Expropriation of a Leasehold Interest

Tenants, whether residential or commercial, are entitled to compensation in the event of an expropriation of the property where they reside – typically referred to as the expropriation of a leasehold interest.

s.18(2) of the Expropriations Act in Ontario speaks to the disturbance experienced by a tenant whose leasehold interest is expropriated. The compensation entitlement is based on (a) the length of the lease term; (b) the portion of the term remaining; (c) any rights to renew the tenancy or the reasonable prospects of renewal; (d) in the case of a business, the nature of the business; and (d) the extent of the tenant’s investment in the land.

Where a tenant is required to vacate its leasehold interest early on account of expropriation, the expropriating authority will often take the position that the tenant would have moved out on some future date in any event, and accordingly, the compensation should be based on the interest cost of the expense being incurred a few years earlier than otherwise. Therefore, the lessee is not entitled to full compensation for its expenses. This was denoted in an Ontario Court of Appeal case Frankel Steel Construction v. Metro Toronto.  

The principle behind this is stated succinctly:

The measure of compensation for expropriation of a leasehold interest differs from that for expropriation of a freehold interest since the freehold need never have been called upon to meet, while the cost of moving is an expense which a lessee necessarily would have to meet at the expiration of his term. The proper measure of a lessee’s compensation is that amount which a prudent man would have been prepared to pay rather than have had to meet such expense at the date of expropriation rather than at the expiration of the leasehold term. The compensation is related to the acceleration of the expense rather than to the expense itself

If relocation is not feasible, then s.19(2) of the Expropriations Act bases compensation on the goodwill value of the business and the loss in the realization on the sale of tangible assets.   All in all, where a business owner/occupant of commercial premises is being expropriated, it is advisable to consult with experts that are familiar with the law in this area and can assist in calculating damages in the most favorable manner.