sched. 5, s. 35.

Per s.32(1), a successful owner is entitled to an order directing the statutory authority to pay his or her reasonable legal, appraisal and other costs incurred for the purposes of determining the compensation payable. A successful owner is one who, in the words of the statute, is awarded 85% or more, of the amount offered by the statutory authority.  The Board has jurisdiction to disallow a portion of the owners’ costs, even where the 85% threshold is met, where the expenses are found to be unreasonable.

“Reasonable Costs”

The assessment officer is entitled to consider the total sum claimed for costs in light of the amounts at issue in the proceeding.  In D.D.S Investments Ltd. v Toronto (City) (2012), 107 LCR. 164 2012 Carswell Not 10991 (Ont. S.C.J.), the claimant sought recovery for legal accounts of six lawyers, in addition to the lawyer who handled the compensation hearing.  The Officer disallowed the majority of accounts.

Such matter as duplication of time and the costs of an expert witness which was of little use to the proceeding were found not to be reasonable. Campbell v. Brennan (1976) 11 LCR 9.  There is responsibility on the solicitor to keep sufficient records to enable them to demonstrate the fairness of the account they present.  For a discussion on the factors to be considered in assessing the reasonableness of legal fees claim, see D.S.S Investments, supra. 

s.32(2)
Where the amount to which an owner is entitled upon an expropriation or claim for injurious affection is determined by the Tribunal and the amount awarded by the Tribunal is less than 85 per cent of the amount offered by the statutory authority, the Tribunal may make such order, if any, for the payment of costs as it considers appropriate, and may fix the costs in a lump sum or may order that the determination of the amount of such costs be referred to an assessment officer who shall assess and allow the costs in accordance with the order and the tariffs and rules prescribed under clause 44 (d) in like manner to the assessment of costs awarded on a party and party basis

Awards under S. 32(2)

The Board has discretion to deny a claimants cost claim where the award at a Tribunal is below 85% of the amount offered by the expropriating authority.  The Board exercises its discretion to award costs.

Circumstances Where Adverse Cost Order Made Against Party

In accordance with the Ontario Land Tribunal Rules of Practice and Procedure, s.23.9 sets out the limited circumstances where a Tribunal may order costs against a party only where the conduct or course of conduct has been frivolous or vexatious or if the party has acted in bad faith.  Further explanation is detailed therein: https://olt.gov.on.ca/wp-content/uploads/2021/06/OLT-Rules-June-2021-ENG.pdf