We represent the Estonian Ministry of Environment in a court dispute with Estonian construction company Merko Ehitus Eesti (‘’Merko”).
A 17-year dispute
The dispute dates back to 2004 when Merko’s legal predecessor began implementing a 1998 detailed spatial plan on the Lasnamäe limestone cliff. The foundations of several residential buildings and some roads were completed in 2005, but the development stalled amid a rapid economic recession. At the end of 2006, the Government established a nature reserve for the protection of rare plants (Cerastium alpinum, Saxifraga adscendens, and Dianthus superbus) found on some of the plots. Moreover, Tallinn’s comprehensive plan adopted in 2010 included the immovables in a green zone where the principal purpose of the land is vegetation and construction is prohibited. Already before to the economic downturn, Merko’s legal predecessor had sought to exchange the protected lands for state land elsewhere. Meanwhile, a legal amendment entered into force, prohibiting such land exchanges altogether.
In 2014, the parties held negotiations for the sale of the protected immovables to the Government but failed to agree on the terms and conditions. Furthermore, a reassessment of the status of rare plants indicated that the condition of the plants had deteriorated significantly and the plants had retreated from the immovables and adjacent areas. The Government consequently lifted reserve protection to enable Merko to freely use the immovables again. In 2016, Merko filed a claim against the state for EUR 2 million in damages. Merko claimed compensation for all expenses relating to the partial development activities carried out in 2005–2006 as well as for revenue lost due to the development ban. Alternatively, compensation was claimed for tolerating the restrictions.
Courts exonerated the Government
The Supreme Court ruled on 05.03.2021 to reject most of Merko’s claims, but this final ruling was preceded by five different court disputes. In earlier cases, the issues included whether the Government had the right to lift reserve protection and whether Merko was entitled to request the court to order the state to purchase their immovables. Courts found that the Government acted correctly when lifting reserve protection and ruled that the owner of an immovable is not entitled to obligate the state to buy their property. Also, an owner of protected land cannot require the state to maintain the restrictions.
The Supreme Court’s ruling was an important precedent in the area of state liability. The Supreme Court had so far not clarified the grounds for claims against the state in such detail and had not explained which types of damage an undertaking may claim from the state if the state has acted improperly, or if the state has acted lawfully but an undertaking suffers loss nevertheless. For example, the Supreme Court concluded that an undertaking cannot hold the state liable for every type of business risk and an undertaking is not eligible for compensation for every damage incurred due to the materialisation of business risks. Even if the Government had not established a nature reserve and corresponding restrictions on construction, the development could still have failed and revenue could have been lost.
Proceedings shall partially continue
The Supreme Court referred the dispute back to the Administrative Court to determine whether Merko could have incurred any damage at all. The Supreme Court also noted that the only type of damage to be considered is the loss of value of the immovables. Thus, the Administrative Court will reassess the initial and current value of the immovables, and whether these could allow concluding that the state would be liable to Merko even after courts have established that the state has not acted unlawfully towards Merko. The City of Tallinn has held a vision competition for future buildings on the disputed immovables and the results thereof will enable to consider a detailed plan amending the comprehensive plan and permitting Merko to construct buildings on the immovables affected by the nature reserve.
Our client team