Date: 19990608
Docket: T-2406-90
BETWEEN:
HER MAJESTY THE QUEEN
Plaintiff
and
KENNETH EDWIN CROSSON and PHYLLIS EVELYN CROSSON
Defendant
T-2407-90
HER MAJESTY THE QUEEN
Plaintiff
and
WASAGAMING WIGWAM LTD.
Defendant
T-2408-90
HER MAJESTY THE QUEEN
Plaintiff
and
69158 MANITOBA LTD.
Defendant
T-2409-90
HER MAJESTY THE QUEEN
Plaintiff
and
KENNETH CHARLES BURR and EDITH MARIS BURR
Defendant
T-2410-90
HER MAJESTY THE QUEEN
Plaintiff
and
BEA-GREN ENTERPRISES LTD.
Defendant
T-2411-90
HER MAJESTY THE QUEEN
Plaintiff
and
GEORGE EVERETT NEILLY
Defendant
T-2412-90
HER MAJESTY THE QUEEN
Plaintiff
and
DONALD KENNETH HAWKING and CAROL DIANNE HAWKING
Defendant
REASONS FOR JUDGMENT
EVANS J.:
[1] Riding Mountain is Manitoba"s only national park. It is a place of considerable natural beauty and currently draws approximately 400,000 visitors a year, mostly in the summer months of June through September. Clear Lake is one of its great attractions.
[2] From the time that the park was established in the 1930s the Crown has granted leases in the park, for both residential and commercial purposes. The commercial lessees are nearly all located in the park"s town site, Wasagaming, and provide various goods and services to visitors. The presence of businesses has been an important element over the years in Parks Canada"s development of Riding Mountain for visitors.
[3] This litigation has its roots in a report submitted to Public Works Canada by an independent land appraiser in 1989 as part of the decennial rent review process for lessees in the park. On the basis of the report the rents payable for the ten years starting April 1, 1990 were increased very substantially. For commercial lessees, including the defendants in this litigation, the increases ranged from 300-360%, compared with 30-40% increases in the rents of the residential lessees, the cottagers.
[4] The defendants, seven in all, refused to accept any of the rent-setting options offered by Parks Canada and have continued to pay only the rent fixed in the previous decennial review in 1980. In form, this litigation is an action by the Crown for the recovery of rent due but unpaid from April 1, 1990. In substance, however, it is a request by the defendants in accordance with the terms of their leases for a judge of the Federal Court of Canada to determine their rent.
[5] The central issue in dispute is the accuracy of the Crown"s evaluation of the unimproved fee simple in the land leased to the commercial lessees. This in turn depends on the report prepared for the Crown by Mr. David Lenych, an experienced real estate appraiser in Manitoba. Mr. Lenych concluded that, like most other land, the value of the land in Riding Mountain had increased very substantially during the 1980s.
[6] The difficulty facing Mr. Lenych in determining the value of the land was that there had been no sales of precisely comparable land during the 1980s: that is, there had been no sales of unimproved lots in Riding Mountain, or leases granted by the Crown, for commercial purposes. His solution was to research sales that he believed to be broadly comparable, mostly sales of residential property in the area during the relevant period, to develop a bench-mark value from this evidence, and then to adjust it to take into account park conditions and to allow for a margin of error.
[7] In determining whether the Crown has established that in all the circumstances the 1990 rent increases imposed on the defendants were fair and equitable I shall consider a range of factors: the terms of the defendants" leases; the regulatory framework created by the National Parks Act R.S.C. 1985, c. N-14 and the regulations made under it; the process by which the 1990 rents were determined and the other evidence before me pertaining to the value of the land; and the appropriateness of using a capitalization rate of 6% of appraised value to fix the rents.
[8] However, as I have already indicated, the resolution of this dispute turns principally on the appraisal of the land relied on by the Crown. It was acknowledged by counsel for the parties that land appraisal is not an exact science. Certainly, there are some important concepts and principles that are generally accepted among land appraisers as providing the essential analytical framework for the conduct of a reliable appraisal. However, it is equally clear that the experience and professional judgment of the appraiser are also important components, and that reasonable and well qualified appraisers can reach different conclusions on the value of a piece of land.
[9] In the course of his cross-examination, Mr. Booth, counsel for the defendants, succeeded in denting aspects of Mr. Lenych"s report and the evidence that he gave at trial. However, none of the hits scored by Mr. Booth inflicted any significant damage on the essential premises, methodology and conclusions of the report, or on the credibility of Mr. Lenych and his testimony.
[10] In contrast, counsel for the Crown, Mr. Edwards, effectively demolished in cross-examination the evidence given by Mr. Dennis Browaty, the appraiser retained and called as an expert witness by the defendants. So complete was the demolition that Mr. Browaty ended up by agreeing that were it not for some crucial errors in his report, his methodology and calculations would have indicated that many of the 1990 rent increases should probably have been higher than those fixed by the Crown on the basis of Mr. Lenych"s report.
[11] Not surprisingly, Mr. Booth did not seek to rely on Mr. Browaty"s evidence when he made his closing submissions. Instead, he relied heavily on the transcript of the examination for discovery of Mr. James Murray, the principal of one of the defendants, who has owned and operated businesses in Riding Mountain for more than 20 years. While appraisals may be almost as much art as science, I can attach relatively little weight to the opinion of the value of land given by a person, such as Mr. Murray, who is neither a professionally qualified appraiser, nor disinterested in the value of the property.
[12] Finally, I should note that the seven actions were heard together pursuant to an order of Muldoon J., dated April 8, 1998. The legal and factual issues raised by the cases are for all practical purposes identical.
[13] The leases of five of the seven defendants have been renewed and are in materially identical terms, while two of the leases are original and are couched in somewhat different language. However, in my opinion, nothing turns on the differences in the wording of the renewed and original leases, and I have concluded that the relevant provisions of the leases of all seven defendants are to the same effect.
[14] The leases held by the defendants are all perpetually renewable. This is a very valuable aspect of the leases as far as the lessees are concerned. Subject to the payment of rent and to the conditions contained in the leases, the interest in the land of lessees of perpetually renewable leases approaches that of a fee simple owner.
[15] All the leases also contain decennial rent review provisions. The rent review clause of the five renewed leases provides that a lessee who does not agree to the rent fixed by the Minister for the next ten years may request
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... that a determination be made by a Judge of the Federal Court of Canada, such yearly rent to be calculated altogether as ground rent of a parcel of land situated as the said premises shall be situated and the value of any buildings, tenements, houses or erections placed thereon by the lessee shall not be taken into account in fixing such rent ... |
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The rent review clause in the original leases provides that, if the lessee does not agree to the rent fixed by the lessor, the rent shall be
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... as may be determined by a Judge of the Exchequer Court to be the full annual value of the tenement at the time of such determination ... |
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[16] It is common ground that the value of the buildings on the land is to be disregarded in fixing the rent payable by the defendants, even though the original lease does not contain a provision expressly to this effect. It would, however, be unfair to permit the Crown to include in the rent the value of any buildings erected at the expense of or paid for by the lessee, and the Crown has always proceeded on the assumption that, when the value of the land is appraised, it is to be without regard to any buildings on it.
[17] There was some disagreement, however, about the interest in the land that was to be valued in this exercise. Mr. Booth maintained that the appraisal should have been based on the value of the leasehold interest held by the lessees, rather then the fee simple estate of the Crown out of which the leases were carved. He relied particularly on the language contained in the original leases which provided that the rent shall be "the full annual value of the tenement".
[18] In the letter of transmittal accompanying his report to Public Works Canada Mr. Lenych stated that he had appraised the lots "as if they were vacant and assumed to be in fee simple interest", that is, unencumbered by leases. The appropriateness of this assumption was confirmed by another expert witness called by the Crown, Mr. Peter Nichols, a management and economic consultant, and financial analyst, whose experience includes real estate feasibility and market studies.
[19] Mr. Nichols testified that the market rent of land represents the income that the fee simple owner could have generated from the highest and best permitted use of the land. Therefore, if rent is set accurately it will capture the whole of the annual value of the fee simple, so that the value of the lessee"s interest in the land is zero. Accordingly, an assignee would be prepared to pay nothing to the lessee for an assignment of the lease. However, if the lessee has put up buildings, or runs a business on the land, these would have a value that accrues to the lessee for which a purchaser would be willing to pay for an assignment of the lease.
[20] Accordingly, since the context of the disputed phrase in the original form of the leases under consideration here is a rent review clause, the words "the full annual value of the tenement" should be interpreted to refer to the annual value, or income, produced by the fee simple, as if the lands have not been leased. As the leasehold interest in the land, without buildings, should be zero if a market rent is charged, it would make no sense to interpret "tenement" as meaning leasehold interest.
[21] In the rent review clause in the renewed leases the word "tenements" equally clearly refers to things built on the land. However, in my opinion this does not put in doubt the meaning that I have attributed to it in the original leases. As Black"s Law Dictionary (6th edition, 1990) states, "tenements" can mean either the houses or buildings on land or, "in its original or legal sense", the lands themselves.
| (iii) occupancy restrictions |
[22] Six of the leases under consideration in this litigation permit the lessees to occupy their lots only in the months of April to October inclusive. Only one lease provides for 12 months" occupancy. Mr. Lenych stated that his appraisal of the value of the land took this limitation into account, and treated it, in effect, as a zoning restriction forming part of the regulatory and economic environment in which the land is situated and a factor relevant to determining its highest and best permitted use.
[23] Whether he gave sufficient weight to the fact that the leases prohibited the lessees from using the land for 40% of the year is a matter of dispute between the parties. The defendants" suspicion that he did not has been fuelled by the Minister"s decision to reduce by 40% the rents payable by the cottagers on the 1990 appraisal of their lots.
| (iv) commercial nature of the leases |
[24] Each of the defendants" leases provides that the land to which it relates is to be used for business or commercial purposes. The defendants complain that there is no reason why the Minister did not extend to commercial lessees the full rent reduction offered to residential tenants, since there is nothing in the leases to support such differential treatment. Furthermore, Mr. Booth argued, it is inconsistent for the Crown to make this distinction between commercial and residential lessees, while at the same time seeking to justify the 1990 rents by reference to Mr. Lenych"s report, which assumes that commercial and residential land has approximately the same value.
[25] This is a point to which I shall return. However, in my opinion the fact that the only difference between the two categories of lease is that one prescribes a commercial use of the land, and the other a residential use, does not preclude the Minister as a matter of discretion from treating one class more favourably than the other in setting the rent. Nor, of course, does it follow from this that for appraisal purposes the values of residential and commercial land are not normally regarded as comparable.
| C. The Statutory Framework |
[26] The Crown"s right as owner of the land in Riding Mountain National Park to sell, lease or otherwise dispose of it is subject to the statutory framework established by and under the National Parks Act . In particular, subsection 7(1) of the Act authorizes the Governor in Council as he deems expedient to make regulations for
| (g) the granting, amending and surrender of leases and licences of occupation of public lands in towns and visitor centres for the purposes of residence, trade, tourism, schools, churches, hospitals and places of recreation or entertainment, and of public lands in resort subdivisions for the purpose of residence;
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g) l'octroi de baux et de permis d'occupation " y compris leur modification et leur annulation " sur des terres domaniales situées dans les périmètres urbains et les centres d'accueil pour habitation, commerce, tourisme, écoles, églises, hôpitaux et lieux de divertissement ou de récréation, ainsi que de terres domaniales situées dans des centres de villégiature aux fins de résidence;
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Wasagaming is a "visitor centre". Paragraph 7(1)(h ) contains a similar authorization in respect of park lands outside towns and visitor centres.
[27] The regulations applicable to these proceedings are the National Parks Lease and Licence of Occupation Regulations SOR/81-627. These regulations were repealed in 1991 by regulations with a similar name and an expanded, but broadly analogous content.
[28] Subsection 9(1) of the 1981 Regulations set out four formulae for the determination, at ten yearly intervals, of the rents payable by lessees in national parks, including Riding Mountain. The lessee is required to select one of the following options:
| (a) six per cent per annum of the appraised value of the lot to which the lease applies;
(b) an average of six per cent per annum of the appraised value of the lot to which the lease applies, phased in at equal increments over the rental period terminating in 1990;
(c) a negotiated percentage of the annual gross revenue of the lessee"s business conducted on or from the lot to which the lease applied plus 25 per cent of the annual fair market rent derived by the lessee from all sublessees of any premises on the lot to which the lease applies; or
(d) the greater of 25 per cent of the annual fair market rent for the premises on the lot to which the lease applies and two per cent per annum of the appraised value of the lot to which the lease applies.
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| a) de six pour cent par année de la valeur estimative de visé par le bail;
b) d"une moyenne de six pour cent par année de la vie estimative du lot visé par le bail, établi suivant des augmentations égales et échelonnées sur la période de locative terminant en 1990;
c) un pourcentage négocié des recettes annuelles brutes l"entreprise exploitée par le locataire sur le lot visé par bail ou à partir dudit lot, plus 25 pour cent par année à juste valeur locative marchande perçue par le locataire tous les sous-locataires des locaux situés sur le lot visé par bail; ou
d) le plus élevé des deux montants suivants soit 25 pour cent par année de la juste valeur locative marchande locaux situé sur le lot visé par le bail, soit deux pour cent par année de la valeur estimative du lot visé par le bail.
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[29] Two observations on these provisions are in order. First, section 2 of the Regulations defines "appraised value" to mean "the value of a lot to which a lease applies, based on the highest and best permitted use as determined by the Minister pursuant to section 6". This is consistent with the assumption on which Mr. Lenych based his appraisals.
[30] Second, only option (a) could be agreed to without requiring an amendment to the terms of the defendants" leases. The defendants seem averse to the possibility of an amendment to the terms of their leases. This may be the result of a policy at one time pursued by Parks Canada of seeking to remove the perpetual renewal clauses from leases. It may also reflect the general suspicion and hostility that seems to have developed between, on the one hand, the defendants and other lessees too perhaps, and Parks Canada on the other.
| D. The Jurisdiction of the Court |
[31] Subsection 17(3) of the Federal Court Act, R.S.C. 1985, c. F-7 confers on the Trial Division of the Federal Court exclusive original jurisdiction to hear and determine
(a) the amount to be paid where the Crown and any person have agreed in writing that the Crown or that person shall pay an amount to be determined by the Federal Court, the Trial Division or the Exchequer Court of Canada;
a) le paiement d'une somme dont le montant est à déterminer, aux termes d'une convention écrite à laquelle la Couronne est partie, par la Cour fédérale " ou l'ancienne Cour de l'Échiquier du Canada " ou par sa Section de première instance;
[32] However, a statutory grant of jurisdiction to the Court is only constitutionally valid if the claim to be decided is "founded on existing and applicable federal law": [1980] 1 S.C.R. 695">R. v. Thomas Fuller Construction Co. (1958) Ltd. , [1980] 1 S.C.R. 695. A claim by the Crown against an individual is not founded on federal law unless the intervention of federal legislation has provided enough of a statutory dimension to the parties" rights and duties as to ground them in federal law: Rhine v. The Queen ; [1980] 2 S.C.R. 442">Prytula v. The Queen, [1980] 2 S.C.R. 442.
[33] The leases from which this litigation arises appear to have been granted by the Crown in its capacity as a common law corporation sole and as the owner of the fee simple estate in the land in Riding Mountain. Rights created in the exercise of the Crown"s common law contractual capacity are not as such founded on federal law ([1977] 2 S.C.R. 654">McNamara Construction (Western) Ltd. v. The Queen , [1977] 2 S.C.R. 654), and the same must be true of the Crown"s common law proprietary rights. However, as noted above, the grant, amendment and surrender of leases in national parks are subject to regulations passed pursuant to subsection 7(1) of the National Parks Act , and there were regulations in place governing park leases in some detail.
[34] Unlike the 1991 Regulations, the 1981 Regulations do not specifically provide that the terms and conditions of leases and licences of occupation are subject to any applicable statutory provisions. Nonetheless, the statutory framework created by the 1981 Regulations impinges significantly on the leases and should normally be regarded as determinative of any matter on which they speak.
[35] Thus, the rent options to be offered by the Crown to its lessees are prescribed in subsection 9(1) of the 1981 Regulations, although the Regulations are silent on what is to happen if a lessee does not agree to any of the options. However, the Regulations are not left behind, because section 6 provides that the Minister may appraise the value of a lot to which a lease applies based on the highest and best permitted use of that lot as determined by the Minister. Lessees who are not satisfied with any of the options are authorized by their leases to seek a determination of their rents from this Court. In essence, this proceeding is about the propriety of the appraisal made by the Minister through Mr. Lenych.
[36] In these circumstances, I am satisfied that the statutory umbrella casts enough of its shadow over the rights of the parties to this dispute that it can be said that the Crown"s claim is based on existing and applicable federal law in the constitutional sense. I find, therefore, that I have jurisdiction over this matter.
[37] Finally, there was some discussion during argument about the basis on which the Court ought to exercise its jurisdiction to determine the rent to be paid by lessees in national parks who do not accept any of the options offered at the time of the decennial rent review. Mr. Edwards submitted that paragraph 9(1)(a) of the Regulations should be regarded as the default option, and that the Court"s principal function in this case is to determine whether the appraised value of the lots to which the leases apply is appropriate.
[38] He pointed out that, unlike the other three options, option (a) involves no amendment to the terms of the defendants" leases. I agree that it would not normally be desirable, even if within its jurisdiction, for the Court to fix a rent on a basis that required an amendment to a lease that the lessee might not want. Furthermore, of the thirty-two or so commercial lessees in Riding Mountain who accepted one of the options offered by Parks Canada, all but two chose option (a ).
[39] Accordingly, I have interpreted my mandate in this case as being to scrutinize the reliability of the appraisal of the value of the lots on which the 1990 rents were based, and the appropriateness of the 6% capitalization rate used by the Crown.
| E. The Capitalization Rate |
[40] Counsel for the defendants did not seriously take issue with the appropriateness of fixing the rents by the application of a capitalization rate of 6% of the appraised value of the land. His quarrel was with the appraised values themselves.
[41] The Crown"s expert witness, Mr. Nichols, gave evidence that 6% was well below the market rate of return on lands leased for commercial purposes, and that public authorities that had decided to move to market rents had adopted a capitalization figure in the 8-12% range. In his opinion a 7-10% range would have been a fair and equitable rate of return in 1990 when Parks Canada reviewed the rents, but that in order to allow for the effect of the inflation of land values over the period 1990 to 2000, 10% would be a fully justifiable rate of return on the lands.
[42] I am satisfied on the basis of this evidence that the 6% rate adopted by the Minister was perfectly reasonable. I do not have to decide, therefore, whether I have jurisdiction to select a rate different from the 6% prescribed in option (a) in subsection 9(1) of the Regulations.
[43] Because a decennial rent review is a highly predictable event there is ample opportunity for Parks Canada to conduct comparative research and to consult with interested persons ahead of time, and they did. Mr. Lenych"s report was the subject of considerable and no doubt at times heated public discussion. He attended a public meeting to explain how he had reached his conclusions, and was available to advise the Appraisal Review Committee established by Parks Canada to reconsider the rents of lessees who were dissatisfied with the appraised values of their lots. Mr. Lenych visited the properties with the Committee, but did not participate in the making of its decisions.
[44] All the defendants asked the Committee to review the rent determined by the Minister under option (a), that is 6% of the appraised values of the lots. The Committee reduced the appraised value, and therefore the rent, in the case of four of the defendants, and confirmed the appraised values of the other three. The Committee comprised three nominees of Parks Canada, two of whom had sat on similar committees across western Canada, and two representatives of Riding Mountain lessees.
[45] The Executive Summary of the Appraisal Review Committee"s Report concluded that members of the Committee were satisfied with the process that they had adopted and recommended a similar process in the future, with some modifications. The fact that only seven of the lessees, the defendants in this litigation, did not agree to one of the options offered by the Crown is an indication that the process was effective, particularly in light of the very significant increases payable by lessees from 1990, as compared with the rents set in the decennial review for 1980.
[46] I should also say something about the options offered to the commercial lessees, other than option (a). Evidence was given by Mr. John Low, Chief of Land Management for Parks Canada at national headquarters in Hull, Québec; previously he had been town site manager at Riding Mountain, having been employed in different position by Parks Canada since 1983. Mr. Low provided valuable background information on the administration of Riding Mountain and Parks Canada"s policies. In particular, he testified that Parks Canada did not treat all the lessees alike; it established categories and sub-categories of lessee and afforded similar treatment to those in the same sub-category. Hence, not all commercial lessees were given identical options, and different lessees might also require different amendments to their leases depending on the option that they decided to accept.
[47] Mr. Low also stated that Parks Canada had evolved the options over the years after extensive consultation with national park lessees. For instance, some lessees had expressed a concern that ten years was a long time between rent reviews: increases in rent could more easily be managed if they were staged at more frequent intervals. Thus, one of the options in the 1981 Regulations provided for a phasing in of a rent increase over the rental period, while others appear to have applied for the full term of the lease.
[48] A concern of the commercial lessees in Riding Mountain that reverberated throughout the rent-setting process, and these proceedings, has been the seasonal nature of the properties in Wasagaming. Not only do the leases of six of the seven defendants restrict the use of the land to seven months of the year, but also Manitoba"s climate and the location of Riding Mountain at some distance from Winnipeg compress the bulk of the business season into the months of July and August, when schools are closed for the summer holidays. Businesses are open in the "shoulder" months of May, June and September, but these months account for a relatively small portion of their annual revenue.
[49] The "seasonality concern" can be addressed through the option that builds into the rent-setting formula a percentage of a lessee"s annual gross revenue. Evidence was adduced of one lessee who had chosen this option, but reverted to the 6%-of-appraised- value option because it was about one-twentieth of the rent under the percentage-of-gross-revenue option.
[50] Parks Canada has also been actively interested in promoting a longer season in Riding Mountain, and has agreed in the case of a few commercial lessees in Wasagaming, including one of the defendants, to remove the seven months" occupancy restriction from the lease.
[51] In order to put the issue in some perspective, I shall indicate the rents fixed for the defendants" properties for the years 1980-90, and the rents payable for the ten years commencing on April 1, 1990. While the percentage increase in each case is undoubtedly substantial, the actual dollar amounts are not, even bearing in mind the fact that six of the seven defendants are limited to seven months" occupancy of their lots, and the effective season is considerably shorter.
[52] The annual rent paid by five of the defendants was increased from a range of $366-$420 in 1980 to a range of $1140-$1200 in 1990. The annual rent of one defendant was raised from $366 to $1020, and of another, who leased a double lot, from $696 to $2160.
| (ii) the lessees" laments |
[53] The flames of resentment kindled by these rent increases were fanned by at least four concerns, not all directly related to the accuracy of the appraised value of the lands.
| (a) differential treatment |
[54] First, as I have already mentioned, the defendants regard it as very unfair that their rents should be increased by 300% or more, while the rents of the residential lessees have gone up by a relatively modest 30-40%. The explanation of this differential given by Mr. Low is that commercial lessees are generating revenue from the use of public land and that the public is therefore entitled to a larger return on the value of the land. He maintained that there was no obligation on the Minister to treat commercial and residential categories of lessee identically, and that the Minister was entitled to favour those who used the land for residential purposes.
[55] Although it was never articulated clearly by any witness I inferred from evidence given that, over the last ten years, the commercial lessees believe that there has been a philosophical shift on the part of Parks Canada that has had a damaging effect on them. The allegation is, I believe, that pride of place is now being given to environmental concerns and to the use of the park for hiking, swimming and other "eco-friendly" outdoor recreational activities, and that the concerns and interests of the commercial lessees operating businesses in the park have been relegated to second place.
[56] There is, of course, a symbiotic relationship between the visitors to the park and the businesses that supply goods and services to them. However, as Mr. Booth put it, the treatment of commercial lessees today is a far cry from that of the early days of the park when the Crown offered favourable terms in order to attract businesses to Riding Mountain so as to increase the number of people visiting it.
[57] However, even if I have correctly identified one of the underlying elements of the apparent friction between the commercial lessees and the defendants in particular, and Parks Canada, it cannot be translated into evidence that the 1990 rent levels are not fair and equitable. I see no reason why the Minister may not decide to treat residential lessees more favourably than commercial lessees in the matter of rent in order to implement the Minister"s view of the primary purposes of the park. The Crown is, after all, the owner of the fee simple estate in the land and, subject to any statutory restrictions or other public law limitations, may exercise as it sees fit its rights of ownership, which include setting the rents payable by its lessees.
| (b) administrative changes |
[58] Certain administrative changes made by Parks Canada over the last ten years are also said by the defendants to have had a deleterious effect on their businesses. For instance, much was made of the fact that the old gates to Riding Mountain were closed and the road was diverted away from Wasagaming with the result, it was alleged, that motorists were less likely to stop at the town site to make purchases, but would instead drive right through the park. Other changes have made pedestrian access to the town site more difficult for those staying at the camp grounds adjacent to Wasagaming, thus encouraging campers to take to their cars and head out of the park - to Onanole, for instance - or to bring all their supplies with them.
[59] A sharp increase in the park entrance fee is also said to discourage visitors and to put the commercial lessees in Riding Mountain at a competitive disadvantage to businesses located outside the park, especially those at nearby Onanole, and a relatively new resort conveniently located on the route of the highway a little further away. Restrictions on fireworks on Canada Day and on snowmobiling in winter, and onerous health and fire safety requirements, are further irritants in the relations between the commercial lessees and Parks Canada.
[60] Mr. Lenych testified that in appraising land values in Riding Mountain he took into account in a general way a number of these concerns when reducing by a total of 25% the appraised values that he had arrived at after examining sales of comparable properties. However, he also noted that there were a number of positive features associated with land located in Riding Mountain, such as: the maintenance of high standards of construction and repair of properties; Parks Canada policies designed to ensure that the general attractiveness of the location is not diminished; and the capital investment by Parks Canada in infrastructure in Riding Mountain. In addition, the annual number of visitors to the park has risen steadily: approximately 300,000 in 1989 and 400,000 today.
| (c) competition with outside-the-park businesses |
[61] Mr. Booth submitted that the difficulties facing the commercial lessees in Wasagaming were a microcosm of a continent-wide phenomenon, namely the economic decline of urban centres and the rise of suburban shopping malls and other large out-of-town retail outlets that are readily accessible by car. Onanole posed a growing threat to Wasagaming, which, unlike Onanole, had no large supermarket, or hardware, liquor or antique stores. On the evidence of the differential treatment of the cottagers and commercial lessees, and the various administrative changes described above, he argued, Parks Canada has been totally insensitive to the deteriorating business climate in which the commercial lessees have had to operate. The 1990 decennial increase in the rent was simply the last straw.
[62] I have not found this line of argument very compelling. First, even accepting the aptness of treating Wasagaming as a microcosm of urban economic changes in North America, Mr. Booth may have simplified the patterns of these changes. While the trend that he described was undoubtedly extremely powerful some years ago, since the early 1980s there have been instances of the renewal of city centres.
[63] No doubt out-of-town "megastores" and shopping malls continue to exert pressure on businesses in many city centres. In others, however, governmental stimuli in the form of tax breaks, the lifting of urban planning controls and the easing of building codes have had the effect of reviving the urban core. There is, in a word, a variety of urban economic trends and, without evidence, it cannot be assumed that Wasagaming is inevitably hitched to some downward spiral of economic urban decay.
[64] Second, the evidence adduced did not support Mr. Booth"s thesis that businesses in Wasagaming are in decline. True, there were no new lots leased for commercial purposes in the town site in the relevant period, and some businesses have failed. However, the former seems largely attributable to Parks Canada"s policy of not releasing land for commercial purposes, and businesses may fail for a variety of reasons unconnected with general economic conditions in the area.
[65] On the other hand, there has been an active market for the assignment of commercial leases, no lease has been surrendered except on the payment of fair market value, and none of the lots leased for commercial purposes is vacant. Furthermore, a commercial lessee who had opted for a rent based on a percentage of gross revenue generated so large a turn-over that the rent paid under this formula rose to approximately twenty times the 6%-of-appraised-value formula.
[66] The evidence of Mr. Murray, one of the defendant commercial lessees, is particularly revealing. For all his tales of woe, Mr. Murray appears to be running a successful pizza restaurant in Riding Mountain. The business generates enough revenue to enable him to hire a manager and another staff member, to pay combined salaries of $30,000 to himself and his wife who work hard in the business during the summer months when they are on holiday from school teaching, and to pay down the mortgage with which he has financed the purchase, subsequent upgrading and expansion of the premises. It is impossible on the basis of this evidence to take as anything more than a debating point Mr. Murray"s contention in his examination for discovery that Parks Canada should be paying him to keep his business open.
[67] Third, perhaps as revealing as any of the evidence described above is the refusal of the defendants to produce to the Crown the audited financial statements for their businesses. These could surely have provided powerful evidence to support their contention that it was very unfair for the Crown to slap big rent increases on ailing businesses.
[68] The reason given for the lessees" reticence on this point was that the financial statements were irrelevant to this litigation, which is about the value of the land, not of the buildings on it or of the businesses conducted there. While this assertion is true, as far as it goes, it also adds nothing to the credibility of the defendants" claim that Wasagaming is on the economic ropes, and that it was insupportable for Mr. Lenych to have used residential land as a comparable when appraising the value of land leased in the park for commercial purposes.
| (d) the "Hobson" s choice"factor |
[69] Mr. Booth made much of the fact that apart from option (a) the options offered by the Crown as rent-setting formulae involved amendments to the terms of defendants" leases. The lessees, he argued, were entitled to insist on retaining the terms of the leases to which they had agreed, and should not be pressured into accepting amendments as the price of avoiding the percentage-of-appraised-value formula. The others were therefore not "genuine" options, but merely faced the defendants with a choice of equally unpalatable, if different, rent-setting formulae.
[70] I found this argument difficult to fathom, since an amendment would only be required to the rent review clause in the leases. However, I inferred from Mr. Booth"s submissions, from part of his cross-examination of Mr. Low and, to an extent, of Mr. Lenych, and from Mr. Murray"s evidence, that there is an apprehension among commercial lessees that Parks Canada might use an amendment to the rent review clause as an opportunity to prise other concessions out of them, in particular, the removal of the perpetual renewal clause. It was alleged that this was a tactic used by the Crown to obtain its consent to an assignment of a lease.
[71] Even if well-founded, and I am in no position to know if it is, this concern does not have any bearing on the propriety of the 1990 rent. It was not alleged that the Crown had failed to offer the options in accordance with paragraphs 9(1)(b)-(d) of the Regulations. Accordingly, I have not taken this factor into account when fixing the rent that the defendants should pay.
[72] After clearing away much of the undergrowth that has clogged the trail in this case, I have now reached the central issue: the accuracy of Mr. Lenych"s appraisal of the value of the lots leased to the defendants. As I have already noted, Mr. Lenych adopted the methodology most widely used by professional land appraisers: the prices of directly comparable sales.
[73] Finding no sales in the relevant time period of commercial land in the park, Mr. Lenych was compelled to consider the prices paid for land that was not strictly comparable in that it was not situated in Riding Mountain, was dedicated to residential use, or had buildings on it. He justified his choice of comparables, despite their various limitations, on the ground that in a given region at any one time there is generally little difference in the value of residential and commercial land, and to the extent that there is, commercial land tends to have a higher value.
[74] Mr. Lenych stated that he used his professional judgment to make adjustments in the values so as to take into account any significant differences between the commercial leases in Riding Mountain and the comparators that he used. He conducted site inspections of the lots, and in making adjustments from the sale price of the comparators to the appraised value of the park lots he factored in the advantages of land in the park, as well as the drawbacks.
[75] I found Mr. Lenych a very credible witness. The clarity and cogency of the explanation of his report that he provided in his evidence, and the nuanced and thoughtful answers that he gave in response to Mr. Booth"s cross-examination, reflect the more than forty years" experience that Mr. Lenych has had as an appraiser of the value of all kinds of real estate, including recreational properties.
| (b) Mr. Browaty and the "abstraction method" |
[76] Testifying for the defendants, Mr. Browaty said that he did not believe that there were directly comparable sales available on which to base a reliable appraisal of the value of the land leased in the park. Furthermore, the problem with using as comparables the sale price of different kinds of land is that it is difficult to make appropriate adjustments to factor in the differences.
[77] Accordingly, Mr. Browaty relied on the "abstraction method" of appraisal. This requires the appraiser to start with the value of the improvements to the land, calculated by their replacement costs. From this figure a deduction is made for depreciation. This latter figure is then subtracted from the sale price of the property, the resulting amount being the value of the lessee"s interest in the vacant land. Using this method Mr. Browaty appraised the land of the seven defendants at an average value of $0.35 per square foot, which is less than one-quarter of the value fixed by Mr. Lenych, and very little different from the appraised value in 1980.
[78] Like the direct comparison approach, the abstraction method also has its limitations, in particular the difficulty of determining the replacement value and depreciation of older buildings. These difficulties are magnified by the lapse of time between the date when the appraisal is made and the date for which the value of the land was to be determined. In this case, Mr. Browaty was attempting in 1998 to determine replacement costs and depreciation as of 1989.
[79] In addition to the important limitations inherent in the abstraction appraisal method, which were clearly applicable in this case, Mr. Browaty"s attempt to apply it was defective in some critical respects. For example, he based his calculations on the assumption that the appraisal report for 1980, which had itself been based on the somewhat similar "extraction method", took 1974 as the date at which the current value and depreciation of the improvements to the land had been determined. However, Mr. Reimche, who had appraised the properties for the 1980 rent review, testified that the correct date was September 15, 1978. Thus, Mr. Browaty erroneously took into account four years of depreciation, which had the effect of lowering the capital value of the unimproved land, and hence of reducing the rent.
[80] Furthermore, Mr. Browaty relied exclusively on depreciation tables, despite statements in some of the leading texts on real estate appraisal that it is always important for the appraiser to examine the appraised site and inspect the buildings so as to make an estimate of the general condition of the improvements that had been made to the land. This is because the tables are based on average depreciation, and therefore should be cross-checked by the appraiser through an inspection of the premises, especially in the case of older buildings, to determine whether the actual state of the buildings matched their chronological age.
[81] Instead, Mr. Browaty spent very little time in Riding Mountain while preparing his report. He met with three of the commercial lessees, including two of the defendants, and discussed with them general economic conditions in the park. They took him on a driving tour of the properties, the camp ground area adjacent to Wasagaming, and Onanole, the business district just outside Riding Mountain.
[82] Finally, Mr. Browaty selected as comparables the sale of four commercial leases of improved land in the park. However, unknown to him, at least two of the sales were inappropriate because they possessed unusual features that tended to depress the price at which they were sold.
[83] Thus, one was a sale by a mortgagee who had foreclosed, and the proceeds of sale were equal to the amount owed by the lessee to the lending institution. Mortgagees are not motivated to obtain the best possible price for land that they are selling under a power of foreclosure; their primary concern is simply to realize the security for the amount that they are owed. Another property represented a particularly unattractive commercial proposition to a prospective purchaser because the lease then in place was very unfavourable to the lessee, who had chosen a percentage-of-gross-revenue rent option.
[84] After conceding his errors in calculating the value of the land under the abstraction method, Mr. Browaty recalculated the figures, which resulted in some appraised values that exceeded those based on Mr. Lenych"s approach. In short, Mr. Browaty"s evidence was of virtually no assistance to the defendants.
[85] In fact, his testimony tended to reinforce the position of the Crown by showing that, even when there are no strictly comparable sales available, the direct comparability approach, in experienced and careful professional hands, is likely to be a more reliable guide to the value of the land than the abstraction method when applied to determine as of nine years earlier the replacement costs and depreciation of older buildings. Furthermore, Mr. Browaty"s errors in applying his chosen method served to point up the systematic and thorough way in which Mr. Lenych had gone about his task.
| (c) Mr. Lenych"s comparables |
[86] In the absence of sales of directly comparable properties in the 1980s Mr. Lenych appraised the value of the lots leased in Riding Mountain by considering the price at which broadly comparable land had sold in the region, which he defined as Manitoba and north west Ontario, during the relevant period.
[87] For the purpose of this exercise he considered the prices at which more than 200 properties had sold. They were nearly all sales of residential land: vacant lots or land with cottages. He considered sales of properties in Onanole, 110 in all, to be the closest comparators because of Onanole"s proximity to Wasagaming: it is located just outside the park, due south of Wasagaming. He looked particularly at the price of lots of comparable size to those in Riding Mountain, and distinguished between lake front and back tier properties. He regarded the lower priced back tier properties as being the appropriate comparators for the commercial lots in the park.
[88] On the basis of this evidence he established a bench-mark appraised value of $1.78 per square foot, which he described as being at the low end of the range. His evidence was that under normal conditions there was no significant difference in the value of residential and commercial land. He therefore regarded the prices obtained for broadly comparable residential land in the region as sufficiently reliable to enable him to establish a bench-mark that he could adjust to take account of conditions in the park. Only if there was evidence of obvious economic decline, such as closed businesses, would the value of commercial land sink appreciably below that of residential land.
[89] In making adjustments to the bench-mark value that he had established Mr. Lenych considered the positive and negative features that were likely to affect the value of land in Riding Mountain. On the positive side he considered Wasagaming to be a clearly superior location to Onanole, particularly from the points of view of aesthetics and servicing of the land: indeed, he concluded that servicing in the park was the best of any recreational area in Manitoba that he considered. He was also impressed by the infrastructure investment that Parks Canada had recently made in Riding Mountain.
[90] On the negative side he took into account the seven months" occupancy restriction in the leases and the even shorter length of the effective commercial season, but not the policy of Parks Canada to attempt to extend its length. Nor did he take account of the other clauses in the individual leases. He did, however, consider the increased park entrance fee for visitors.
[91] On the basis of all these considerations Mr. Lenych adjusted the bench-mark value down by 20% and then took off another 5% to provide a margin for error. Some lessees have no doubt asked themselves the question that Mr. Booth often asked during the trial: why was a reduction of only 20% made when the occupancy clause in the leases precluded the lessees from occupying their lots for 40% of the year?
[92] The answer would appear to be twofold: first, in Mr. Lenych"s view park land is in other respects superior to the land that he considered for comparison purposes in other locations. Second, equally important factors in restricting occupancy of land in the park are the climate and its location. Riding Mountain is essentially a summer resort, although there is some winter occupancy and it probably has development potential for winter activities: indeed, snowmobiling is permitted by Parks Canada on Clear Lake.
[93] On the basis of this evidence I cannot regard the fact that the Minister made a further reduction for the benefit of the residential lessees in recognition of the occupancy restriction as evidence that this factor was not appropriately taken into account in appraising the park land leased for commercial purposes.
[94] After the defendants had asked the Appraisal Review Committee to reconsider the value at which Mr. Lenych had appraised their properties, three were left at the appraised values of $1.77, $1.77 and $1.80 per square foot, which are very close to the bench-mark of $1.78. The other four were reduced to $1.19, $1.28, $1.34 and $1.48 per square foot.
[95] It would be quite inappropriate for me to attempt to fine-tune any of the appraised values of the defendants" lots. On the evidence before me I am satisfied that the values were appropriate. As I have already noted, I found Mr. Lenych to be a very credible witness who had applied himself to a difficult task with the utmost professionalism, and with a sympathetic eye for local conditions.
[96] The fact that of the thirty-six commercial lessees in Wasagaming only the seven defendants in this proceeding did not accept one of the options offered by the Minister is another indication that the rent increases were not unreasonable. The review process was no doubt of great assistance in smoothing the rough edges of a mass appraisal.
[97] Furthermore, the defendants offered no credible alternative theory or evidence. They did not, for example, provide evidence of the price at which land had been sold in other national parks in western Canada, or in provincial parks in Manitoba. The plaintiff, however, did provide evidence of the 1990 commercial rents in Waterton Lakes National Park and Waskesiu National Park in Prince Albert, Saskatchewan, where the appraised values per square foot were significantly higher than those in Riding Mountain.
[98] Mr. Browaty"s evidence did not give me any reason to think that in the circumstances of this case the abstraction method was a more reliable guide to the value of the land in Riding Mountain than the direct sales comparison method. Indeed, as I have already noted, after Mr. Browaty had corrected his errors, his figures were somewhat higher than some of those of Mr. Lenych.
[99] Nor could I give much weight to Mr. Murray"s non-professional and self- interested opinion on the value of his land. His evidence that businesses in the park were just keeping their heads above water was contradicted by nearly all the other evidence before me. Equally telling, neither Mr. Murray nor any of the other defendants was prepared to support their position by disclosing the financial statements of their businesses.
[100] For these reasons, judgment is given for the plaintiff in each of the actions brought against the defendants. I determine that the rent for each of the properties for the ten years starting April 1, 1990 that the Minister fixed in default of the lessees" selecting one of the other options is fair and equitable. Accordingly, each defendant shall pay to the Crown the difference between the 1980 rent and the 1990 rent from April 1980 to April 1, 1999.
[101] The following amounts are owed to the Crown as unpaid rent in respect of each of the seven properties.
| Property
|
Annual rent
|
Amount owing
|
| 108 Wasagaming
|
$1,020
|
$5,643
|
| 123 Wasagaming
|
$1,140
|
$6,840
|
| 127 Tawapit
|
$1,140
|
$7,467
|
| 128 Wasagaming
|
$1,200
|
$7,866
|
| 132 Wasagaming
|
$1,200
|
$7,866
|
| 137 Tawapit
(double lot)
|
$2,160
|
$13,908
|
| 122 Wasagaming
|
$1,200
|
$7,923
|
[102] I also order that pre-judgment interest be paid by the defendants on these amounts, and I award the Crown its costs, including the costs of the motion for a non-suit brought by Mr. Booth on behalf of the defendants, which I dismissed on February 10, 1999 with costs in the cause.
OTTAWA, ONTARIO John M. Evans
June 8, 1999. J.F.C.C.
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