Musqueam Indian Band v. Glass, 2000 SCC 52, [2000] 2 SCR 633

Musqueam Indian Band v. Glass, [2000] 2 S.C.R. 633

Mary Glass, Hin F. Ko, Mabel W. Ko, Roy Westwick,

Gwyneth M. Westwick, Kerry‑Lynne Ferris,

Stephen W. Findlay, Norah C. Findlay,

Jerry Janes, Diana Janes, Gregory Pappas,

Tasie Pappas, Solon S. Wang, Peter M. Lee,

Herbert M. Lewis, Alexander Kalinowski,

Katarina Kalinowski, John W. Whitefoot,

Sheila M. Whitefoot, Lisbet MacKay, Pierre Dow,

Mona McKinnon, Wong L. Lee, Manloong Lee,

John M. Glaiserman, Juan L. G. Cam, Elizabeth C. Cam,

Evelyn M. Murray, William T. Ziemba, James R.

Thompson, Ann B. Thompson, Yum C. Lau, Irene Lau,

James Y. P. King, Tjin K. Tan, Eiji Murakami,

Miyako Murakami, Thomas W. F. Fung, Amy M. L. Chan,

Gertrude Henneken, Hans T. Henneken, Howard G. Isman,

Marjorie E. Isman, Stanley Evans, Dorothey Evans,

Khi Yoeng Tjin, Wen Tien Tai, Kui‑Hsiang Huang,

Phyllis Weinstein, Patricia Lai, Wilfred E. Patton,

Jean M. Patton, Attilio Girardi, Mary Girardi, Irma E. Boulter,

George S. Boulter, John G. Cragg, Olga B. Cragg,

Howard E. Cadinha, Arlene B. Cadinha, Maria C. Ormond,

Douglas R. Eyrl, Judith F. Eyrl, Cheung K. Choi,

Chan P. K. Choi, Celia Kaan, Cecil S. C. Kaan,

Ramon Y. Kan, Helena Kan, Leslie Bara, Ottilia Bara,

Alfred K. Lee, Esther K. Lee, Diana W. C. Sung,

Donald C. Graham, Winnifred A. Graham,

Ronald J. MacKee, Alexander H. Wong, Stella L. Wong,

Edward B. Huyck, Dorothy A. Huyck, Frederick S. Edy,

Ellen V. Edy, Victor H. Hildebrand, John E. Egan,

Chi K. Ching, Siu Y. Chan, Lavender Chu, Frederick Chu,

George E. Rush, Anne L. Rush, Herta J. Neumann,

Cornelius Neumann, James A. Forsythe,

Diane R. Forsythe, Peter J. Funk, Elizabeth Funk,

Elfriede Machek, Adelheid Machek, Lillian P. Toews,

Hui C. Keung, Patricia H. K. S. Wah, Vadilal J. Modi,

Mira V. Modi, Charles H. Shnier, Elaine C. Shnier,

Agnes P. C. Shen, Carol M. Lau, Dennis Lau,

Marjorie McClelland, Arthur Nee, Laura T. Nee,

Donald W. Scheideman, Kathryn M. Scheideman,

William N. King, Allan J. Hunter, Grace K. Hunter,

Grace Ng, Irving Glassner, Noreen G. Glassner,

Priscilla Fratkin, Nancy B. Berner, Gregory Hryhorchuk,

Darcy L. Hryhorchuk, Astley E. Smith, Betty Ann Smith

and Lily R. Eng                                                                                  Appellants/

Respondents on cross‑appeal

v.

Musqueam Indian Band, Chief Joseph Ralph Becker,

Ernie Campbell, Wayne Sparrow, Leona M. Sparrow,

Nolan Charles, Mary Charles, Johnna Crawford,

Gail Y. Sparrow, Myrtle McKay and Larry Grant                          Respondents/

Appellants on cross‑appeal

and

Her Majesty The Queen                                                                   Respondent

Indexed as:  Musqueam Indian Band v. Glass

Neutral citation:  2000 SCC 52.

File No.:  27154.

2000:  June 12; 2000:  November 9.

Present:  McLachlin C.J. and L’Heureux‑Dubé, Gonthier, Iacobucci, Major, Bastarache, Binnie, Arbour and LeBel JJ.

on appeal from the federal court of appeal

Indians – Reserve land – Leases – Interpretation – Meaning of phrase “current land value” used in leases for reserve land – Whether costs of servicing leased land to be deducted from “current land value”.

In 1960, the Musqueam Indian Band surrendered approximately 40 acres of  reserve land to the Crown for the purposes of leasing.  In 1965, the Crown entered into an agreement with a company unrelated to the Band.  The company serviced and subdivided the land and the Crown provided the company with an individual lease for each lot.  Each lease had a term of 99 years.  In 1966 the company assigned the leases to individuals, who built houses on the lots.  The rent for the first 30 years was specified in the leases.  It was subject to review after the first 30 years, and every 20 years thereafter.  The leases provided that the rent payable upon review would be fair rent for the land and indicated that an annual clear total rental representing 6 percent of the “current land value” should be regarded as “fair rent”.  When the rent first came up for review in 1995, the parties were unable to agree as to the meaning of “current land value” and whether the costs of servicing the lots should be deducted from the value of the land.  The Band applied to the Federal Court, Trial Division for a determination of the fair rent payable upon review.  The court held that the estate and tenure to be valued was a 99‑year leasehold on reserve land and that “current land value” should be calculated as representing the hypothetical fee simple value of the land discounted by 50 percent to take into account the long‑term leasehold interest and Indian reserve features.  The court further held that the costs of servicing the lots should be deducted from the current land value.  The Federal Court of Appeal reversed this decision and held that the current land value represented the fee simple value of the land without the 50 percent reduction on account of the Indian reserve features.  The leaseholders were granted leave to appeal on the issue of the proper meaning of the phrase “current land value”.  The Band was granted leave to cross‑appeal on the question of the deductibility of servicing costs.

Held (McLachlin C.J. and L’Heureux‑Dubé, Iacobucci and Arbour JJ. dissenting on the appeal):  The appeal should be allowed.  The cross‑appeal should be dismissed.

Per Gonthier, Major, Binnie and LeBel JJ.:  In the absence of any contrary indications in the leases, the expression “current land value” in the rent review clause refers to the fee simple or freehold value as opposed to leasehold value of land located on the reserve.  Although there is no such thing as freehold title on reserve, this hypothetical value can be assessed and can serve its function in the rent review calculation.  The meanings of “land” and of “value” are well established in law.  Unless the agreement states otherwise “land” refers to a right to receive a good title in fee simple.  In real estate law, “value” generally means the fair market value of the land, which is based on what a seller and a buyer would pay for it on the open market.  Market value generally is the exchange value of the land, rather than its use value to the lessee.  Land is valued without regard to the tenant’s interest in it, for the tenant’s decision not to use the land for its highest use does not reduce the land’s exchange value.

Valuing the Musqueam land at its freehold value is 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.  It does not follow that the freehold value of land outside the reserve should be used to determine the rent.  The capital asset here is reserve land surrendered for leasing, not land surrendered for sale.  Contrary to some other leases of reserve land, the Musqueam leases do not specify that off‑reserve land values should be used in the rent review formula.  The hypothetical used to establish market value in the absence of an actual market should reflect the land as it is in its actual circumstances and should not change the nature of the land appraised.  Since it has chosen not to surrender the land for sale, the Band holds reserve land and must accept the realities of the market for this capital asset.

The value of a hypothetical interest in fee simple ownership on the reserve must reflect the legal restrictions on land use, as opposed to restrictions found in the lease, and market conditions.  Like municipal zoning, restrictions on land use imposed by a band can either increase or decrease land value depending on how the market responds to them.  Since the legal environment on a reserve must be taken into account when appraising land value, fee simple off‑reserve value cannot simply be transposed to the Musqueam lands.  The hypothetical value of fee simple title on reserve land may be determined by adapting the off‑reserve value to take into account the actual features of the land and of the market.  The trial judge’s finding of fact that the fee simple value of comparable lands off the reserve was $600,000 on average and his determination that the Musqueam lands were worth 50 percent less than the comparable off‑reserve properties should be accepted.

In determining the “current land value”, the leases require that one assume that the lands are “unimproved lands in the same state as they were on the date of this agreement”.  On the basis of the plain meaning of the word “unimproved” and of its use in the leases, it is evident that “unimproved lands” means “unserviced” lands, not just lands without buildings.  The costs of servicing the land should therefore be deducted from the value of the lots.

Per Bastarache J.:  The phrase “current land value” should be interpreted as referring to the value of leasehold reserve land.  This construction reflects the best description of what the land in fact is and is consistent with the parties’ intentions.  The location of the land and its status as reserve land has an important impact on its value and can either decrease or increase land value depending on how the market responds.  The land to be valued in this case is land held under a long‑term lease and should not be treated as land held in fee simple.  A market value appraisal is a valuation of specified rights in the subject property, not the physical real estate.  In the case of reserve lands, the highest form of individual property possible is not a fee simple but a long‑term lease.  The total value of the land consists therefore of the value of the lease and of the reversion.  This does not pose a problem in this case because a long‑term lease, in its first years, is equivalent in value to a fee simple.

The value of the land must reflect the legal restrictions on the land including the  legal regime that affects the use of the land and the rights and privileges of the holders of the land.  The power of the Band to modify unilaterally such restrictions by converting the lands to fee simple lands does not mean that while restrictions exist they can be ignored.  It would be improper to hypothesize that such restrictions do not exist. Consequently, the valued land retains its character as land reserved for Indians and this status is relevant for the purposes of rent review.

To construe “current land value” as referring to the value of the land as leased reserve land is consistent with the intention of the parties to the agreement.  The parties intended that “current land value” be interpreted and guided by what the land in fact is, namely a leasehold interest in reserve land.  This interpretation reflects an intention that the value of the lease follow the contemporary market for long‑term leases of Indian reserve land.  Comparisons with non‑reserve values should only be used where clear language to that effect is adopted by the parties.

Per McLachlin C.J. and L’Heureux‑Dubé, Iacobucci and Arbour JJ. (dissenting on the appeal):  The expression “current land value” in the leases means the price a willing buyer would pay for fee simple title to the land.  This construction is consistent with the plain meaning of the language used in the leases and common industry practice.  It is also consistent with the widely accepted rationale for a rent review provision like the one at issue here and reflects 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 land were not subject to a long‑term lease.  Calculating fair market value requires determining the “highest and best use” for the land that is legally permissible, disregarding any restrictions imposed by the lease itself.  The only impediment to the Band’s selling its land is the leases themselves, whose restrictions should be disregarded.  This removes the justification for discounting the value of the land.  The fact that the Band has chosen not to sell its land cannot bear on the land’s value.  It follows that the “exchange value” of the land means what it could be sold for, not 50 percent of that amount.  While in principle, fair market value must reflect legal restrictions on the land, the fact that land is part of a reserve is not a legal restriction within the ambit of this principle, which applies only to restrictions over which a landowner has little or no control.

The proposed 50 percent reduction for reserve related factors depends on the valuation of an interest that could simply never exist.  Reserve land can be converted to fee simple only by surrender to the Crown.  Once reserve land is surrendered to the Crown, it loses all the characteristics of reserve land.  Because there is no such thing as a fee simple interest in reserve land, there is simply nothing to which the subject property can be compared.  If “current land value” means fee simple, and fee simple is inconsistent with reserve status, then it must be wrong to devalue fee simple for factors related to reserve status.

The rent should be set at 6 percent of the current land value, and no discount should be applied merely because the subject land is on an Indian reserve.  Gonthier J.’s reasons concerning the deductibility of servicing costs were agreed with in principle.  However, insofar as servicing costs are a function of current land value, the value discussed in these reasons should be used rather than the lower value arrived at by the trial judge.

Cases Cited

By Gonthier J.

Referred to:  Leighton v. Canada (1987), 13 F.T.R. 198; Ball v. Gutschenritter, [1925] S.C.R. 68; Revenue Properties Co. v. Victoria University (1993), 101 D.L.R. (4th) 172; Re Farlinger Developments Ltd. and Borough of East York (1975), 61 D.L.R. (3d) 193; Sun Life Assurance Co. of Canada v. City of Montreal, [1950] S.C.R. 220; Bullock’s, Inc. v. Security‑First National Bank of Los Angeles, 325 P.2d 185 (1958); Gulf Oil Canada Ltd. v. National Harbours Board, F.C.T.D., No. T‑1478‑71, September 15, 1972; Burrard Dry Dock Co. v. Canada, [1974] F.C.J. No. 417 (QL); No. 100 Sail View Ventures Ltd. v. Janwest Equities Ltd. (1993), 84 B.C.L.R. (2d) 273, leave to appeal refused [1994] 2 S.C.R. viii; British Gas Corp. v. Universities Superannuation Scheme Ltd., [1986] 1 W.L.R. 398; Rodgers v. Canada (1993), 74 F.T.R. 164; Devil’s Gap Cottages (1982) Ltd. v. Canada, [1991] F.C.J. No. 1142 (QL); The Queen v. Guerin, [1983] 2 F.C. 656; Re Planet Parking Ltd. and Assessment Commissioner of Metropolitan Toronto, [1970] 3 O.R. 657.

By Bastarache J.

Referred to:  Revenue Properties Co. v. Victoria University (1993), 101 D.L.R. (4th) 172; Devil’s Gap Cottages (1982) Ltd. v. Canada, [1991] F.C.J. No. 1142 (QL); Rodgers v. Canada (1993), 74 F.T.R. 164.

By McLachlin C.J. (dissenting on the appeal)

Ball v. Gutschenritter, [1925] S.C.R. 68; Revenue Properties Co. v. Victoria University (1993), 101 D.L.R. (4th) 172; Blueberry River Indian Band v. Canada (Department of Indian Affairs and Northern Development), [1995] 4 S.C.R. 344; St. Mary’s Indian Band v. Cranbrook (City), [1997] 2 S.C.R. 657; Golden Acres Ltd. v. Canada (1988), 22 F.T.R. 123; Rodgers v. Canada (1993), 74 F.T.R. 164; Devil’s Gap Cottages (1982) Ltd. v. Canada, [1991] F.C.J. No. 1142 (QL); Steel Brothers Canada Ltd. v. Canada (1986), 1 F.T.R. 22.

Statutes and Regulations Cited

Assessment Act, R.S.B.C. 1996, c. 20, s. 19.

Expropriation Act, R.S.B.C. 1996, c. 125, s. 32.

Indian Act, R.S.C., 1985, c. I ‑5, ss. 37  [rep. & sub. c. 17 (4th Supp.), s. 2 ], 38 [idem], 39 [am. idem, s. 3 ], 83 [am. idem, s. 10 ].

Property Transfer Tax Act, R.S.B.C. 1996, c. 378, s. 1 [am. 1997, c. 45, s. 52; am. 1999, c. 47, s. 50].

Authors Cited

Appraisal Institute of Canada.  The Appraisal of Real Estate, Canadian ed.  Winnipeg:  The Institute, 1999.

Friedman, Milton R.  Friedman on Leases, vol. 2.  New York: Practising Law Institute, 1974.

Megarry, Robert Edgar, and William Wade.  The Law of Real Property, 6th ed. By Charles Harpum.  London:  Sweet & Maxwell, 2000.

APPEAL and CROSS‑APPEAL from a judgment of the Federal Court of Appeal, [1999] 2 F.C. 138, 235 N.R. 164, [1998] F.C.J. No. 1893 (QL), allowing in part the appellants’ appeal from a judgment of Federal Court, Trial Division (1997), 137 F.T.R. 1, [1997] F.C.J. No. 1339 (QL).  Appeal allowed, McLachlin C.J. and L’Heureux‑Dubé, Iacobucci and Arbour JJ. dissenting.  Cross‑appeal dismissed.

Jack Giles, Q.C., Kerry‑Lynne D. Findlay, Q.C., and Ludmila B. Herbst, for the appellants/respondents on the cross‑appeal.

Darrell W. Roberts, Q.C., Wendy A. Baker, Lewis Harvey and Leona M. Sparrow, for the respondents/appellants on the cross‑appeal.

Mitchell R. Taylor and Keith J. Phillips, for the respondent Her Majesty the Queen.

The reasons of McLachlin C.J. and L’Heureux-Dubé, Iacobucci and Arbour JJ. were delivered by

1              The Chief Justice (dissenting on the appeal) — This case requires us to interpret a lease.  The parties entered into the contract voluntarily and with counsel.  Thus our only task is to interpret their agreement.  Two issues of interpretation arise – the meaning of “current land value” and the deductibility of servicing costs.  I agree in principle with Justice Gonthier on the second issue but respectfully disagree on the first.  In my view, “current land value” means the actual value of similar land held in fee simple, and should not be reduced by 50 percent because the Musqueam Indian Band (“Band”) continues to hold the land as a reserve.

I. Background

2              In 1960, the Band surrendered approximately 40 acres of  reserve land to the Crown for the purposes of leasing.  On June 8, 1965, the Crown entered into an agreement (“Master Agreement”) with the Musqueam Development Company Limited (“Company”) under which the Company was to service and subdivide the land, and the Crown was then to provide the Company with an individual lease for each lot.  Each lease was to have a term of 99 years, running from the date of the Master Agreement.  The Company fulfilled its obligations under the Master Agreement, the Crown provided the leases, and in 1966 the Company assigned those leases to individuals, who built houses on the lots.  Those individuals, or their assignees, are the appellants here.

3              Under the individual lease agreements, the lessees agreed to pay rent to the Crown in right of the Band, and in 1980 the Crown transferred management authority to the Band so that the Band now receives the rent directly.  The rent for the first 30 years was specified in the leases, and increased from approximately $300 per year to approximately $400 per year over that period.  The rent was subject to review after the first 30 years, and every 20 years thereafter.  Thus the rent came up for review in 1995.

4              The rent review clause, identical in each of the individual leases, is the subject of this dispute.  It provides: 

2(2) The rent for each year of the three succeeding twenty (20) year periods and for the final nine (9) year period of the term hereof, shall be a fair rent for the land 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,

                                                                   . . .

2(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.

5              The lessees contend that “current land value”, as used in clause 2(4), means the value of the land as it is currently held — that is, as reserve land.  The Band, by contrast, argues that “current land value” refers to the value of fee simple title to similar land, absent factors associated with its reserve status.

II. Judgments Below

A. Federal Court, Trial Division (1997), 137 F.T.R. 1

6              The trial court, per Rothstein J., noted first that Indian title in reserve lands is generally inalienable.  A band may not sell or otherwise encumber reserve lands except by surrendering the land to the Crown.  Surrender allows the land to be held in fee simple, but irrevocably strips the land of its character as land reserved for Indians.  Rothstein J. reasoned that, because the land leased here had not been surrendered to the Crown for sale, it should not be valued as if it could be held in fee simple.  He reasoned, rather, that “for rent renegotiation purposes, the estate and tenure [to be valued] is a 99-year leasehold” (para. 38) on reserve land.

7              Proceeding from this premise, the trial court’s assessment of “current land value” took into account “evidence of factors that might negatively affect the value of a long-term leasehold interest in land on an Indian Reserve” (para. 43), such as uncertainty related to property taxation, publicized unrest, and limitations on non-natives’ entitlement to stand for election to the reserve’s governing body.  Rothstein J. noted that the fact that the interest to be valued was a leasehold rather than a freehold did not significantly affect the valuation; it is widely accepted that the value of a 99-year lease approximates the value of a freehold interest in the same property.  That the leasehold to be valued was on Indian land, however, did have a significant effect on the valuation, reducing the value of the interest by approximately 50 percent.

B. Federal Court of Appeal, [1999] 2 F.C. 138                                 

8              The Federal Court of Appeal, per Sexton J.A., disagreed as to the property interest to be valued.  In Sexton J.A.’s view, the trial court erred in reading “current land value” to mean the value of a leasehold on reserve land, rather than the value of a freehold interest in the land.  Sexton J.A. reasoned at para. 21 that “[t]he long-standing practice . . . is to value the land at its fee simple value”, and that if the parties had intended otherwise, they would have stated so specifically.  Sexton J.A. noted that the rent review clause employed in the leases here was not atypical:  linking rent to the value of the underlying land “ensure[s] that the rent represents the true return negotiated by the parties on the market value of the land.  It reflects the fact that the lessor could sell the land at its current land value and reinvest the proceeds at market rates of interest, if not subject to a long-term lease” (para. 20).  The court concluded that the interest to be valued was freehold title, not a leasehold interest in land on the reserve.  Accordingly, it held that the trial court erred in imposing a 50 percent reduction to account for the “Indian reserve feature” of the land (para. 75).

III. Analysis

9              In construing a lease, our first consideration is the language of the lease itself.  Here that language is clear.  In a real estate document, “land” usually means “a right to receive a good title in fee simple”.  See, e.g., Ball v. Gutschenritter, [1925] S.C.R. 68, at p. 71.  “Value” means the “fair market value” of the land or, equivalently, the “exchange value” of the land: what a willing buyer would pay for the land in the open market.  See, e.g., Revenue Properties Co. v. Victoria University (1993), 101 D.L.R. (4th) 172 (Ont. Div. Ct.), at p. 180.  In British Columbia, the Property Transfer Tax Act, R.S.B.C. 1996, c. 378, s. 1, the Assessment Act, R.S.B.C. 1996, c. 20, s. 19, and the Expropriation Act, R.S.B.C. 1996, c. 125, s. 32, all use substantially the same definition.  Nothing in the leases at issue here suggests that either “land” or “value” should be assigned any definition other than the generally accepted one.  Thus “current land value” means the price a willing buyer would pay for fee simple title to the land.

10          This construction of the disputed clause, which simply gives effect to the plain meaning of its words, is entirely consistent with the widely accepted rationale for a rent review provision like the one at issue here.  Rents that are linked to the underlying value of the land ensure that the lessor gets a fair return on the asset.  See Friedman on Leases (1974), vol. 2, at p. 567.  As Sexton J.A. noted, linking rent to the value of the land “reflects the fact that the lessor could sell the land at its current land value and reinvest the proceeds at market rates of interest, if not subject to a long-term lease” (para. 20).  The linking of rent and underlying land value can be advantageous to the lessee as well: if market rates of return exceed the percentage specified in the lease – here, 6 percent – the lessee nonetheless pays a rent equal to only 6 percent of the land value, even though the lessor could get a higher rate of return by selling the land and investing the proceeds.  Further, linking rent to underlying land value ensures that the lessee’s rent rises no more quickly than real estate prices, and indeed that the rent would fall if real estate prices were to fall.  Leases that link rent and land value thus provide certainty that is often valuable to both the lessor and the lessee.  Where, as here, the lease runs for a long term, a rent review clause that links rent to land value is especially useful, because predicting the course of the real estate market over such a long period is practically impossible.

11          The advantages of linking rent to underlying land value are well illustrated by the circumstances of this case.  In 1966, neither the Band nor the lessees could have known what course real estate prices would take over the next 30 years, let alone the next 99.  If the parties had fixed the rent for each lot at a particular dollar amount per year (presumably escalating every year at some fixed rate), the lessees would have run the risk that their rent would escalate more quickly than land prices, and the Band would have run the risk that real estate prices would escalate more quickly than the rent.  Having linked rent to the value of the land, however, the parties are now assured that their 30-year-old leases will reflect the contemporary market.  The Band is assured that it will receive an income comparable to the income it would receive if it was unencumbered by the existing leases.  And the lessees are assured they will pay no more than they would if they entered into a new lease with any other landowner today.

12          My colleague Gonthier J. agrees that the plain meaning of “current land value” is freehold value, and that the purpose of the rent review clause here was to ensure a fair return to the lessor and a fair rent to the lessee.  However, he nonetheless affirms the trial court’s valuation of the leased lands at 50 percent of freehold value.  With respect, I cannot agree.

13          First, although my colleague agrees that “current land value” requires the assessment of the “exchange value” of the land, his result does not in fact assess the land on the basis of its potential sale.  As he states, calculating fair market value requires determining the “highest and best use” for the land that is legally permissible, disregarding any restrictions imposed by the lease itself.  One way the Band could legally use the land is to sell it for fair market value. See the Indian Act, R.S.C., 1985, c. I-5, ss. 37 -38 ; see also Blueberry River Indian Band v. Canada (Department of Indian Affairs and Northern Development), [1995] 4 S.C.R. 344; St. Mary’s Indian Band v. Cranbrook (City), [1997] 2 S.C.R. 657.  The only impediment to the Band’s selling its land is the leases themselves, whose restrictions my colleague Gonthier J. concedes should be disregarded.  This removes the justification for discounting the value of the land.  The fact that the Band has chosen not to sell its land cannot bear on the land’s value.  It follows that the “exchange value” of the land means what it could be sold for, not 50 percent of that amount.

14          The rationale for placing weight on the fact that the Band has chosen not to sell the land is said to be that fair market value “must reflect the legal restrictions on the land” (Gonthier J., at para. 46).  However, the fact that land is part of a reserve is not a legal restriction within the ambit of this principle.  This principle is properly applied to such restrictions as zoning laws, building codes, historical district or other non-zoning land-use controls, and environmental regulations.   See Revenue Properties, supra; see also Appraisal Institute of Canada, The Appraisal of Real Estate (Canadian ed. 1999), at p. 270.  Adjusting fair market value to account for such restrictions makes sense, because usually a landowner has little or no control over them, and clearly a buyer is not going to pay the going rate for commercial land if the land is zoned only for residential use.  By contrast, nothing stops the Band from surrendering the land to the Crown and selling the land just like any other freehold is sold, except the leases themselves, whose restrictions must be disregarded in determining “current land value”.  The reserve character of the land is therefore not a legal restriction.  As for the argument that determining fair market value by valuing freehold title to the land is circular, the inquiry is essentially: what else could be done with the land?  That is the same question that is asked in any appraisal, and it is not circular.  See Appraisal Institute of Canada, supra, at p. 269, which states that appraising land requires consideration of “all potential uses”. 

15          Second, although my colleague Gonthier J. agrees that the rent review clause here was meant to assure the Band a market rate of return on its land, the reduction of land value for reserve related factors precludes this result.  Rather, it assures that the Band will never get a market return on its land, by  effectively reading “current land value” to mean 50 percent of current land value.  As a result, the Band will get a 6 percent return on half the value of its asset, or, equivalently, a 3 percent return.  As Sexton J.A. noted, at para. 25, “it is extremely doubtful that the Band would enter a long-term lease if the effect of its doing so would be to devalue the worth of its own asset, thereby lowering the return it receives on the asset”.

16          Third, the proposed 50 percent reduction for reserve related factors depends on the valuation of an interest that could simply never exist.  As the trial court noted, reserve land can be converted to fee simple only by surrender to the Crown.  Once reserve land is surrendered to the Crown, it loses all the characteristics of reserve land.  Thus there can be no such thing as fee simple title to reserve land.  Given that no such interest can ever exist, it is difficult to see how it could be valued in any principled way.  As it is, appraisal is a notoriously unscientific endeavour.  See, e.g., Golden Acres Ltd. v. Canada (1988), 22 F.T.R. 123, at para. 15: “Whatever kind of alleged art it may be, the practice of the alleged profession of appraising is nothing like that which can be dignified as a science.”  In part, this is because any appraisal involves asking a hypothetical question — namely, what would the landowner receive for the land on the open market?  That question, however, can be answered in a relatively principled way, by, for example, looking to the price of similar property.

17            The combined fee simple/reserve factor approach, by contrast, is not susceptible of principled analysis.  Because there is no such thing as a fee simple interest in reserve land, there is simply nothing to which the subject property can be compared.  The comparison is not with real properties, but with something that cannot exist – a parcel of land that is both fee simple and reserve land.  I cannot accept that this is what the parties intended when they referred to “current land value”.  If “current land value” means fee simple, and fee simple is inconsistent with reserve status – propositions with which my colleague Gonthier J. agrees – then it must be wrong to devalue fee simple for factors related to reserve status, such as speculation about unrest, limitations on non-natives’ standing to be elected to the governing body, and uncertainty about property taxation.  (This does not preclude consideration of the fact that the fee simple is located near reserve land, should this prove relevant to assessing the value of the fee simple.)

18          As my colleague notes, some leases for aboriginal land specifically provide that the subject property is to be valued by reference to comparable property located outside the reserve.  See, e.g., Rodgers v. Canada (1993), 74 F.T.R. 164, at para. 6 (lease called for valuation by reference to “vacant land . . . situate[d] outside of the Reserve”); Devil’s Gap Cottages (1982) Ltd. v. Canada, [1991] F.C.J. No. 1142 (QL) (T.D.) (lease called for valuation by reference to “vacant land outside the Reserve”).  It does not follow, however, that when the lease does not include an express indication that off-reserve property is the touchstone, the parties intended otherwise.  “Current land value” generally means fee simple value, and common industry practice is to value land by assessing what the land would be worth on the open market.  Except where the parties expressly provide for a different method of valuation, it is plain meaning and common practice that should provide the default.  See, e.g., Steel Brothers Canada Ltd. v. Canada (1986), 1 F.T.R. 22  (assessing fair market value of reserve land by reference to off-reserve property, where the lease was silent as to the intended valuation method).

19          In my view, the rent should be set at 6 percent of the current land value, and no discount should be applied merely because the subject land is on an Indian reserve.  This construction accords with the leases’ plain meaning, common industry practice, and the clear purpose of the rent review clause.

20          As indicated above, I agree in principle with my colleague Gonthier J.’s reasoning as to servicing costs.  Insofar as those costs are a function of “current land value”, however, I would use current land value as discussed herein, rather than the lower value arrived at by the trial judge.

IV. Conclusion

21          I would dismiss the appeal and the cross-appeal and affirm the judgment of the Federal Court of Appeal.

The judgment of Gonthier, Major, Binnie and LeBel JJ. was delivered by

Gonthier J. —

I.  Introduction

22          The rent for the Musqueam lands in the City of Vancouver came up for review in 1995.  The parties, the Musqueam Indian Band (“Band”) who owns the land and the leaseholders who live on it, failed to negotiate a new rent.  They submitted their dispute to the courts for resolution. 

II.  Facts

23          The Band surrendered part of their reserve in trust to the Crown in 1960 for the purpose of leasing.  The Crown entered into a Master Agreement with the Musqueam Development Company Limited (not related to the Band) in 1965.  Under the Master Agreement, the company was to subdivide and service the land by setting up such amenities as roads, sewers and water supply.  Once the land was divided into serviced lots, the Crown provided the company with leases for each lot.  The company assigned the leases to individuals, who built houses on the lots.  The leaseholders paid a lump sum to the company and agreed to pay rent to the Minister on behalf of the Band.  Most of the leases are dated May 16, 1966 and run for a term of 99 years from the date of the Master Agreement (June 8, 1965).

24          In 1980, the Crown transferred management authority to the Band so that the Band now receives the rent directly.  The rents for the first three 10-year periods are set in the leases at approximately $300-$400 per year.  The rent first came up for review in June 1995, as it will again every 20 years thereafter.  The leases stipulate that the annual rent is to be 6 percent of the “current land value”.  Below is a typical rent review provision:

2(1) YIELDING AND PAYING therefor, yearly, and every year in advance during the said term to the Minister a rent as follows:

(a) for each year during the first ten years of the term, the sum of ($298.00);

(b) for each year during the second ten years of the term, the sum of ($343.75);

(c) for each year during the third ten years of the term, the sum of ($375.00);

2(2) The rent for each year of the three succeeding twenty (20) year periods and for the final nine (9) year period of the term hereof, shall be a fair rent for the land 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 shall also be made in the case of any determination of the rent pursuant to the provisions of subparagraph (3) hereof.

2(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 .

2(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.  [Emphasis added.]

The parties cannot agree on the meaning of “current land value” in clause 2(4), or on the interpretation of “unimproved lands” in clause 2(2)(a).  Under clause 2(3), the Band applied to the Federal Court, Trial Division for a determination of these issues. 

III.  Judgments Below

A. Federal Court, Trial Division (1997), 137 F.T.R. 1

25          Rothstein J. found that “current land value” refers to “a 99‑year leasehold on the Musqueam Indian Reserve No. 2 unaffected by the terms of the current leases except for the prescribed assumptions in s. 2(2) of the current leases” (para. 40).  He held that it is inappropriate to use the freehold value of the land because of the “unique” nature of Indian title.  Indian title is inalienable.  When legal title is vested in the Crown, it is encumbered by a fiduciary duty to the Indians.  Neither the interest of the Crown (once Indian land is surrendered) nor that of the Indians in reserve land can be equated to a freehold estate in fee simple.  The Musqueam land was only surrendered for leasing purposes.  “Accordingly, it retains its character as land reserved for Indians with all of the benefits and limitations flowing from that character” (para. 36). 

26          Because of the difficulties in appraising the value of land in the reserve, the trial judge accepted an indirect comparison with non-reserve land.  He found that the fee simple value of off-reserve land was on average $600,000 (upon which expert appraisers for both sides agreed).  He used this as a benchmark to determine the actual value of Musqueam Park land, by discounting it by 50 percent “having regard to the long-term leasehold interest and Indian reserve features” (para. 86).  This works out to $300,000 per average lot. 

27          The 50 percent discount figure was arrived at by comparing the value of pre-paid leaseholds in Salish Park (also on the Musqueam Reserve) with West Side properties in the City of Vancouver.  The Salish lots sold for roughly 50 percent less than the comparable West Side properties.  The trial judge agreed with the appraiser who believed that the difference reflected the fact that the Salish properties were on the Musqueam Reserve.

28          The trial judge reasoned that land on the Musqueam Reserve has a lower value than neighbouring fee simple land not because of discriminatory considerations in the courts but because of the market.  Furthermore, the lower value “is not significantly related to the leasehold aspect” (para. 57) of the land.  Experts showed that at the start of a long-term lease, “there is no discernable difference between the value of leasehold and freehold interests” (para. 57).  Rather, the difference between the value of Musqueam land and neighbouring fee simple land off the reserve is attributable to the “Indian reserve feature[s]” (para. 57) of the land.

29          On the issue of “unimproved land”, the trial judge found that the words “this agreement” in clause 2(2)(a) referred to the Master Agreement, at the time of which the land was not serviced.  “Unimproved” therefore means without servicing, not just without buildings.  This is only one of several arguments for his decision to deduct the cost of servicing, found to be $117,818 per lot, from the current land value.

B.  Federal Court of Appeal, [1999] 2 F.C. 138

30          The Federal Court of Appeal found that “current land value” refers to the value of the land held in fee simple with no reduction for the “Indian reserve factor”.  This interpretation of the leases better reflects the parties’ intention.  The leases do not say “current leasehold value” or as in Leighton v. Canada (1987), 13 F.T.R. 198, the value of “the land leased on the terms and conditions contained in this lease” (para. 19).  It was an error by the trial judge to focus on the interest of the lessees as opposed to focussing on the land value itself.

31          The Band could surrender the land to the Crown for sale were it not subject to the long-term leases.  Its sale price would be the fee simple value of the land.  The distinction between reserve land and land held in fee simple was “not relevant to the valuation of the current land value for purposes of rent review” (para. 30).  According to Sexton J.A., “the value of the asset for the purpose of determining the lease is not affected by the decision to lease.  In my view, the fact that the land could be sold is fatal to the contention that it should be valued at anything other than its freehold value” (para. 32).  The court concluded that “the parties intended the ‘current land value’ to mean the freehold value of the land....  To hold that the land’s value is in any way diminished by the fact that the land is reserve land imports an element into the Aboriginal context which is irrelevant in the present context” (para. 36).

32          Rent review, unless the contract is drafted to the contrary, is generally based on freehold market value.  The Federal Court of Appeal also considered a series of leasing cases concerning Aboriginal land.  Some of these leases specifically provide that the rent is to be based on comparable on- or off-reserve properties.  The court found that the terms of the lease should be respected; where trial judges have refused to enforce a lease that specifies that the off-reserve land value is to be used in the rent review, they were in error.  Ultimately, however, leasing cases are not “particularly useful in that they essentially turn on the construction of the words employed in each lease in question” (para. 44).

33          On the issue of reasonable rent increases, the Federal Court of Appeal noted that it is misleading to focus on the percentage increase to determine if rent is reasonable.  When reserve land values have been set below market prices, increases to market value appear unreasonable.  Undervaluing native land to protect lessees creates a vicious cycle because the next time the rent comes up for review, a large percentage increase will seem unreasonable.  The court found that earlier Aboriginal leasing cases often relied incorrectly on the belief that “Indian land simply cannot in reality attain the value of land in an authentically free and open market” (para. 70).  Rather,

[i]n the absence of words to the contrary, the valuation of the market value of Aboriginal land should be made in the same manner as any other land.  Discounting the value of Aboriginal land on the basis of their sui generis interest in their own land is irrelevant to the determination of rent calculated as a percentage return on a capital investment.  If the parties intended to depart from the well‑established practice of valuing land in long‑term leases at its freehold or exchange value, they could, and should have specified this in the lease. [para. 71]

In conclusion, the Federal Court of Appeal accepted the trial judge’s determination that the hypothetical fee simple value of the average lot was $600,000.  This amount represented the “current land value” referred to in the leases; the 50 percent reduction in value imposed by the trial judge was an error.  On the issue of servicing, the court agreed with the trial judge, but increased the servicing costs to reflect the higher land value they found.

IV.  Issues

34          1.  What is the meaning of “current land value” in the Musqueam rent review clause 2(4)?

2.  What is the meaning of “unimproved” and “this agreement” in clause 2(2)(a) of the leases?

V.  Analysis

A.  Construction of the Leases

35          I find that “current land value” in the rent review clause refers to fee simple or freehold as opposed to leasehold value, but that it refers to freehold on the reserve, not off the reserve.  A freehold value for the Musqueam lands must be hypothetical because there is no such thing as freehold title on a reserve.  But this does not mean that this hypothetical value cannot be assessed and then serve its function in the rent review calculation. 

36          Unless the parties specify otherwise, the meanings of “land” and of “value” are well established in law.  When land is sold, “land” refers to “a right to receive a good title in fee simple” unless the agreement states otherwise (Ball v. Gutschenritter, [1925] S.C.R. 68, at p. 71).  “Land” is not given a special meaning in the Musqueam leases; in particular, it is not defined as a 99-year leasehold interest in the property under the lease.

37          “Value” in real estate law 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.  See Revenue Properties Co. v. Victoria University (1993), 101 D.L.R. (4th) 172 (Ont. Div. Ct.), at p. 180; Re Farlinger Developments Ltd. and Borough of East York (1975), 61 D.L.R. (3d) 193 (Ont. C.A.), at p. 205, and Sun Life Assurance Co. of Canada v. City of Montreal, [1950] S.C.R. 220.

38          Market value generally is the exchange value of land, rather than its use value to the lessee.  This distinction was articulated in Bullock’s, Inc. v. Security‑First National Bank of Los Angeles, 325 P.2d 185 (Cal. Dist. Ct. App. 1958), at p. 188, where the lease “calls for a determination of the value of the land, not the value of the use of the land for any particular purpose”.  Land is valued without regard to the tenant’s interest in it, for it does not reduce the land’s exchange value if the tenant chooses not to use the land for its highest use.  This case has been cited in Canada (e.g., Revenue Properties, supra) and the principle is part of Canadian law.  It was applied in Gulf Oil Canada Ltd. v. National Harbours Board, F.C.T.D., No. T‑1478‑71, September 15, 1972, at p. 19, which was followed in Burrard Dry Dock Co. v. Canada, [1974] F.C.J. No. 417 (QL) (T.D.), at para. 9.  Most recently, in No. 100 Sail View Ventures Ltd. v. Janwest Equities Ltd. (1993), 84 B.C.L.R. (2d) 273, leave to appeal refused [1994] 2 S.C.R. viii, the majority of the British Columbia Court of Appeal held at p. 281 that the specific terms of a lease were not relevant when determining “fair market value of the Leased Premises as bare land” (emphasis added) for a rent review.

39          Like the Musqueam leases, the lease in Bullock’s, supra, referred only to land value.  The court held that if the parties “had intended anything other than market value, they would have said so expressly” (p. 189 (emphasis in original)).  This is true of the Musqueam leases as well.  The leases do not refer to “current leasehold value” or to “the value of the land leased on the terms and conditions contained in this lease” as did the lease on reserve land in Leighton, supra.  In the absence of any indication that the leasehold value is to be used to set the rent, “current land value” means freehold value.

40          The economic rationale for determining rent as a percentage of land value articulated by the Federal Court of Appeal is sound.  As they explained at para. 20, “it is common in long‑term leases to use a percentage of land value to determine annual rent”.  They accepted the view of Steele J. that “the fixing of rent for long term leases 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” (Revenue Properties, supra, at p. 180).  The rent represents the true return on the market value of the land.  “It reflects the fact that the lessor could sell the land at its current land value and reinvest the proceeds at market rates of interest, if not subject to a long-term lease” (para. 20).  The economic rationale of seeking a return on a capital asset through rent review clauses is recognized in Canadian law, in American law (Bullock’s, supra, at p. 189) and in English law (R. E. Megarry and W. Wade, The Law of Real Property (6th ed. 2000), at para. 14-246, citing British Gas Corp. v. Universities Superannuation Scheme Ltd., [1986] 1 W.L.R. 398 (Ch. D.), at p. 401).

41          Valuing the Musqueam land at its freehold value is 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.  The freehold value better approximates this return than does the leasehold value.  But this reasoning does not lead to the Federal Court of Appeal’s conclusion that it must be the freehold value of land outside the reserve that should be used to determine the rent.  On the contrary, the capital asset here is reserve land surrendered for leasing, not land surrendered for sale.  The nature of the capital asset at issue is reserve land. 

42          Some leases on reserves specify that off-reserve land values go directly into the rent calculation.  In Rodgers v. Canada (1993), 74 F.T.R. 164, and in Devil’s Gap Cottages (1982) Ltd. v. Canada, [1991] F.C.J. No. 1142 (QL) (T.D.), for example, the leases require that comparison properties be “similar in area and character, but situate outside of the Reserve”.  Where the lease is clear, the Federal Court of Appeal is correct to insist that the courts adhere to the lease when determining rents.  The Musqueam leases, however, do not specify that off-reserve land values should be used in the rent review formula.

43          To find that off-reserve values should be used, the Federal Court of Appeal reasoned, in essence, that market value is established through the sale of land, and that once reserve land is sold it loses its reserve features, so that the relevant market is that for non-reserve land.  With respect, I find this reasoning circular.  The hypothesis of sale is taken as changing the nature of the land appraised from land on reserve to land off reserve, whereas the hypothetical used to establish market value in the absence of an actual market should reflect the land as it is in its actual circumstances. 

44          Interpreting “current land value” as the value of reserve land is consistent with the economic rationale identified above.  It is land which is part of the reserve that the Band owns as a capital asset.  Although the Band could surrender the land for sale, thereby excluding it from the reserve (and presumably achieve market prices for non-reserve land), it has not chosen to do so.  The asset it holds is reserve land, for which it must accept the realities of the market.  Thus, in my view, the leases in stipulating “current land value” refer to the value of freehold land on the reserve.

B.  Appraising the Freehold Value

45          It is difficult to appraise the value of a hypothetical fee simple interest on the Musqueam reserve.  The trial judge found as a fact that the fee simple value of comparable lands off the reserve was $600,000 on average, and this finding was not disturbed by the Federal Court of Appeal.  This figure was also accepted by expert appraisers for both parties; I accept it as well. 

46          As I have explained above, the leases require the court to assess the value of a hypothetical fee simple ownership on the reserve.  This value must reflect the legal restrictions on the land and market conditions.  One cannot simply assume that either legal restrictions or market conditions are the same for reserve land as for off-reserve land.  In fact, the legal restrictions on the reserve land differ from those on the comparable areas of Vancouver.  So too the market may respond differently to Musqueam reserve land than it does to land off the reserve.  To give effect to the leases, the land value in the rent review clause must pertain to the actual land in question. 

47          Legal restrictions on land use, as opposed to restrictions found in the lease, may affect the market value of freehold property.  In Revenue Properties, supra, at p. 182, the court held that “[a]ll applicable statutes and laws relating to use such as zoning by-laws must be considered” when assessing land value.  All three appraisers in the case at bar considered legal restrictions on land use, chiefly zoning, in their reports.  This is consistent with professional appraisal practice in Canada.  To determine land value, whether as vacant or as improved, the appraiser (unless otherwise instructed by the lease) considers the highest and best use that is “legally permissible, physically possible, financially feasible, and maximally productive”.  Legal impediments include “[p]rivate restrictions, zoning, building codes, historic district or other non-zoning land use controls, and environmental regulations” (Appraisal Institute of Canada, The Appraisal of Real Estate (Canadian ed. 1999), at p. 270). 

48          The legal restrictions on land use imposed by a band on its land are analogous to land laws imposed by a municipal government.  As the Federal Court of Appeal held in The Queen v. Guerin, [1983] 2 F.C. 656, at p. 719, which happened to concern the Musqueam Band, the Indian Act, R.S.C., 1985, c. I-5 , “confers on the Minister, the Governor in Council, and the band council certain powers of a local government nature for the management of the reserve”.  Subject to the Indian Act , the band council has some legislative powers to enact its own laws.  Under s. 83, for example, this Band has enacted the Musqueam Indian Band Assessment By-Law and the Musqueam Indian Band Taxation By-Law.  The decision about whether to surrender reserve land for leasing or for sale is a formal decision made by the Band under ss. 37 -39  of the Indian Act .  The decision derives from legislative power, and is not analogous to restrictions on land contained in a lease, which are based on contract.  The legal environment on a reserve should therefore be taken into account when appraising the land’s value.  Of course, like municipal zoning, band restrictions could either increase or decrease land value depending on how the market responds to them.  In Devil’s Gap Cottages, supra, Strayer J. (as he then was) noted that favourable zoning on that reserve increased its value dramatically over non-reserve land.

49          Like the trial judge, I am therefore of the opinion that the fee simple off-reserve value cannot simply be transposed to the Musqueam land.  The chief difficulty in assessing the value of the Musqueam land is that there can be no actual market for the value expressed in the leases.  As soon as reserve land is surrendered for sale, it loses its reserve features.  There can therefore be no such thing as fee simple title on reserve land.  To approximate it, one must use a hypothetical value.  In this case, the value can be determined by adapting the off-reserve value to take into account the actual features of the land and of the market. 

50          Because the direct comparison approach to land appraisal is not available here, the trial judge took the fee simple value for comparable non-reserve land of roughly $600,000 per lot.  He then found at para. 86 that “[t]he actual value of such serviced land having regard to the long-term leasehold interest and Indian reserve features pertaining to it would be approximately 50% of the fee simple values”.

51          The trial judge derived the 50 percent rate from a comparison of the sale of 99-year pre-paid leasehold interests in another subdivision on the Musqueam reserve, Salish Park, to comparable off-reserve properties.  The Salish Park properties were worth 50 percent less than the comparables.  Because the leasehold and reserve features are similar for Salish Park and for Musqueam Park, the trial judge found that the 50 percent rate was transportable, and applied it to the Musqueam comparables.

52          The Salish properties are leasehold, not freehold, interests.  Discounting the land because of its leasehold features is an error in law for, as I have explained above, “current land value” means freehold and not leasehold value.  But this distinction does not significantly affect the market value of the land.  The trial judge accepted the appraisers’ shared view that at the start of a long-term lease, “there is no discernable difference between the value of leasehold and freehold interests” (para. 57).  On the basis of the cross-examination of the appraisers, including the appraiser for the Band, the trial judge also established that the Salish Park leases were “a good proxy” (para. 67) for the Musqueam leases notwithstanding the fact that the unexpired term was only 78 years and not 99 years.  It is worth noting that the amount of the reduction of 50 percent was not disputed before this Court.  There were no submissions on the point.  Although I would not disturb the trial judge’s finding of a 50 percent reduction in this case, it does not follow that land on a reserve will necessarily bear that discount.  It will be a question of fact what, if any, discount should be applied.

53          I find no error in the trial judge’s findings on this question of fact, and agree that in 1995, the 50 percent reduction in value reflected the market value of the Musqueam reserve land.  The trial judge accepted the evidence of the professional appraisers who testified at trial (both Mr. Johnston for the Band and Mr. Oikawa for the leaseholders, as well as the City of Vancouver Assessor Mr. Jones) who all agreed that uncertainty lowered the market price of the Musqueam lands.  This fact cannot be dismissed or ignored.  In the future, the market may respond differently.  But when the market perceives uncertainty, it is cold comfort to the lessor to believe that the lessees’ fears are unwarranted.  The market value of the Musqueam lands in 1995 having been found to be 50 percent of that of comparable off-reserve lots, the rent should be based on this value as being their current land value under the terms of the leases.

C.  Servicing Costs

54          The leases list four factors in the rent review section which are to be taken into account in determining the “current land value.”  Clause 2(2)(a) requires that one assume that the lands are “unimproved lands in the same state as they were on the date of this agreement”.  The Band cross-appeals on the meaning of “this agreement” and on whether “unimproved” means simply without buildings or whether it means without services as well.  If the latter, some amount must be deducted from the “current land value” notionally to return the land to its unserviced condition.

55          The debate in the courts below about whether “this agreement” refers to the Master Agreement or to the leases turns out to be irrelevant, given my decision on the meaning of “unimproved” land.  On the basis of the plain meaning of the word “unimproved” and of its use in the leases, I conclude that “unimproved lands” means “unserviced” lands, not just lands without buildings.  As the Federal Court of Appeal noted, “Black’s Law Dictionary, 6th ed., (at page 757) defines ‘improved land’ as ‘(r)eal estate whose value has been increased by landscaping and the addition of sewers, roads, utilities, and the like’.  Similarly, the term ‘improvement’ generally refers ‘to buildings, but may also include any permanent structure or other development, such as a street, sidewalks, sewers, utilities, etc.’” (para. 87).  In Re Planet Parking Ltd. and Assessment Commissioner of Metropolitan Toronto, [1970] 3 O.R. 657 (H.C.), the court found that the word “unimproved” in the context of the Assessment Act related to the “ordinary and natural” meaning of “improvement” as in “making . . . better” (p. 661).  The court rejected “the contention that unimproved land as distinguished from improved land means land without buildings erected thereupon” (p. 662).

56          In the Musqueam leases, the word “improvement” is used to refer to things other than buildings.  Clause 8(a), for example, refers to “any buildings . . . and . . . such other improvements, including construction of roads, water, sewer, electricity and/or gas systems”.  Similar phrases are found throughout the leases.  Improvements include services, and conversely “unimproved” means without services.  The internal coherence of the rent review clause also supports the view that “unimproved” means unserviced.  The leases were signed before any buildings were built, so the word “unimproved” would have added nothing to the phrase “unimproved lands in the same state as they were on the date of this agreement” unless it referred to the pre-existing  servicing.

57          Because I accept the lower land value found by the trial judge rather than the higher value of the Federal Court of Appeal, I would deduct the lower cost of servicing the land, as did the trial judge.  This amounts to $117,818 per lot.

VI.  Conclusion

58          I would allow the appeal and dismiss the cross-appeal, both with costs.

The following are the reasons delivered by

59          Bastarache J. — I have read the reasons of the Chief Justice and of Justice Gonthier.  Although I agree with the result reached by Gonthier J. and his reasons regarding the deductibility of servicing costs, I reach my conclusions with regard to the main issue, i.e. the meaning of “current land value” in the leases, for different reasons.  I will briefly explain my reasoning.

60          The Chief Justice disagrees with Gonthier J. because, in her opinion, he has chosen to ascribe to the land a value based on the existence of a hypothetical on-reserve fee simple – hypothetical because there can be no fee simple title in reserve land.  The Chief Justice argues that since the Musqueam Indian Band (“Band”) has the power to sell its land in fee simple, even if it has not chosen to do so, the value of the land should be viewed as if it were held under a fee simple title simpliciter.  It is unlikely that the parties would ever have intended a hybrid freehold or fee simple land with its value calculated so as to include its reserve status.  This hypothetical title requires attributing to the parties a far too unusual formulation when there is no indication that it was in fact intended by them.  However, I cannot agree with the reasoning of the Chief Justice when she posits that the land must be valued as though it were not reserve land but had been converted to land held in fee simple.  I believe that the fee simple value ascribed by the Chief Justice is also based on a hypothetical title.

61          It is my view that the “current land value” should be calculated as leasehold land, including its status as reserve land because (i) this is the best description of what the land in fact is, and (ii) this is consistent with the parties’ intentions.

I.  What the Land in Fact Is

62          The Master Agreement, in which the Crown agreed to provide the individual leases, describes the land subject to the leases as situated on the reserve.  The Chief Justice ignores the location of the land in her valuation, ascribing to it a value that could only be real if the land were situated within the City of Vancouver and held in fee simple.  This is not the case.  While it is true that the Band could decide to sell its land in fee simple and pursue the goal of having the land integrated into the City of Vancouver, it has not in fact chosen to do so.  It has not converted the land to land held in fee simple, nor has it changed its character as land situated within a reserve.  The land to be valued is, therefore, reserve land.

63          This is important because the location of the land and its status as reserve land has an important impact on its value.  If the land were not reserve land but fell outside of the city’s limits or were part of another municipality or a region without a municipal government, this would be considered in the valuation process.  The same is true in the case where the land is reserve land.  In other words, the trial judge was correct to accept expert evidence that allowed for the possibility that uncertainty related to property taxation, political unrest, services such as garbage collection, etc. should be taken into consideration when assessing the value of the land.  As Gonthier J. points out, the fact that the land is on a reserve can either decrease or increase land value depending on how the market responds to it, noting an instance where favourable zoning on a reserve increased its value over non-reserve land (at para. 48).

64          The land to be valued in this case is not land held in fee simple and it should not be treated as such.  It is land held under a long-term lease, a type of holding that makes sense in the context of a reserve.  This is important in view of the fact that “[a] market value appraisal is always a valuation of specified rights in the subject property, not the physical real estate” (Appraisal Institute of Canada, The Appraisal of Real Estate (Canadian ed. 1999), at p. 17 (emphasis added)), i.e., not the value that the property can conceivably bear, but what it in fact bears given the nature of the specific rights in it.  The fact that the fee simple value is generally used to determine the value of property reflects the fact that this is generally the highest form of property possible.  In the exceptional case of reserve lands, this is not the situation.  The highest form of individual property possible is the long-term lease.  The total value of the land would consist of the value of the lease and of the reversion.  But this does not pose a problem in this case because the trial judge found that a long-term lease, in its first years, was equivalent in value to a fee simple.  He therefore decided that it was possible to use lands held in fee simple as comparators to establish the value of the land subject to the Musqueam leases.

65          Just as the value of the land may depend on “custom, encumbrances, and conditions” (Appraisal Institute of Canada, supra, at p. 17), as the Chief Justice states, it must also reflect the legal restrictions on the land.  While the Chief Justice states that “the fact that [the] land is part of a reserve is not a legal restriction” (para. 14), the legal regime that affects the use of the land and the rights and privileges of the holders of the land is, in my view, part of those restrictions.  As stated in Revenue Properties Co. v. Victoria University (1993), 101 D.L.R. (4th) 172 (Ont. Div. Ct.), fair market value is “intended to capture periodically the capital value of the property but as affected by legislation relating to the land and by the very nature of the agreement entered into by the parties” (p. 187).  As the trial judge puts it, the land “retains its character as land reserved for Indians with all the benefits and limitations flowing from that character” ((1997), 137 F.T.R. 1, at para. 36).  I do not agree that the power of the Band to modify unilaterally such restrictions by converting the lands to fee simple lands means that while the restrictions exist they can be ignored.  For example, if leased land is subject to a restrictive covenant in favour of the owner, it would affect the value of the land regardless of the fact that the owner could at any time release the lessee from the obligation to abide by the terms of the covenant.  If a restriction exists that affects the value of land, it exists.  It would be improper to hypothesise that it does not exist.  It is true that an absolute surrender of the land would extinguish the Band’s interest and cause the land to lose its character as reserve land.  However, the nature of the interest would in that case be radically different.  This hypothetical situation cannot be used to create the interest to be valued.  The valued land retains its character as land reserved for Indians and this status is relevant for the purposes of rent review.

II.  What the Parties’ Intentions Indicate

66          In addition to the fact that the preamble to the Master Agreement refers to the leased land within the reserve, the idea that the parties intended “current land value” to refer to the value of the land as leased reserve land is, in my view, more consistent with what the parties to the agreement intended than the claim that it was meant to refer to the value of the land if it were sold in fee simple.  The centrality of the parties’ intentions to the interpretation of a contract such as this one demands that this issue be given prominence.

67          Sexton J.A. at the Federal Court of Appeal argued that if the parties had intended the rent review clause to refer to the value of a leasehold on reserve property, they would have used a more specific phrase, such as “current leasehold value” ([1999] 2 F.C. 138, at para. 19).  He also stated that since long-standing practice is to value the land at its fee simple value (a question I have addressed earlier in these reasons), if something else like the leasehold value of reserve land had been intended, it would have been stated expressly (para. 21).  Moreover, it would have been odd for the Band not to be protecting its return on a capital asset by designating the fee simple value of comparable non-reserve land with the phrase “current land value” (paras. 25 and 26).  These reasons are adopted by the Chief Justice in her interpretation of the parties’ intentions who adds the point that such designation is mutually beneficial to both parties to the agreement.

68          However, it appears to be more plausible to say that the parties intended “current land value” to be interpreted and guided by what it in fact is, namely, a leasehold interest in reserve land and, in my view, this is what the parties in fact intended.  As the trial judge put it, “there is no suggestion in the leases that the ‘current land value’ refers to anything other than the actual value of the land which forms the subject of the leases” (para. 29).  And while it is true that “[i]n most leases, words such as ‘current land value’ will be taken to mean the freehold value” (para. 37), this is not a value based on an unencumbered right.  Indeed, the interpretation favouring a valuation based on the land as leased reserve land would indicate a true intention to map the value of the lease to current market values, i.e., to ensure, as the Chief Justice puts it, that the “leases will reflect the contemporary market” (para. 11).  However, this should be understood as the market for long-term leases of Indian reserve land.  The relevant market here is not the market for the sale of unencumbered land held in fee simple.  The case law indicates that comparisons with non-reserve values should only be used where clear language to that effect is adopted by the parties; see Devil’s Gap Cottages (1982) Ltd. v. Canada, [1991] F.C.J. No. 1142 (QL) (T.D.), and Rodgers v. Canada (1993), 74 F.T.R. 164.  Hence, I underscore that where the parties chose to make assumptions which would be taken into account in the valuation of the land, they included them in the lease at clause 2(2).  I see no justification for reading in any further assumptions and respectfully disagree with the Chief Justice’s comments on this issue and her discussion of the cases where specific assumptions with regard to location were included in band leases.

69          I would allow the appeal, dismiss the cross-appeal  and affirm the judgment of the Trial Division of the Federal Court with costs.

Appeal allowed with costs, McLachlin C.J. and L’Heureux‑Dubé, Iacobucci and Arbour JJ. dissenting.  Cross‑appeal dismissed with costs.

Solicitors for the appellants/respondents on cross‑appeal:  Farris, Vaughan, Wills & Murphy, Vancouver.

Solicitors for the respondents/appellants on cross‑appeal:  Roberts & Baker, Vancouver.

Solicitor for the respondent Her Majesty the Queen:  The Attorney General of Canada, Vancouver.