Hodgson v. Musqueam Indian Band

Hodgson v. Musqueam Indian Band
Court (s) Database
Federal Court Decisions
Date
2017-05-18
Neutral citation
2017 FC 509
File numbers
T-1912-15
Decision Content
Date: 20170518
Docket: T-1912-15
Citation: 2017 FC 509
BETWEEN:
GEOFFREY W. HODGSON,
MICHELLE E. MURPHY, SCOTT HARRIS, CHANTAL HARRIS, BRENT W. POIRIER, LARA F. SHECTER, JEFFREY T. BANNARD, CHRISTINE L. BANNARD, JOHN E. D. CAMERON, THERESA M. ALLEN, JENNIFER L. SCHECTER
(A.K.A. JENNIFER L. SHECTER),
JEFFREY N. BALIN,
JOHN I. CHRISTENSEN,
STEPHEN B. COULSON,
STEFANIA G. CICCONE,
CRISTINA M. CICCONE,
WAN H. JUNG, KUEI S. FU, HENRY SCHROEDER, JERRY JANES, DIANA JANES, JIN MA, ESTATE OF HERBERT M. M. LEWIS (DECEASED), JOHN W. WHITEFOOT, SHEILA M. WHITEFOOT, DONALD A. COOKE, KAREN L. COOKE,
WONG L. LEE, MAN-LOONG LEE, MARILYN J. ROSS, WILLIAM T. ZIEMBA, JAMES R. THOMPSON, ANN B. THOMPSON, YUM C. LAU, IRENE LAU, HELEN C. L. TING, SHAVIV BEN NERIAH, SUSANA G. BEN NERIAH, CHI J. LIU, KEE L. SZE, ALI SHAH, FIKRIYE SHAH, KHI Y. TJIN,YUNG C. LIU, LISA A. RAGOSIN, MIRIAM G. WEINSTEIN, SHAUNA L. LORE, PATRICIA LAI, LUKE A. LAI, JEAN M. PATTON, SHEILA W. PATTON, BARBARA J. PATTON, PAMELA A. PATTON, BRUCE R. BAILEY, LISA J. BAILEY, JUDITH F. EYRL,
LI Q. WANG, ZHE M. YAN, QIN ZHANG, HELENA KAN, FRANCESCO L. PICCONE, MARIA C. PICCONE, ANTHONY W. L. LO, CYNTHIA LEE, NIK D. KELAVA, MARY J. KELAVA, HAN XIA, SEUK J. JANG, SEONG I. HAN, YUNG H. LIU, CAROLYN RENDLE, PREIANATHAN ARMOGAM, AMELIA F. M. HENRIKSEN, GEOFFREY LEE DESIGN & CONSTRUCTION LTD., ROBERT J. RIVINGTON, AGNIESZKA RIVINGTON, MARGARET A. C. NIELSEN, KWAN Y. LIU, AMY W. C. LIU, NICOLE L. FUNK, NORMAN D. FUNK, MIRA V. MODI, CHARLES H. SHNIER, WILLIAM V. Y. SHEN, HAPPY C. Y. SHEN, ROSS LOUKAS, GEORGIA LOUKAS, SILVIA B. NEGRONI, LAURA T. NEE, YIRK L. SO, SAU Y. SO, MOHAMED R. M. LUTHFY, SITHIE R. LUTHFY, STEPHEN D. SHAW, ELIZABETH J. L. CLARKE, JI S. LIM, CHOON M. LIM, LILY R. ENG, CAROL M. S. LAI, DONG H. KIM, HYE M. KIM, ALLAN T. OKABE, SUZANNE A. OKABE, TAMARA BELL, PAUL-SONG WU, LI ZHOU, CHRISTINE YIM HUNG SIU, YIN TAT HO
AND WALEED SUKKARIE
Plaintiffs
and
MUSQUEAM INDIAN BAND AND
HER MAJESTY THE QUEEN
IN RIGHT OF CANADA
Defendants
and
KIMBERLEY LAWSON, CHESTER LAWSON, CHERYL BURDICK, DANIEL P, ROYER, XIE SHI WANG (A.K.A. XUE SHI WANG), WILLIAM NORMAN KING,
ROSALIND RAE FORD
Third Parties
REASONS FOR JUDGMENT
MACTAVISH J.
Blank
Para
Background
[3]
The Litigation Surrounding the 1995 Rent Increase
[14]
The Federal Court’s Decision
[15]
The Federal Court of Appeal’s Decision
[25]
The Supreme Court of Canada’s Decision
[28]
The 2015 Rent Negotiation
[44]
The Issues
[48]
The Expert Evidence
[51]
Mr. Dybvig’s Approach to Valuation
[55]
(1) Mr. Dybvig’s First Step: Isolating the “On-reserve” Value of an Interest in Land
[70]
(2) Mr. Dybvig’s Second Step: Determining the Depreciated Value of the Improvements on the Salish Park Properties
[74]
(3) Mr. Dybvig’s Third Step: Calculating the Leasehold to Freehold Adjustment
[89]
(4) Applying Mr. Dybvig’s Analysis to the Musqueam Park Properties
[100]
(5) The Cost of Servicing
[105]
Mr. Neufeld’s Approach
[116]
(1) Mr. Neufeld’s Instructions
[117]
(2) Mr. Neufeld’s Approach to Value
[121]
(3) Mr. Neufeld’s Application of the Direct Comparison Approach
[122]
(4) The Appropriateness of Applying an “On-reserve” Discount
[134]
(5) Mr. Neufeld’s Application of the Land Extraction Method
[142]
(6) The Cost of Servicing
[153]
(7) Mr. Neufeld’s Calculation of the “Fair Rent”
[156]
Analysis
[158]
Why the Evidence of Mr. Dybvig is to be Preferred to that of Mr. Neufeld
[163]
(1) The Relative Qualifications of the Two Experts
[165]
(2) The Level of Care Taken in Each Expert’s Analysis
[173]
(3) Independence
[198]
(4) Methodology
[229]
(a) Mr. Dybvig’s Use of the Land Extraction Method
[230]
(b) Mr. Neufeld’s Analysis of his Vancouver West Side Comparables
[265]
(c) Mr. Neufeld’s Size Adjustment for the Musqueam Park Properties
[288]
(d) Mr. Neufeld’s Estimate of the Depreciated Value of the Salish Park Homes
[292]
(e) Mr. Neufeld’s Calculation of the Leasehold to Freehold Adjustment
[296]
(f) The Discrimination Issue
[299]
The Cost of Servicing the Musqueam Park Lands
[315]
The Inferences to be Drawn from the Fact that Mr. Neufeld Provided Evidence on the Costing Issue
[319]
The Legal Issue Regarding Servicing Costs
[328]
The Impact of the Cost of Servicing on the Current Market Value of the Musqueam Park Lands
[351]
The Allocation of Value Between Lots
[357]
Interest
[362]
Costs
[365]
The Form of the Judgment
[366]
[1] By this action the plaintiffs seek the determination of the “fair rent” to be paid annually by lessees of 69 lots in Musqueam Park, a housing development located on Musqueam Indian Reserve No. 2 in southwest Vancouver, for the 20-year period commencing June 8, 2015. According to the relevant leases, the annual “fair rent” for each lot is to be calculated at 6% of the “current land value” immediately before June 8, 2015.
[2] The Supreme Court of Canada has held that the nature of the interest in land that is to be valued in accordance with the rent review provisions of the Musqueam Park leases is that of a hypothetical fee simple interest in the lands in question. Consequently, the principle issue to be determined in this action is the value of a fee simple interest in the Musqueam Park lands in an unimproved and unserviced state as of June 7, 2015.
I. Background
[3] I do not understand there to be any dispute as to the following facts, which are largely taken from a statement of facts that has been agreed to by the plaintiff leaseholders and the defendant Musqueam Indian Band (MIB). While not a party to the agreed statement of facts, counsel for Her Majesty the Queen in right of Canada (Canada) has confirmed that Canada does not dispute the facts set out below. The Third Parties (who are the leaseholders of the remaining six residential lots in Musqueam Park) have not participated in this action.
[4] On February 17, 1960, the MIB surrendered approximately 40 acres of land situated on Musqueam Indian Reserve No. 2 to Canada for the purpose of leasing the land. In accordance with the provisions of the Indian Act, R.S.C. 1952, c. 149, Canada accepted the surrender for this purpose on April 20, 1961.
[5] On June 8, 1965, Canada entered into a “Master Agreement” with the Musqueam Development Company Limited (the Company). The Company is unrelated to the MIB. Under the terms of the Master Agreement, the Company was required to subdivide and service the surrendered reserve land. The land was then split into two parcels which are described as Parcels B and G in the Master Agreement.
[6] In 1965, Parcel G was subdivided into 69 single-family lots (Lots 1 to 69) and one multi-family lot (Lot 70). Lot 70 is not at issue in this proceeding. Parcel B was subdivided in 1972, when 6 additional single-family lots were created (Lots 7l to 76). A table setting out the lot numbers, civic addresses and size in square feet of each of the lots at issue in this case is attached as Appendix “A” to this decision.
[7] Once the Company had subdivided and serviced the lots, Canada delivered leases to the Company in its favour for each of the 75 lots (the Leases). Other than the description of the individual lot to which each Lease pertains, there are no material differences in the provisions of the Leases, each of which was for a 99-year term. In consideration of a lump sum payment and annual rent to be paid to Canada on behalf of the MIB, the Company then assigned each Lease to individual tenants who would then have a residence built on their leased lot. Since then, the Leases have, from time to time, been re-assigned to new tenants.
[8] Initially, the tenants paid their annual rent to the MIB through Canada. However, in 1980, the Crown transferred management authority over the lands to the MIB, so that the Band now receives the rent payments directly.
[9] Annual rents were established by the Leases for each lot in Parcel G for the first 30 years of the lease term: that is, from June 8, 1965 to June 7, 1995. The rents were as follows:
An average of approximately $298 for each year of the first ten years of the term of the Leases;
An average of approximately $343.75 for each year of the second ten years of the Lease terms; and
An average of approximately $375 for each year of the third ten-year term of the Leases.
[10] The annual rent and lease period for each lot in Parcel B varied slightly as a result of the later commencement date of those Leases.
[11] The Leases provided that rents were to be reviewed after the first 30 years of the Lease terms, and every 20 years thereafter. The rent review provisions of the Leases are contained in subsections 2(2) to 2(4) of the Leases. They state that:
(2) The rent for each year of the three succeeding twenty (20) year periods and for each year of the final nine (9) year period of [the] term hereof, shall be a fair rent for the land comprised in each of such leases negotiated immediately before the commencement of each such period. In conducting such negotiations the parties shall assume that, at the time of such negotiations, the lands are:
(a) unimproved lands in the same state as they were on the date of this agreement;
(b) lands to which there is public access;
(c) lands in a subdivided area, and
(d) land which is zoned for single-family residential use,
and the foregoing assumption[s] shall also be made in the case of any determination of the rent pursuant to the provisions of subparagraph (3) hereof.
(3) In the event the Minister and the Lessee or its assignees cannot reach agreement on the rents to be paid in any of the succeeding periods as provided in subparagraph (2) above, the question shall be determined under the authority of paragraph (g) of [….] subsection (1) of Section 18 of the Exchequer Court Act.
(4) An annual clear total rental which represents six percent (6%) of the current land value, calculated at the time of renegotiation, and on the basis set out in subparagraph (2) hereof, shall be regarded as a “fair rent” for the purposes thereof.
[12] The first time that the rents came up for negotiation under the terms of the Leases was in 1995. While the per lot annual rent demands varied, on average, the MIB demanded an annual rent of approximately $36,000 per year for each lot. The lessees did not accept this demand, and the parties were unable to come to an agreement as to an appropriate rent increase for the 20-year period commencing June 8, 1995.
[13] Consequently, in 1996, the MIB commenced an action in this Court, as the successor to the Exchequer Court. By its action, the Band sought an order setting the annual “fair rent” for each of the 75 lots for the period from June 8, 1995 to June 7, 2015 (the 1996 action).
II. The Litigation Surrounding the 1995 Rent Increase
[14] The 1996 action proceeded through three levels of court, culminating in a decision of the Supreme Court of Canada in 2000. Given that the findings made by various Courts are central to this case, I will review the decisions relating to the 1996 action in some detail.
A. The Federal Court’s Decision
[15] The trial of the MIB’s action took place in June of 1997, before Justice Rothstein, who was then a judge of this Court. His decision is reported as Musqueam Indian Band v. Glass (1997), 137 F.T.R. 1, [1997] F.C.J. No. 1339 (Glass FC).
[16] Justice Rothstein observed in Glass FC that title in Indian reserve lands is generally inalienable, and that a Band may not sell or otherwise encumber reserve lands except by surrendering the land to the Crown. While surrender permits the land to be held in fee simple, it irrevocably strips the property of its character as ‘land reserved for Indians’. As the lands at issue in the 1996 action had been surrendered to the Crown for leasing purposes and not for sale, Justice Rothstein found that it would be inappropriate to value them as if they were held in fee simple. Rather, he concluded that “for rent renegotiation purposes, the estate and tenure [to be valued] is a 99-year leasehold” interest in reserve land: Glass FC at para. 38.
[17] Because of the difficulties in determining the current value of the Musqueam Park land, Justice Rothstein started his analysis by looking to the value of neighbouring non‑reserve lands. The appraisal experts appearing before Justice Rothstein agreed that the average fee simple value of comparable off-reserve lots in June of 1995 was $600,000. Using this figure as his starting point, Justice Rothstein then discounted the value of the lands at issue by 50%, because of the long-term leasehold nature of the interest in the property, and what he described as “Indian reserve features”. This led him to arrive at an average land value of $300,000 per lot: Glass FC at para. 86.
[18] The MIB argued at trial that taking the Indian reserve status of the Musqueam Park lands into account in arriving at the current land value of the lots in question was discriminatory, and contravened section 15 of the Canadian Charter of Rights and Freedoms, Part I of the Constitution Act, 1982, being Schedule B of the Canada Act 1982 (U.K.), 1982, c. 11. According to the MIB, considering the inalienability of reserve lands “unfairly devalues reserve land and wrongly perpetuates the historic disadvantage and discrimination against Indians and their land”: Glass FC at para. 41.
[19] Justice Rothstein acknowledged that “the approach to valuation has been a sensitive issue in this case”: Glass FC at para. 41. However, he rejected the MIB’s discrimination argument, concluding that land in Musqueam Park has a lower value than neighbouring fee simple property, not because of discriminatory considerations but because of the market. He further concluded that the lower value was “not significantly related to the leasehold aspect”, as the experts had testified that there was “no discernable difference between the value of leasehold and freehold interests” at the start of a long-term lease: Glass FC at para. 57. Rather, the difference between the value of Musqueam land and neighbouring fee simple land off the reserve was attributable to what he called the “Indian reserve feature[s]” of the land: Glass FC at para. 57.
[20] According to Justice Rothstein, “Indian reserve features” were “factors that might negatively affect the value of a long-term leasehold interest in land on an Indian Reserve”: Glass FC at para. 43. These factors included uncertainty regarding property assessment and taxation, publicized unrest on several Indian reserves in the Province, and the inability of non-Natives to stand for election to the Reserve’s governing body, the Indian Band Council, which meant that non-Native residents had no vote on matters such as planning, zoning or taxation. Ministerial approval was, moreover, required for certain sales, mortgages or construction. Finally, although the City of Vancouver was providing services such as garbage pick-up, sewer, police and fire services to the Musqueam Park properties under contract, permanent arrangements for the provision of these services had yet to be finalized: Glass FC at para. 44.
[21] Justice Rothstein arrived at his 50% discount rate by comparing the value of pre-paid leasehold properties in Salish Park (another residential development on Musqueam Indian Reserve No. 2 close to Musqueam Park) with that of properties on the west side of the City of Vancouver. He determined that Salish Park lots sold for approximately half of what comparable west side properties were going for, accepting the opinion of an appraiser that the difference in value was attributable to the fact that the Salish Park properties were located on the Musqueam Reserve. Justice Rothstein was further satisfied that the 50% discount rate was transportable to the Musqueam Park properties, giving him an average land value of $300,000 per lot.
[22] Having arrived at an average land value of $300,000 per lot, Justice Rothstein next had to address “whether and to what extent servicing costs should be deducted from the serviced land value in Musqueam Park to comply with the prescribed assumption in paragraph 2(2)(a) of the Lease”. This provision states that in arriving at the current market value of the Musqueam Park properties for rent review purposes, the lands are to be considered as if they were “unimproved lands in the same state they were in on the date of this agreement”. Justice Rothstein had to determine which “agreement” was being referred to in the Leases. This was important, as the lands were serviced by the time that the Leases were entered into, but were unserviced at the time that the Master Agreement was signed on June 8, 1965.
[23] Justice Rothstein concluded that the agreement that was referred to in the Leases was the Master Agreement, with the result that the parties were required to assume that the land was unserviced for rent review purposes: Glass FC at para. 96. Consequently, Justice Rothstein concluded that that all servicing costs had to be deducted from the current value of serviced lots in Musqueam Park: Glass FC at para. 101.
[24] Although the annual rent set under the Leases for the twenty-year period commencing June 8, 1995 differed among the 75 lots, depending upon their size and other characteristics, the result of Justice Rothstein’s decision was that the average annual rent for lots in Musqueam Park for the period from June 8, 1995 to June 7, 2015 was determined to be approximately $10,000 per lot.
B. The Federal Court of Appeal’s Decision
[25] The Federal Court of Appeal allowed the appeal from Justice Rothstein’s decision, in part: Musqueam Indian Band v. Glass, [1999] 2 F.C. 138, [1998] F.C.J. No. 1893 (Glass FCA). The Court disagreed with Justice Rothstein as to the nature of the property interest to be valued, finding that he had erred in focussing on the nature of the lessees’ interest in the land rather than the value of the land itself. Consequently, the Federal Court of Appeal found that the “current land value” meant the value of a freehold interest in the land, rather than the value of a 99-year leasehold interest in the lands in Musqueam Park.
[26] The Court further found that because the interest to be valued was a fee simple, and not a leasehold interest in land on the Reserve, Justice Rothstein had erred in imposing a 50% percent reduction to account for the “Indian reserve features” of the land: Glass FCA at para. 75.
[27] According to the Federal Court of Appeal, the reference to the “current land value” in the Leases meant that the Band was entitled to receive 6% of the fee simple value of the land as annual rent, and that the hypothetical fee simple value of the average lot was thus $600,000.
C. The Supreme Court of Canada’s Decision
[28] The principal issue before the Supreme Court of Canada was whether the phrase “current land value” in the Leases meant the value of the land as reserve land (as the lessees contended) or, as the Band argued, the value of fee simple title to similar land off-reserve, absent factors associated with its reserve status: Musqueam Indian Band v. Glass, 2000 SCC 52 at para. 5, [2000] 2 S.C.R. 633 (Glass SCC).
[29] In a split decision, eight of nine judges agreed that in the absence of any contrary indications in the Leases, the term “current land value” in the rent review provisions of the Musqueam Park Leases referred to the fee simple value of the property, rather than its leasehold value: Glass SCC at paras. 9 and 35. Justice Bastarache was, however, of the view that the “current land value” should be calculated on the basis of a leasehold interest in the Musqueam Park lands, as the land at issue was in fact leasehold land on a reserve. In his view, this approach was consistent with the parties’ intentions: Glass SCC at para. 61.
[30] Writing for three other judges, Justice Gonthier noted that, as it is used in the real estate context, the term “value”, “generally means the fair market value of the land, which is based on what a seller and buyer, ‘each knowledgeable and willing,’ would pay for it on the open market”: Glass SCC at para. 37. He further noted that the economic rationale for determining rent as a percentage of land value is that fixing rent as a percentage of the market value of the land “is a formula by which a conservative investor expects to receive, in return for accepting a modest return on his investment, a maximum of certainty and a minimum of risk”: Glass SCC at para. 40, quoting Revenue Properties Co. v. Victoria University (1993), 101 D.L.R. (4th) 172 (Ont. Div. Ct.), at p. 180.
[31] According to Justice Gonthier, rents thus represent the true return on the market value of the land, reflecting the fact that the lessor could sell the land at its current land value and reinvest the proceeds at market rates of interest, if the lands were not subject to a long-term lease. Valuing the Musqueam Park land at its freehold value is thus consistent with an interpretation of the Leases that sees the rent review clause as an attempt to generate an annual fair market return on a capital asset: Glass SCC at para. 40. Chief Justice McLachlin (writing for four judges) came to a similar conclusion: Glass SCC at para. 10.
[32] According to Justice Gonthier, valuing the Musqueam Park lands at their freehold value did not, however, lead to the Federal Court of Appeal’s finding that the freehold value of land outside the Reserve should be used to determine the rent. That is because the capital asset that is at issue is reserve land surrendered for leasing, and not reserve land that had been surrendered for sale. Moreover, the Musqueam Park Leases did not specify that off-reserve land values should be used in the rent review formula.
[33] While recognizing that there is no such thing as freehold title to reserve lands, Justice Gonthier nevertheless held that a hypothetical fee simple value could be assessed and used in the rent review calculation: Glass SCC at para. 35. According to Justice Gonthier, in the absence of an actual market for fee simple reserve lands, the hypothetical to be used to establish market value should reflect the land in its actual circumstances, and should not change the nature of the land appraised.
[34] That is, the value of a hypothetical fee simple interest in land on the Reserve should reflect the legal restrictions on land use and market conditions, as opposed to restrictions on use found in the Leases. One cannot, however, simply assume that “… market conditions are the same for reserve land as for off-reserve land”, and one cannot simply transpose fee simple off-reserve values to the Musqueam Park lands: Glass SCC at para. 46. Consequently, Justice Gonthier directed the parties to look to market evidence in the future in order to value a hypothetical fee simple interest in land located on the Musqueam Reserve: Glass SCC at para. 48.
[35] It will be recalled that Justice Rothstein had found as a fact that the fee simple value of comparable lands off of the Reserve was $600,000 on average, a figure that had been accepted by experts for both sides. This finding had not been disturbed by the Federal Court of Appeal, and the $600,000 average lot value for off-reserve comparables was also accepted by the majority of the Supreme Court.
[36] Five judges, including Justices Gonthier and Bastarache, further accepted that it was appropriate to apply a discount to the current market value of the Musqueam Park properties to reflect the fact that the lands in Musqueam Park were on a reserve. In coming to this conclusion, Justice Gonthier noted that the assessment of the value of a property had to reflect market conditions affecting the property in question, and that the legal environment on a reserve also had to be taken into account when determining the value of the land: Glass SCC at para. 48.
[37] Justice Gonthier recognized that the fact that there is no actual market for the freehold properties governed by the Leases creates difficulties in arriving at the current market value of the properties in question, as reserve lands would lose their reserve features as soon as they were surrendered for sale. However, the majority of the Supreme Court nevertheless held that the hypothetical value of fee simple title to reserve land could be determined by adjusting the off-reserve value to take into account the actual features of the land and of the market: Glass SCC at para. 49.
[38] The majority of the Supreme Court further noted that the legal interest in the Salish Park properties was a leasehold, and not a freehold interest, whereas the task for the Court was to identify the hypothetical fee simple value of the lands at issue. Consequently, the Court found that Justice Rothstein had erred in discounting the land to reflect its leasehold features: Glass SCC at para. 52. The majority was, however, satisfied that this error did not significantly affect the market value of the Musqueam Park land, as the experts agreed that there was no discernable difference between the value of leasehold and freehold interests in land at the start of a long-term lease.
[39] The majority further noted that the 50% discount rate had not been disputed by the parties before the Supreme Court, and no submissions had been made on this issue. The majority accepted that the uncertainties that had been identified by Justice Rothstein were reflected in the 50% reduction in the value of properties in Musqueam Park. Because the current market value of the Musqueam Park lands was 50% less than the value of comparable off-reserve properties, it followed that the rent for the 20-year period in issue had to be based on this discounted value.
[40] While the Supreme Court did not disturb Justice Rothstein’s finding regarding the 50% discount rate, the majority was nevertheless careful to note that the market may respond differently in the future, and that “[i]t will be a question of fact what, if any, discount should be applied” in the future: Glass SCC at para. 52.
[41] All nine of the judges were in agreement insofar as the issue of servicing costs was concerned. The question before the Supreme Court was whether “unimproved” meant simply without buildings, or whether it meant without services as well. If it was the latter, some amount had to be deducted from the “current land value” in order to notionally return the land to its unserviced condition: Glass SCC at para. 54.
[42] The Supreme Court determined that the plain meaning of the phrase “unimproved lands” was “unserviced lands”, and not just lands without buildings: at para. 55. Consequently, the cost of servicing the land had to be deducted from the current market value of the property.
[43] The result of the Supreme Court of Canada’s decision was to affirm Justice Rothstein’s finding that that the average annual rent for lots in Musqueam Park for the period from June 8, 1995 to June 7, 2015 should be set at approximately $10,000 per lot.
III. The 2015 Rent Negotiation
[44] In early 2015 the Leaseholders, through their representative the Musqueam Park Leaseholders Association (MPLA), met with representatives of the MIB in an effort to negotiate, on a without prejudice basis, the annual “fair rent” for the Musqueam Park properties for the period from June 8, 2015 to June 7, 2035. Despite negotiating in good faith, the parties were unable to reach an agreement with respect to the rents to be paid for the twenty-year period in question.
[45] On May 8, 2015 the MIB issued a written Notice of Rent to each of the Leaseholders advising that rents for the period from June 8, 2015 to June 7, 2035 would be increased to amounts ranging from $58,543 to $146,743 per annum. The average proposed new rent was approximately $80,000 per year for each lot, representing an eightfold increase in the average annual rent from that which had been determined to be the “fair rent” for the period from June 8, 1995 to June 7, 2015.
[46] The Leaseholders did not accept the MIB’s proposed rent increase, and despite further without prejudice negotiations between the MIB and the MPLA, the parties were unable to resolve the dispute through negotiation. Consequently, in accordance with the terms of the Leases, the plaintiff Leaseholders commenced these proceedings in this Court on November 12, 2015.
[47] In the meantime, pending determination of the annual “fair rent” by this Court, each Leaseholder has continued to pay the annual rent set in accordance with the decision in Glass SCC to the MIB, subject to such future adjustment as may be necessary after the determination by this Court of the annual “fair rent” that should be payable from June 8, 2015 to June 7, 2035.
IV. The Issues
[48] The parties agree that there are two issues that require resolution in this action. They are:
Which of the appraisal experts’ methodologies should be adopted as having achieved the task set by the Supreme Court in Glass SCC of determining the market value of a hypothetical, fee simple, on‑reserve lot, without improvements and without servicing?
What servicing costs have to be deducted from the value of hypothetical fee simple on‑reserve lots in order to arrive at the value of the lots as unimproved lands in the same state as they were on the date of the Master Agreement, that is, without improvements and without servicing?
[49] Insofar as the first issue is concerned, the plaintiffs submit that once I make a finding as to which of the two appraisers’ evidence is more reliable, it follows that I should accept that appraiser’s estimate of the current market value of the Musqueam Park lands. The plaintiffs contend that I should not substitute my own opinion on specific issues, as appraisal techniques are outside the Court’s expertise: Piot v. Canada, 2016 FC 1077 at paras. 92 and 93, [2016] F.C.J. No. 1042.
[50] That said, I understand the plaintiffs to agree with the MIB that my analysis of the expert evidence does not require an “all or nothing” approach, and that it is indeed open to me to accept the evidence or arguments of one side on some issues, and the evidence or arguments of the other side on other issues. I agree that this is open to me in considering the task at hand.
V. The Expert Evidence
[51] The plaintiffs and the MIB each called a real estate appraisal expert to testify as to the “current market value” of a hypothetical fee simple interest in the lands at issue in this proceeding. The plaintiffs called Larry Dybvig as their appraisal expert, whereas the MIB called Lonnie Neufeld as their expert. Both individuals were qualified as experts in land appraisal and the determination of ground rent.
[52] The plaintiffs also called Nancy Hill to testify on their behalf. Ms. Hill was qualified as an expert in civil engineering and the costing of municipal infrastructure, and she provided evidence as to the cost of servicing the Musqueam Park lands. Mr. Neufeld also provided evidence on the servicing cost issue, although the MIB abandoned most of his evidence on this issue prior to the commencement of the trial.
[53] Although represented by counsel throughout the trial, Canada called no evidence, nor did it cross-examine any of the other parties’ witnesses or make any submissions in this matter. As noted earlier, none of the Third Parties participated in this proceeding.
[54] Insofar as the appraisal evidence is concerned, Messrs. Dybvig and Neufeld took fundamentally different approaches in attempting to arrive at the current market value of a hypothetical fee simple interest in the Musqueam Park lands. Each of these approaches will be discussed below.
A. Mr. Dybvig’s Approach to Valuation
[55] In explaining his approach to valuation in his initial appraisal report, Mr. Dybvig noted that depending on the nature of the available data, a number of different approaches can be taken to value land that is vacant and suitable for development.
[56] Mr. Dybvig acknowledged in cross-examination that the direct comparison approach is the preferred method to use, where comparable sales are available. This approach is based on the principle of substitution, according to which it is to be expected that a prudent purchaser will not pay more for a property than the cost of acquiring an equally desirable substitute property that is available under similar terms and conditions.
[57] The direct comparison approach requires research and a comparative analysis of transactions involving essentially similar properties and market conditions. In this case, Mr. Dybvig says that comparable sales would have been recent sales of on‑reserve properties in the Musqueam Park community that were held in fee simple and had the same highest and best use as the properties being valued. Comparable properties would also be similar in size and shape to the properties in issue, and would also be subject to similar land use controls.
[58] According to Mr. Dybvig, the location of the subject lands on a reserve complicates the analysis in this case. The direct comparison approach cannot be used here, he says, as there are no actual sales of fee simple reserve lands that could be used to determine the current market value of the Musqueam Park properties. This is because reserve lands are never held in fee simple, and the interest to be valued is thus a hypothetical one.
[59] Although there were other approaches that could have been used to ascertain the value of hypothetical fee simple lots on the Musqueam Reserve, Mr. Dybvig asserts that most of these approaches would require that a number of adjustments be made in order to arrive at a fee simple on‑reserve value, making the results of the valuation exercise less reliable.
[60] Mr. Dybvig specifically considered whether regard should be had to freehold sales of properties located on Vancouver’s west side in valuing the Musqueam Park properties. He determined that there were several reasons why this would not be appropriate.
[61] First, Mr. Dybvig found that the market on the west side of Vancouver was not behaving the same way that it was in either Musqueam Park or Salish Park. It will be recalled that Salish Park is another subdivision located on the Musqueam Reserve, just south of Musqueam Park, which shares many attributes with Musqueam Park. There are 154 lots in Salish Park, and the development was created by 99-year prepaid leases in or around 1970.
[62] Mr. Dybvig noted that prices were escalating rapidly in the freehold marketplace on the west side of Vancouver in June of 2015, with the value of the lots outstripping the relative value of the homes located on them. This imbalance led to the phenomenon of “economic” or “external obsolescence”, which has resulted in many homes on Vancouver’s west side that were not otherwise physically or functionally fully depreciated being bought as “tear downs”.
[63] That is, the significant and rapid increase in land values on the west side of Vancouver, coupled with the virtual unavailability of vacant lots in the area, has led to lots with habitable 40- or 50-year-old homes on them being purchased for large sums of money. Because the homes on the lots are of a quality and/or size that no longer matches the value of the land, the homes are being demolished soon after the completion of the sale, and are being replaced by larger homes. This phenomenon was not, however, being observed in either Salish Park or Musqueam Park. The absence of “tear downs” in these two communities suggested to Mr. Dybvig that the highest and best use of the land continues to be the homes already located on it.
[64] Mr. Dybvig further noted that any comparison between the value of a hypothetical fee simple interest in land on a reserve and that of an actual fee simple interest in land off-reserve would first require the determination of the value of an “on‑reserve” interest. Once that value was known, undertaking the additional step of determining the value of a comparable fee simple property off-reserve would be superfluous or redundant.
[65] In Mr. Dybvig’s view, the most important and most difficult factor in valuing the Musqueam Park properties is the on‑reserve fee simple nature of the interest to be valued. This is because on‑reserve and off-reserve land values vary “for reasons on which [he] could only speculate”, and the variance can differ from location to location.
[66] Because of the absence of clear market data with which to make the appropriate market-based adjustments from off-reserve sales to on‑reserve values, Mr. Dybvig was of the view that it would be fundamentally unreliable to use transactions involving properties on the west side of Vancouver as his comparable sales, and accordingly, he did not use them. Instead, he selected the approach that he says provided the most market-based information and required the fewest adjustments.
[67] Mr. Dybvig looked at recent sales of properties in Salish Park as the best source of comparable sales to be used in valuing the Musqueam Park lots. Salish Park properties share many features with Musqueam Park lots in terms of the nature, layout and quality of the neighbourhood. Both subdivisions are adjacent to the Shaughnessy Golf & Country Club, and average lot sizes in Salish Park are similar to those in Musqueam Park. Consequently, the Salish Park sales met all of Mr. Dybvig’s criteria for sales to be comparable, with one exception: the nature of the interest in the land in question.
[68] As is the case with Musqueam Park properties, Salish Park properties are not held in fee simple. However, unlike the lots in Musqueam Park (where rent is paid on a periodic basis), occupants of Salish Park properties hold prepaid leasehold interests in their lots, with 58 years remaining on the term of the Leases as of the June 7, 2015 valuation date. This difference does not present a problem in valuing the properties, however, as Mr. Dybvig and Mr. Neufeld agreed that property appraisers can readily determine the appropriate “leasehold to freehold” adjustment to control for this factor through a market analysis.
[69] With this in mind, Mr. Dybvig utilized a three-step approach involving an extraction analysis to arrive at the current market value of a hypothetical fee simple interest in the Musqueam Park lands.
(1) Mr. Dybvig’s First Step: Isolating the “On‑reserve” Value of an Interest in Land
[70] Mr. Dybvig’s first step was to isolate the “on‑reserve” value of an interest in land. To do this, he analyzed 21 sales in the Salish Park subdivision that occurred in the three years preceding the June 7, 2015 valuation date, adjusting for time where necessary.
[71] To adjust for time, Mr. Dybvig plotted his 21 Salish Park sales on a graph to determine whether there was a demonstrated relationship between the date of sale and the price achieved. This analysis showed that notwithstanding the significant increase in the value of homes in Vancouver in the last few years, there was little relationship between the date of sale and the sale price when it came to homes in Salish Park.
[72] Mr. Dybvig also analyzed three paired sales from his cohort of 21 comparables. By comparing the sale price of very similar Salish Park properties that were sold at different times, Mr. Dybvig was able to confirm that there had been little, if any, change in value that would require an adjustment to sale prices to reflect market conditions in Salish Park in the three years leading up to the June 7, 2015 valuation date.
[73] This analysis gave Mr. Dybvig the market value of 58-year prepaid leasehold interests in improved lots of various sizes that were actually on the Musqueam Reserve. It is important to note that because the Salish Park properties were on the Musqueam Reserve, it was not necessary for Mr. Dybvig to determine whether any “on‑reserve discount” should be applied to the value of the Musqueam Park properties relative to