Kraft Construction Co. Ltd. v. Metropolitan Corporation of Greater Winnipeg, [1972] SCR 289

Supreme Court of Canada

Kraft Construction Co. Ltd. v. Metropolitan Corporation of Greater Winnipeg, [1972] S.C.R. 89

Date: 1971-10-05

Kraft Construction Company Ltd. Appellant;

and

Metropolitan Corporation of Greater Winnipeg Respondent.

1971: June 23, 24; 1971: October 5.

Present: Abbott, Hall, Spence, Pigeon and Laskin JJ.

ON APPEAL FROM THE COURT OF APPEAL FOR MANITOBA

Expropriation—Compensation—Valuation—Shop-ping centre complex expropriated—Premises victim of “planning blight”—Whether arbitrator in error in accepting appraiser’s economic approach in circumstances of case rather than cost approach.

The appellant was employed by the owners of certain lands to construct thereon a shopping centre complex. The owners ran into financial difficulties and in consequence were unable to finance the completion of the shopping centre or to pay the appellant. An agreement was arrived at whereby the property was transferred to the appellant. Later, the property was expropriated by the respondent. The parties were unable to agree on the amount of compensation to which the appellant was entitled by virtue of the expropriation and the matter proceeded to arbitration. The arbitrator’s award was sustained by the Court of Appeal (one member of the Court dissenting) and the appellant then appealed to this Court.

At the hearing before the arbitrator, the appraiser for the respondent approached the question of value on two bases, using (a) the economic approach, and (b) the cost approach. The only question on the appeal to this Court was whether the arbitrator was in error in accepting the appraiser’s economic approach in the circumstances of the case rather than his cost approach.

Held: The appeal should be allowed.

The economic approach was less reliable in this case than the cost approach and therefore it was on the basis of the latter that the award should be fixed.

The economic approach, to be meaningful, had to derive its relevance and utility from rental values which were either already agreed upon as fair or

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which could with reasonable precision be so fixed. Here, however, because the premises were the victim of “planning blight”, the actual rentals were not a fair indication of true rental value. The appraiser, therefore, had felt obliged to base economic approach not upon the actual rentals but upon a higher scale of rentals adjusted to take care of the factor of planning blight. The difficulty, however, was that the task of making a suitable upward adjustment took one into an area of guesswork and speculation.

The cost approach was admittedly one of infrequent application but when, as here, the only other basis suggested by the accredited expert was manifestly so unconvincing, the case for employing the cost approach became stronger than it might otherwise have been. The appraiser’s reason for rejecting the cost approach in favour of the economic approach rested on the difficulty of correctly estimating obsolescence and depreciation. But it could not be said that his estimates of those factors were unduly favourable to the appellant.

APPEAL from a judgment of the Court of Appeal for Manitoba[1], sustaining an arbitrator’s award of compensation for expropriation. Appeal allowed.

E.B. Pitblado, Q.C., and A. Anhang, for the appellant.

D.C. Lennox, Q.C., and F.N. Steele, for the respondent.

The judgment of the Court was delivered by

HALL J.—This is an appeal from the Court of Appeal for Manitoba which sustained (Freedman J.A. as he then was, dissenting) an award of $120,500 made by His Honour Judge Keith as arbitrator following the expropriation by the respondent of lands of the appellant.

The property in question is located at the intersection of Pembina Highway and University Avenue in the Municipality of Fort Garry, a suburb of the City of Winnipeg. During the years 1964

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and 1965 the then owners employed appellant to construct a shopping centre complex some 10,000 square feet in area on the property. The owners ran into financial difficulties due to the collapse of Atlantic Acceptance Corporation, and in consequence were unable to finance the completion of the shopping centre or to pay appellant. An agreement was arrived at whereby the owners transferred the property to the appellant who took possession in January 1966. It made some alterations to suit its needs and moved in.

By By-law No. 1174 dated April 27, 1967, respondent expropriated the property. At that time there were four tenants in the building in addition to appellant. On taking possession the appellant had attempted to obtain other suitable tenants but had found difficulty in so doing because it was becoming known that the property would soon be expropriated.

The parties were unable to agree on the amount of compensation to which appellant was entitled by virtue of the expropriation and the matter proceeded to arbitration. The learned arbitrator awarded appellant the sum of $120,500 plus interest at the rate of 5 per cent from the date of taking, namely May 4, 1967.

At the hearing before the arbitrator, two expert witnesses gave evidence, Farstad for the appellant and Trumpour for the respondent. Farstad valued the property at $160,000. This valuation was rejected by the arbitrator and his discretion in this respect is not to be disturbed. Trumpour for the respondent approached the question of value on two bases, using (a) the economic approach, and (b) the cost approach. Using the economic approach, Trumpour arrived at a final valuation of $110,000 and using the cost approach he produced a figure of $127,500. To each of these figures had to be added two items: $8,000 for dispossession costs and $2,500 for lost archery equipment, neither of which are in dispute. The arbitrator accepted Trumpour’s economic approach figure and fixed the value at $110,000 which, with the two items just mentioned, brought his award to $120,500. The appellant now asks that the value be fixed at Farstad’s figure of $160,000 or, in any event, at not less than the

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sum of $138,000 which is the amount which Freedman J.A. would have allowed in his dissenting judgment.

There was no disagreement between the parties here or in the Court of Appeal as to the law applicable or as to the proper principles upon which an award of arbitration should be made, and the only question is whether the arbitrator was in error in accepting Trumpour’s economic approach in the circumstances of this case rather than his cost approach. I am in agreement with Freedman J.A.’s view that the arbitrator erred in fixing a valuation based on the economic approach and I do not think that I can put the matter any better than Freedman J.A. did in his reasons as follows:

I confess to some surprise that a valuation based on the economic approach was regarded by the learned arbitrator as the most acceptable method of fixing value in this particular case. It seems to me that this was peculiarly a case in which the economic approach was so surrounded with uncertainties as to make its employment here a most dubious and hazardous course. The economic approach, if it is to be meaningful at all, must derive its relevance and utility from rental values which are either already agreed upon as fair or which can with reasonable precision be so fixed. Here, however, it is common ground that the actual rentals being paid were not a fair indication of true rental value. The specific reason for this was that the premises were the victims of what is known as “planning blight”. Prior expropriations of property in the immediate area and the general knowledge that further expropriations might take place had cast a shadow on the property and had adversely affected the opportunity of securing leases at fair values. Mr. Trumpour in his report frankly acknowledged this situation, and for that reason felt obliged to base economic approach not upon actual rentals being paid but upon a higher scale of rentals adjusted to take care of the factor of planning blight. The difficulty, however, is that the task of making a suitable upward adjustment takes one into an area of guesswork and speculation. Mr. Trumpour’s adjusted rental scale was significantly lower than that of Mr. Farstad.

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I am quite aware that the learned arbitrator rejected the conclusion of Mr. Farstad and accepted that of Mr. Trumpour. I do not quarrel with his right to make such a choice according to his discretion. But, dealing only with the case as it was presented from the lips of Mr. Trumpour, I am bound to say that the learned arbitrator’s acceptance of the economic approach in this case is not supportable.

Indeed when the claimant, early in the case, attempted to adduce evidence of its operating costs for the purpose of establishing value on the basis of the economic approach, the learned arbitrator commented thus:

“What kind of a speculation would I have to enter into to arrive at the value of this property on its rental value?”

And, again:

“THE COURT: I think it’s too complicated altogether. It would have to be speculation, this kind of evidence. It couldn’t be direct evidence. I mean there would be so many factors: the size of the building, apart from the location of it, the size of the building would I would imagine definitely limit the use of it. You would have to find people that would fit into what there is there and that might take you a long time. I don’t doubt that eventually you could fill it up with tenants and eventually you could arrive at what it would cost you to maintain the building and you would subtract that from what you got in in rent and you could show something if it were direct and practically know what the value of the building is as a business concern. That’s what you are evidently trying to get at but this thing never did get to be a business concern, did it?

MR. ANHANG: Of course the question is: why not? And I think the reply is that the threat of expropriation was hanging over it.

MR. MACIVER: That’s right.”

Having taken such a strong position on that subject, the learned arbitrator surprisingly made a complete volte-face and declared that Mr. Trumpour’s approach to market value was the right one. Although the learned arbitrator did not identify that approach as the economic one, that is precisely what it was—the very method which (correctly, in my view) the learned arbitrator had earlier described as “too complicated altogether” and resting entirely on “speculation”.

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The cost approach is admittedly one of infrequent application. Here, however, when the only other basis suggested by the accredited expert is manifestly so unconvincing, the case for employing the cost approach becomes stronger than it might otherwise be. Indeed Mr. Trumpour’s treatment of the cost approach seems in my eyes to be sounder and more persuasive than his handling of the economic approach. His reason for rejecting the former in favour of the latter rested on the difficulty of correctly estimating obsolescence and depreciation. But it cannot be said that his estimates of those factors were unduly favourable to the claimant. Indeed the claimant contends, with some justification, that the amounts which Mr. Trumpour deducted for obsolescence and depreciation were grossly excessive. Any change there should in fairness redound to the advantage of the claimant. I do not, however, propose that such a change be made, but rather that an award be granted on the basis of the cost approach as it stands.

* * *

Bearing in mind that the evidence of Mr. Farstad was not accepted, I am prepared to dispose of this case on the evidence of Mr. Trumpour. But for the reasons already given I find the economic approach less reliable in this case than the cost approach. I would accordingly fix the award on the basis of the cost approach, namely, $127,500, to which I would add the item of $8,000 for dispossession costs, and $2,500 for lost archery equipment, making a total award of $138,000, with interest at five per cent per annum.

I would, accordingly, allow the appeal and fix the amount payable at $138,000 with interest at 5 per cent from May 4, 1967. The appellant is entitled to its costs in this Court and in the Court of Appeal.

Appeal allowed with costs.

Solicitors for the appellant: Pitblado, Hoskin & Co., Winnipeg.

Solicitor for the respondent: D.C. Lennox, Winnipeg.