Date: 19980716
Docket: T-234-92
BETWEEN:
MAURICE ST. MARTIN, LUCIE ST. MARTIN, ALINE BONSALL, ALBERT E. LEGAULT, GARY MacKENZIE, SCOTT TAYLOR, PETER MERCHART, SHIRLEY BERTRAND, DENNIS BERTRAND, ROBERT DEACON, JEANNETTE DEACON, JOHN W. SMITH, JAMES REID, LINDA REID, BRUCE JEWITT, JUDY JEWITT, HARVEY CORMIER, LOLA CORMIER, JOYCE FARQUHAR, JEAN FARQUHAR, GEORGE DESCHAMPS, VIOLA DESCHAMPS, HOMER SAMMET, RICHARD GILBERT, MORLEY GILBERT, WAYNE MINOR, DIANE MINOR, ROLAND SAVARIE, AGNES SAVARIE, PETER MORRIS, SUSAN A. DESJARDINS, NICK MATASICH, PIERRETTE MATASICH, ERIC HART, MARIE HART, EDWARD GRASSI, PAULETTE GRASSI, DENNIS TORNOPOLSKY, DELMO P. BALDELLI, JENNY BALDELLI, WILLIAM STEVENSON, MARY STEVENSON, GRAHAM W. ROSS, CHARLES LARMONDIN, ELIZABETH LARMONDIN, JACK A. LEPPINEN, DAWN LEPPINEN, NICK ZATEZALO, CARMEN ZATEZALO, JAMES K. BROWN, TERRENCE MURPHY, DOROTHY MURPHY, MARIA JACOBA HUFFELS, ALAIN PAQUETTE, DIANE PAQUETTE, MARY ELEANOR SANCHIIONI, DAVID BENSON, RICHARD LALONDE, JACQUELINE LALONDE, EDWARD J. GORC, RICHARD PETER PROCEVIAT, NORMAN JAMES MILES, LAURENT POULIN, CLAUDETTE DERANGERE MUSICO, ROBERT RUSSELL, JAMES BULLOCK, CECIL ACE, DONALD LACHANCE, CHRISTINE LACHANCE, RICHARD O"BONSAWIN, DIANE O"BONSAWIN, OLIMPIO MAZZA, ARCADIA MAZZA, ALDO ORASI, RAYMOND MARION, AUDREY MARION, GILLES MAINVILLE, JACQUELINE MAINVILLE, CLAUDE MALETTE, GABRIEL FERNANDEZ, LORNE CHUIPKA, MARLENE CHUIPKA, RENALD LAPLANTE, SYLVIA LAPLANTE, MAURICE M. BRABANT, BARBARA BRABANT, SAMUEL ZATEZALO, RUBY ZATEZALO, JERRY LOISELLE, MARLENE LOISELLE, HERMAN BOIVIN, PAULINE BOIVIN, BRIAN MacKENZIE, SANDRA BOYUK, JOSEPH KOSIOR, HARMON MALLOY, ANNETTE MALLOY, ROBERT DIEBEL, GARY MERKLEY, ELMER C. MERKLEY, GLORYANN DORE, GARRY MARKLEY, JANET MILLER, JACQUELINE M. PETRILLI, JILL PACEY, INNOCINZO COSTANZI, JOSEPH PURIFICATI, ANNE MARIE PURIFICATI, DAVID GLOVER, JUDITH POGUE, JOHN LANTEIGNE, DIANE LANTEIGNE, JACK LEONARD, LYLE PERRY, CAROL PERRY and GEORGE GARDNER
Plaintiffs
- and -
HER MAJESTY THE QUEEN IN RIGHT OF CANADA
as represented herein by THE MINISTRY OF
INDIAN AFFAIRS AND NORTHERN DEVELOPMENT
Defendant
REASONS FOR JUDGMENT
RICHARD A.C.J.:
NATURE OF THE PROCEEDING
[1] This is an action brought by sixty-one lessees of individual lots, on lands situated on an Indian reserve, for a determination of the annual rental of each demised tract of land for a seven year period commencing on April 1, 1991.
BACKGROUND
Pleadings
[2] In their statement of claim the plaintiffs allege, and the defendant admits as substantially correct, the following allegations of fact:
| - The plaintiffs are all lessees of tracts of land situated within and being part of Whitefish River Indian Reserve Number Four in the Province of Ontario. |
| - The plaintiffs entered into leases whereby the rental cost of the land was initially fixed with a renewal period succeeding in each seven (7) year of the term of the lease. The plaintiffs request being able to produce the respective leases of all of the plaintiffs. |
| - The provisions of the lease provide that the rental cost be determined prior to the beginning of each renewal period and shall be based on the market value at that time without regard to the value of the improvements thereon by the lessee, but having regard to the value of other demised lands in the area. The rental will be assessed by applying the current prime lending factor of the Bank of Canada to the said market value of the land. |
| - The plaintiffs were notified that the rental rate would increase by letter in December of 1990 effective April 1, 1991 which letter advised of the new rental rate without providing the method or basis of calculation. |
| - The plaintiffs were subsequently notified by the defendants, in a letter dated May 10, 1991, that the rental rate was changed and indicated what the market value assumption was in the calculation required under the lease. |
[3] In its statement of defence, the defendant says that the method of determining the rent upon renewal of the leases is in accordance with the provisions of the leases and is therefore fitting and proper.
The lands
[4] The lands were formally known as conditionally surrendered lands, and, since June 28, 1988, are known as designated lands under the Indian Act.
[5] The Minister appointed the Chief and Councillors of the Whitefish River Band to manage the designated lands of Whitefish River Indian Reserve No 4 by letter dated December 30, 1993 pursuant to subsection 53(1) of the Indian Act.
[6] Certain authority is also given to the Land Manager of the Band in the same letter.
[7] Twenty percent of the lessees are from Espanola, which is 18 miles away, two of the lessees are band members and the balance, except for one, are from the Sudbury region.
[8] The subject lands are located on the Cloche peninsula, which is located in Georgian Bay of Lake Huron, and is adjacent to Great Cloche Island and Manitoulin Island.
[9] The Manitoulin District is well known for popular boating waters, cottage spots and recreation amenities, therefore making tourism a major element of the district"s economy. This industry, being seasonal, causes large fluctuations in population and overall traffic in the area, from one season until the next, the summer being the most active.
[10] Population figures for the Manitoulin District show approximately 11,000 permanent resident and 6,900 seasonal residents. The area also has a large influx of tourists passing through by motor vehicle or boat.
[11] The subject land is located approximately 60 miles southwest of Sudbury, 135 miles east of Sault Ste. Marie and 300 miles north of the Toronto area, and is accessible by paved road from all of these points.
[12] The subject subdivision is situated on McGregor Bay near the village of Birch Island. This subdivision consists of 83 cottage lots on the westerly shore of McGregor Bay. They are serviced by a gravel road with two entrances on Highway 68, and hydro and telephone.
[13] Physically, the subject lots vary quite substantially. While the majority have 100' of water frontage, some have as little as 67.5', while others have as much as 158.4'. All of the sites have a depth of approximately 150' and vary from .33 to .39 acres in area.
[14] Topography of the subdivision varies from fairly steep in the north end (lot 63) to level and at road grade in the south end (lot 145). The steepest sites make the construction of driveways difficult and in some cases, unfeasible.
[15] The subdivision is well treed throughout with a good variety of hardwoods, softwoods and evergreens. The majority of the shoreline is level and boulder strewn and is well suited for recreational purposes such as dock building, etc.
[16] Since the subject lots vary substantially in terms of topography, frontage and shoreline, they must be adjusted accordingly in terms of valuation.
The lease
[17] The lease is a common lease for all of the plaintiffs.
[18] The total duration of the lease is 21 years effective April 1, 1977, with lease renewals for each succeeding seven year periods.
[19] The parties have relied on the following three paragraphs of the lease:
| 1. That the rental for the seven year period of the said term beginning the first day of April, 1984, and for each succeeding seven year period of the said term and any renewal thereof, shall be determined prior to the beginning of each such period and shall be based on the fair market value for the land at that time, without regard to the value of the improvements placed thereon by the lessee, but having due regard to the value of other demised lands in the area. |
| 2. The rental will be assessed by applying the current prime lending factor of the Bank of Canada to the said market value of the land. |
| 3. In the event that the parties hereto fail to reach agreement on the fair market rent, the Minister shall make the determination. The Lessee shall have the right, if he (they, it) disagrees with the Minister"s determination of the rent to refer the question of rental to the Trial Division of the Federal Court of Canada at his own expense. In the event of such referral by the Lessee, he (they, it) shall pay and continue to pay the annual rental determined by the Minister PROVIDED that after determination by the Federal Court aforesaid any amount paid by the Lessee with respect to the seven year period in question shall be adjusted in accordance with such determination by way of rebate or additional payment. |
[20] The lessor and the lessees, represented in this action, have failed to reach agreement on the fair market rent for the period April 1, 1991, to March 31, 1998.
History
[21] Two of the plaintiffs testified to the rent increases from the time the subdivision was opened in the late 1960s to the present time. The rental varied throughout the subdivision depending on the category of land, which is still true and accepted today.
[22] Graham W. Ross, a resident of the subdivision, who acquired his lease in 1971 and built a cottage on the land testified that he originally occupied the land under a document called a land use permit and that he was involved in the negotiation of the subject lease made in 1977. He was part of a committee of residents who negotiated with representatives of the Department of Indian Affairs and Northern Development over a period of time. At that time, the rent was $150.00 per annum and it was increased to $450.00 when the lease was created, a three-fold increase. His rent was increased to $870.00 in 1984.
[23] By letter from the Department, dated December 6, 1990 (Exhibit P-9), Mr. Ross was advised that he was subject to a rental review on April 1, 1991, for the ensuing seven year period. It stated that, according to the formula set forth in his lease, the new rental would be as follows:
Appraised
Market Value
$27,700.00
Prime Landing
Rate @ Oct. 1/90
X 13"%
Yearly
Rent
= $3,809.00
[24] The letter went on to say:
| "However, upon recommendations by the appraiser, the Band has reviewed the market rent and accordingly, are offering $2,078.00 per annum for the seven year period beginning April 1, 1991. This offer is valid only until January 31, 1991. |
[25] The cottagers formed a committee to fight this increase. They were not provided with any appraisal document and took the matter up both with Department and the Band Council. Mr. Ross asserts they wanted to be treated fairly.
[26] In a letter to Mr. Ross dated May 13, 1991, the Department referred to its earlier correspondence regarding the rental review due April 1, 1991, and a meeting regarding this matter held with the Band on April 28, 1991.
[27] The letter clearly states that the current prime lending factor is the Bank rate as at April 1, 1991, the rent review date, which was 9.92%.
[28] It reminds Mr. Ross that an appraisal of the market value of the land was completed by Frank Bell and that the market value of his lot as of October 1, 1990, was assessed at $27,700.00. Therefore, his rental value under the lease, effective April 1, 1991, was calculated as $27,000.00 X 9.92% = $2,748.00.
[29] Mr. Ross was also reminded that the rent must be paid within 60 days after being payable, on pain of termination of the lease.
[30] The letter goes on to demand payment in full of the amount of $2,078.00. This amount is consistent with the "estimated rental value" in Mr. Bell"s 1990 appraisal report (Exhibit P-8, Tab 11) and with the "fair market rent" in Mr. Bell"s 1997 appraisal report (Exhibit P-8, Tab 17) where the amount calculated by him for lot 92 was $2,072.00.
[31] In a letter dated May 13, 1991 (Exhibit P-10), the Department informed Mr. Ross that the interest rate, as of April 1, 1991, was 9.92%. Mr. Ross has been paying the rent of $2,078.00.
[32] Mr. Ross added that he feels that the lease is very restrictive as to what he can and cannot do on the leased land.
[33] On cross-examination, Mr. Ross agreed that the committee of cottagers who had negotiated the 1977 lease were represented by legal counsel.
[34] An appraisal prepared by Frank Bell and dated October 3, 1990 (Exhibit P-8, Tab 11), was introduced in evidence by Mr. Jim Reid, the president of the Cottagers Association, who has held the position for 6 years. The market value of his lot being lot 76 was estimated at $25,400.00. This is consistent with the estimated market value for the same lot in the appraisal report prepared by Frank Bell on December 10, 1997.
[35] In arriving at the estimated rental value, Mr. Bell, in his appraisal report of October 3, 1990, discounted the market value by 40% to arrive at a value for lease purposes and multiplied that amount by an interest rate of 11.65%. He then added $144.00 to that amount to account for the fact that the improvements on the land are not subject to taxation, treating this as a tax advantage to the lessee.
[36] Mr. Reid"s rent was increased from $792.00 to $1,915.00 on April 1, 1991 (Exhibit P-8, Tab 9). On February 12, 1998, the Land Manager for the Band sent him a letter (Exhibit A-1) concerning the rental review on April 1, 1998 and advising that the Council had decided to apply a 40% discount to the market value of his lot, which was now estimated at $29,600.00, and to apply to this discounted market value the prime lending factor of the Bank of Canada rate as of April 1 of the preceding seven year period. The resulting yearly rental was $1,151.00.
[37] With respect to the use of the Bank of Canada rate, the lessor, either itself or through its appraiser, has variously relied on:
| 1) The rate as at October 1, 1990 (Exhibit P-9); |
| 2) The rate as at April 1, 1991 (Exhibit P-10); |
| 3) The average of the Bank of Canada rate for the past five years (Exhibit P-8, Tab 11); |
| 4) The average rate at September 1 of the preceding 5 year period (Exhibit P-8, Tab 17); |
| 5) The average rate as of April 1 of the preceding 7 year period (Exhibit A-1). |
ISSUES
[38] This case involves the interpretation of the lease between the parties and the determination of the annual rental to be paid for the seven year period beginning April 1, 1991 and ending on March 31, 1998.
[39] Two specific issues were raised by counsel:
| 1) the appropriate comparables, and |
| 2) the appropriate lending rate. |
INTERPRETATION OF THE LEASE
[40] The parties agree that the lease is a contract.
[41] The lease provides that the rental shall be based:
| 1. on the fair market value for the land, |
| 2. without regard to the value of the improvements placed thereon by the lessee, |
| 3. but having due regard to the value of other demised lands in the area, and, |
| 4. the rental will be assessed by applying the current prime lending factor of the Bank of Canada to the said market value of the land. |
[42] The lease contemplates that the parties will seek to reach agreement on the fair market rent before the seven year period. It is only if they fail to reach agreement that the Minister shall make the determination. It is only if the lessee disagrees with the Minister"s determination of the rent that the matter may be referred to the Trial Division of the Federal Court of Canada. In the meantime, the lessee must continue to pay the annual rental determined by the Minister.
[43] The parties are free to determine any annual rent which they may mutually agree upon. However, the Minister and the Court must make their determination on the basis of the terms of the lease.
[44] The appraiser is bound by the terms of the lease.
[45] The determination of the rental involves two major components:
| 1) it shall be based on the fair market value of the land at that time, |
| a) without regard to the value of improvements, |
| b) but having due regard to the value of other demised lands in the area. |
| 2) it will be assessed by applying the current Bank of Canada lending rate to the said market value. |
[46] The first exercise must be completed prior to the beginning of each seven year period. The words "based on the fair market value of the land at that time" refer back to the words "prior to the beginning of each such period". There is no impediment to completing this exercise prior to the beginning of the period.
[47] The second exercise involves a determination of the current prime lending rate of the Bank of Canada.
[48] This rate is determined by the Bank of Canada and is expressed as a daily rate.
[49] Clearly the selected rate is significant since the rate ultimately determines the final rental figure and the rate of return.
[50] The parties agree that this refers to the prime lending rate of the Bank of Canada but are at odds over the interpretation of the word "current".
[51] Counsel for the plaintiffs claims that it means the rate in effect on a specific date, in this case, April 1, 1991.
[52] Counsel for the defendant argues that it must be taken to refer to a period prior to the date of commencement of the renewal period.
[53] This lease, unlike others I was referred to, does not direct an averaging of the rate for a certain period of time, as advantageous as that may be in periods of interest fluctuation.
[54] The word "current" means belonging to the present time. What is current must be measured against the date of the beginning of the seven year period, in this case, April 1, 1991. A rate selected six months earlier is not current.
[55] Account must also be taken of the words in the lease that the rental for each succeeding seven year period must be determined prior to the beginning of each such period, in the case at hand, prior to April 1, 1991.
[56] The date of March 31 is both current and prior to the beginning of the period.
[57] Accordingly, the prime lending rate of the Bank of Canada on the day prior to April 1, 1991, that is, March 31, 1991, is to be applied to the market value of the land, as calculated later in these reasons.
[58] Unless counsel advise me otherwise, I will proceed on the basis that the rate on March 31, 1991, was the same as on April 1, 1991, or that the difference was insignificant.
[59] The lease directs "That the rental [...] shall be based on the fair market value for the land at that time, without regard to the value of the improvements placed thereon by the lessee, but having due regard to the value of other demised lands in the area".
[60] The direction concerning the value of improvements being disregarded for the purpose of the exercise is clear and is not a matter of disagreement between the parties.
[61] The words "other demised lands in the area" refer to leased lands and include Indian land leased for similar purposes.
[62] However, the words do not preclude the appraiser from looking at lands held in fee simple in determining the fair market value of the leased lands. The words simply direct that due regard must be had to the value of other demised lands in the area. If the fair market value were to be based only on the value of demised lands, these words would be superfluous.
[63] Counsel for both parties acknowledged that Indian reserve lands cannot be sold but may only be leased. The fair market value cannot be established by sales of comparable land on Indian reserves but must be imputed.
METHODOLOGY
[64] Mr. Love and Mr. Bell have both produced estimates of rental value based on:
| 1) the market value in fee simple, less a discount, times an interest rate; |
| 2) the comparison of other First Nation cottage lot rentals. |
[65] Mr. H. Love was called as an expert by the plaintiffs. In his first report of March 21, 1997 (Exhibit P-8, Tab 16), he reviews the pertinent sections of the lease, being the first two referenced paragraphs, and concludes that these excerpts from the lease are somewhat unclear as to how the rental is to be established. He goes on to say:
| The lease on the subject lots is poorly worded in my opinion, and somewhat open to interpretation, however in my view the most appropriate method of estimating the rentals to be charged for the use of cottage lots is by comparing the subject lots to other cottage lots which are occupied on a similar lease or rental basis. By adjusting for the differences which exist between the subject and the comparables such as access, services, topography, allowable use period and any other factor which would be considered by a potential lessee or lessor, as adding or subtracting from the use and value of the site, a rental rate or range of rates can be determined for the subject. |
[66] In considering the paragraph dealing with the Bank of Canada, rate he says:
| In my opinion, this method of arriving at a market rent should only be used if there were no comparable rentals in the area, or where the lease document compels that methodology. If an appraiser were to use this method he would first have to make a hypothetical estimate of market value in that Reserve lands cannot be sold, therefore by definition do not have a true market value. |
[67] In his original report Mr. Love uses the methodology of the estimation of fair market rent. He criticizes the methodology used by the defendant"s expert, Mr. Frank Bell, that is, market value in fee simple, less a discount, multiplied by an appropriate interest rate. However, Mr. Love subsequently prepared a second report dated February 12, 1998 (Exhibit P-8, Tab 18), at the request of plaintiffs" counsel, which utilizes that methodology, stating that the lease terms may compel this method.
[68] He stated:
| Although it is my belief that establishing rental rates for the subject lots by way of comparisons with negotiated rental rates for other cottage lots is the best method, it appears that the lease may compel the appraiser to use the method of applying an interest rate to the capital value. Since the original report focused on the comparison of rental rates, this report will focus on estimating capital values. |
[69] In his report dated December 10, 1997 Mr. Bell used two valuation methods:
| 1) Valuation based on a comparison of rents on other First Nation cottage lot subdivisions; and, |
| 2) A valuation "in accordance with the lease terms", that is estimate the fee simple market value of the subject sites, reduce this value by a percentage which reflects the difference between fee simple interest and the interests inherent in the demised lands, and, apply a market oriented interest rate to arrive at fair market rent. |
[70] Mr. Bell considers that the lease has failed to specifically define market value and is unclear as to the date upon which the interest rate should be established. He purports to give a reasonable interpretation to these terms of the lease agreement so that the result will be a fair market rent.
[71] Mr. Bell reviewed Mr. Love"s original report of March 21, 1997 (Exhibit P-8, Tab 16) and his second report dated March 21, 1997 (Exhibit P-8, Tab 18). This document was entered as Exhibit D-2.
[72] Both Mr. Love and Mr. Bell were accepted by counsel and by the Court as experts in the field of real estate appraisal. However, of the two, Mr. Bell is the only one who has had extensive experience in the appraisal of values for rental on Indian reserves.
[73] Mr. Bell"s methodology, in his report dated December 10, 1997, is more in keeping with the methodology prescribed by the lease than that of Mr. Love. Mr. Love"s original report does not deal at all with the lease requirement of determining the fair market value for the land and applying the current prime leading factor, whatever that factor may be. The methodology he uses in his original report makes no use at all of the current prime lending factor. He looked only at direct comparisons of rental rates.
[74] The lease contemplates that the lots be valued as if they were placed on the market. Market value is often established for properties that are not for sale, such as, capital gains taxation, mortgages and estate assets.
[75] In his second report, Mr. Love focused on estimating capital values and accepted the bank lending proposed by counsel for the plaintiffs.
[76] In his concluding remarks, counsel for the plaintiffs stated: (transcript p. 651)
| It"s our sincere view and position that the values of the rents obviously should go up, but in 1991 they should go up to the level that is indicated in Mr. Love"s report, his first report. |
[77] Counsel for the plaintiffs had earlier acknowledged that Mr. Love"s original report, his first report, estimated fair market rentals based on an analysis of other cottage lot rental rates and that his calculations in that report did not involve the use of the current prime lending factor of the Bank of Canada, as set out in the lease.
[78] Counsel described this as a "conundrum" that is faced in trying to interpret this document (transcript p. 637).
[79] In referring to the lending rate clause in these circumstances, counsel said "It is a quandary. And we are challenged by it" (transcript p. 638).
[80] Counsel for the plaintiffs agreed that what is common to both Mr. Love, in his second report (Exhibit P-8, Tab 18), and Mr. Bell is the estimation of capital value. They go from freehold to leasehold and develop a capital approach but use different discount factors (transcript p. 638). Mr. Love used a discount factor of 50% while Mr. Bell used a discount factor of 30%.
FINDINGS
[81] Much evidence was elicited concerning the period of use of the lands and their improvements by the lessees and the year-round access.
[82] I find, on the evidence, that there is year-round access by road to the subject lots, that the residences built on those lots can be to whatever standard of permanence the lessee wishes, that the lease specifies that such buildings shall not be used for permanent residence by the lessee during the period from October 31 to May 31, but that use and occupation during that period is allowed provided it is not permanent.
[83] The lessees can build permanent homes but cannot reside in such permanently year-round (transcript p. 650). They can be used for more than six months of the year.
[84] Year-round recreational use is allowed.
[85] I also accept Mr. Bell"s comparables and calculations.
[86] In my view, the report prepared by Mr. Bell (Exhibit P-8, Tab 17, also filed as Exhibit D-1) is more logical and consistent and less arbitrary than the supplementary report prepared by Mr. Love (Exhibit P-8, Tab 18).
[87] Mr. Bell has calculated a capital value and has compared it as the lease provides to comparable rental values.
[88] I disagree, however, with his discount rate of 30% which appears to have resulted from discounting the 40% discount previously used by him to take account of an imputed tax advantage to the tenants.
[89] I would substitute a discount of 40%.
CONCLUSION
[90] The fair market rent, for the period April 1, 1991 to March 31, 1998, is the estimated market value of each lot as calculated by Mr. Bell in his report (Exhibit P-8, Tab. 17) at pages 82 to 83 with a discount of 40% to arrive at the discounted market value, times the lending rate of 9.92% or such other rate as was in effect on March 31, 1991. If the calculation results in an overpayment of rent, then each lessee is entitled to a reimbursement of such an amount to be determined by counsel, together with pre-judgment interest in accordance with the provisions of the Ontario Courts of Justice Act. If there is any dispute over this calculation, the matter may be referred to me.
COSTS
[91] The lease stipulates that the lessee may refer the question of rental to this Court at his or her own expense.
[92] No costs are awarded to or against any of the parties.
____________________________
Associate Chief Justice
Ottawa, Ontario
July 16, 1998