Property Development (Real Estate; Land Use Planning/Municipal)

Reprinted with Permission from the 2006 issue of the Lexpert/ALM Guide to the Leading 500 Lawyers in Canada. (c) Thomson Carswell.

Table Of Contents

1. Practice Area Definition

2. Recent Developments in Property Development prepared by John Doolan of McCarthy Tétrault LLP

3. Leading Law Firms & Practitioners

Property development work is a broad practice area, which for purposes of this Directory is broken down as follows:

Commercial, retail and residential real estate financing and development work covers all aspects of real property transactions, including land acquisitions, site assembly, dispositions, financing structures and negotiations, joint ventures, partnerships, syndications, initial lease-ups, institutional investments including pension funds and REITs, condominium work (registration, bylaws, enforcement, annual meetings, unit purchases and sales, etc.), and issues relating to the enforcement of real estate security.

Land Use Planning/Municipal Law encompasses commercial, retail and residential planning and land use work, including official plan, zoning, subdivision, severance, variance, land use and development, and site plan matters; applications before municipal planning bodies, councils, provincial and federal boards; and related environmental compliance approvals. It may also include representation of regional and municipal governments in drafting of legislation; preparing, enforcing and contesting by-laws; advising on inter-governmental affairs and policy issues; and representing municipalities and their employees on negligence claims.

Please note that the Directory has separate Sections for PROPERTY LEASING, CONSTRUCTION LAW and ENVIRONMENTAL LAW.

First Nations are governed by the Indian Act (Canada) (the "Act"). First Nations are represented by "band councils" ("Councils"), which are elected in accordance with the Act and First Nations’ bylaws and customs. Councils have recognized legal status and have the power to pass bylaws and to enter into contracts, subject to any requirements and limitations under the Act.¹

In accordance with the Act, the legal title to reserve land is held for First Nations by Her Majesty the Queen in Right of Canada ("Her Majesty"), as represented by the Minister of Indian Affairs and Northern Development (the "Minister"). The Minister is represented by the Department of Indian Affairs and Northern Development (the "Department"). There are three types of reserve land – general reserve land, designated land and "CP Land".

General reserve land is land that is held for a First Nation as a whole and that has not been designated by the First Nation for leasing or other purposes.

Designated land is reserve land that has been "designated" or set aside by a First Nation for the purposes of granting lease or other interests therein. A designation of reserve land requires the approval by a majority vote of the membership of a First Nation. A designation can authorize the granting of a lease with a term of up to 99 years, which is the greatest term permitted under Department policy. Once a designation is passed, Her Majesty is authorized to grant interests in the designated land on behalf of the First Nation in accordance with the terms of the designation.

"CP Land" is reserve land that has been allotted to an individual First Nation member (called a "Locatee") pursuant to a "certificate of possession" issued under the Act. The Act provides for the leasing of CP Land without a designation, but Department policy restricts the maximum term of a lease of CP Land to 49 years. The Department also requests that a CP Land lease be supported by a resolution of the Council, although there is case law confirming that the consent of the Council is not required for the grant of a lease of CP Land.

The interest of a First Nation in reserve land can be absolutely surrendered under the Act in order to authorize the absolute disposition of all of the First Nations’ interest, but a First Nation would not absolutely dispose of its interest except under very unusual circumstances.

In a typical reserve land transaction, a lease is negotiated between the Department, on behalf of the First Nation or Locatee, and the developer. Some First Nations have been granted statutory authority to negotiate their own leases in accordance with the Act or the new First Nations Land Management Act (Canada). The lease is the critical document in most transactions and developers will want to negotiate lease terms that are acceptable to subtenants and lenders.

Reserve land leases must be for fair market rent and the developers are required to provide independent appraisals. Developers should consider negotiating fully prepaid rent, as opposed to having periodic rent reviews or ongoing participating rental payments. If there are periodic rent reviews, prospective tenants will be concerned about possible future rent increases. If there are participating rents, developers are typically required to covenant to complete the leasehold development within a certain period, to post labour and material bonds securing construction obligations, to carry on business on the leased premises in a certain manner, and to reconstruct any damaged improvements. This last item will be of particular concern to lenders, who will want to have the option of applying any insurance proceeds toward the repayment of the loan.

Equally, the developer tenant will have fewer lease obligations if the lease provides that the tenant retains ownership of the improvements at the end of the term of the lease. Owning the improvements at the end of the term of the lease also would put the tenant in a position to negotiate the renewal of the lease or the sale of the improvements to the First Nation at that time. This is a step towards making reserve land leases more market-friendly. Off-reserve Crown leases often provide that, at the end of the term, the leasehold landlord must elect to either renew the term of the lease or purchase the leasehold improvements.²

In addition to the above provisions, there are a number of other provisions which might require negotiation, such as those in respect of the following:

The Department’s standard form of lease permits subletting with the consent of the Minister. In most cases, the developer will hold the head lease and grant subleases to homeowners or space tenants. In some instances, the First Nation will create a First Nation corporation to hold the head lease and then will grant a sublease to the developer. This structure may not be desirable in some cases, because each level of leasing and subleasing gives the end user a more remote interest in land. Since any subleasehold interest is dependent upon the good standing and subsistence of any superior interest, some subtenants might not be willing to invest in sub-subleases or more remote interests, particularly in residential developments.

The Department’s standard form of lease also permits the granting of mortgages with the consent of the Minister. The Department has a standard form of mortgage consent agreement. Lenders will want the agreement to include provisions such as the following:

Federal legislation is not as comprehensive as typical provincial land title legislation with respect to the granting of interests in land. The Act authorizes Her Majesty to grant permits and licences for certain purposes. Section 28(2) of the Act provides for the granting of a licence for a fixed period of time. Section 35 of the Act authorizes expropriation for public purposes.

A tenant might be able to grant subordinate rights, such as easements or licences, depending on the terms of the lease. However, such rights would be dependent upon the subsistence of the lease and some parties might require that their interests in the land be granted directly by Her Majesty as land owner so that the grantee’s interest would survive the termination or expiration of the lease. Licences granted under the Act will be personal interests and may be assigned in accordance with their terms, but in some cases the parties will want to attach the benefit of the grant to a lease, sublease or other interest in land so that it automatically runs with the dominant lands. A statutory easement under the Federal Real Property and Federal Immoveables Act (Canada) might be the appropriate instrument in such a case.

Section 54 of the Act permits the assignment of interests in designated land with the consent of the Minister. Section 54 does not apply to undesignated CP Land, but the Department’s standard form of lease requires the Minister’s consent for the assignment of a lease of CP land as well. Section 55(2) of the Act prohibits the registration of a conditional assignment.

The designation process is time consuming and costly and the statutory requirements under the Act must be followed strictly. A designation must be approved by a majority of the electors of the First Nation. In the past, most designations were granted for the purpose of approving specific leases in favour of specific tenants. Now, more and more First Nations are designating lands in advance so that they are in a position to participate in economic opportunities as they arise, without having to go through the designation process each time.

Designations should be kept as clear and as general as possible. Any ambiguities in a designation will cause concerns for tenants, subtenants and lenders. If a designation provides for a lease to a specific tenant, it might be necessary to amend the designation or pass a new designation in order for a lease to be granted to a new tenant if the original tenant ceases to exist. If permitted uses are too narrow, future uses might be unduly restricted. Also, designations should be for indefinite terms, so that a 99 year lease term does not commence on the designation date, which can be well in advance of the date the lease is granted.

Her Majesty will not make representations or give assurances as to the state of title to reserve land. In fact, the tenant will be required to agree that its lease is subject to any unregistered encumbrances and interests. The Department maintains an Indian Land Registry in which leases and other interests in land can be recorded, but there is no statutory requirement to register interests in land, no assurance as to title and no priority of registered interests. The only relevant provision in the Act is Section 55(4), which provides that a registered assignment is valid against an unregistered assignment or an assignment that is subsequently registered.

It is not uncommon to discover unregistered interests and defects in title, including unregistered public rights of way. For designated lands, undisclosed defects in the designation process could go to the root of leasehold title. Therefore, reserve land developers should review historical title and designation documents, obtain current land surveys, carry out historical survey searches and make investigations as to the property directly with the First Nation. They also should consider obtaining title insurance. Title insurance will cover title defects and unregistered interests and can be used as a valuable marketing tool. Title insurance also can cover the "gap" between the time that a lease or sublease is signed and the time it is registered in the Indian Land Registry, so that closings can occur without having to wait for registration. In some circumstances, lenders require title insurance.

Section 28(1) of the Act provides that any instrument by which a First Nation or First Nation member purports to permit a person other than a member of the First Nation to occupy or use reserve land is void unless it is granted in accordance with the Act. The Department has a number of prerequisites to the granting of a lease, including the carrying out of environmental assessments and an appraisal of fair market rent. Her Majesty will not grant a conditional lease in advance of the developer satisfying these requirements. Thus, developers cannot proceed with reserve land transactions as they would proceed in typical off-reserve situations, where rights to land can be secured under a conditional purchase contract while the developer carries out its due diligence investigations. The reserve land leasing process can be time consuming and costly, particularly if a designation is required, and the developer’s investment is at risk until the lease is granted.

A reserve land developer might seek some comfort during its due diligence process by entering into a letter of intent with the First Nation or Locatee, as beneficial owner of the land. However, the letter of intent would not be binding and the land could not legally be "tied up" until the lease was granted. If a developer needs to commence on-site work prior to the granting of the lease due to seasonal or market requirements, it could obtain a permit under Section 28(2) of the Act, but the permit would be for a limited purpose only and the developer’s investment still would be at risk until the lease was granted. Alternatively, a developer could consider requesting that the First Nation or Locatee undertake the site work at its cost until the lease was granted. This would have the added benefit of allowing the developer to avoid having to go through the permitting process.

The Act contains a broad exemption from pledge and seizure in favour of First Nations and First Nations members. Section 89(1) provides as follows:

Section 89(1) is intended to preserve the interests of First Nations and their members in real and personal property on the reserve. However, this provision also would prevent First Nations and First Nation members from obtaining mortgage financing, since it would prevent a lender from taking a valid charge from the First Nations tenant. As a result, even First Nation members who were tenants under leases of designated lands were unable to grant mortgage security until the Legislature amended the Act in 1988 to include Section 89(1.1), which provides as follows:

Personal property still would be exempt and because Section 89(1.1) only refers to designated land, Section 89(1) still would prevent First Nations tenants of CP Land leases from granting valid mortgage security.

The Section 89(1) exemption from pledge and seizure does not apply to a mortgage of a non-native’s leasehold interest in reserve land. Although some legal authors have raised concerns that Section 89(1.1) might implicitly create a general prohibition against anyone mortgaging undesignated CP Land by specifically authorizing the granting of the mortgages of designated land, their concerns are not supported by the context of the Act or the history of the legislation. Section 89(1.1) directly relates to the Section 89(1) exemption in favour of First Nations and their members. It would be a misinterpretation of the legislation to imply from Section 89(1.1) a restraint on a non-native tenant’s right to grant a mortgage of lease. The purpose of Section 89(1.1) is to permit the granting of mortgages of leasehold interests in designated land held by First Nation members. Section 89(1.1) was added to the Act in 1988 with a series of other important amendments which were intended to bring First Nation interests more into the commercial mainstream by empowering First Nations to levy property taxes and otherwise promote the economic use of reserve land by First Nations and their membership.³ It is worth noting that the Department’s form of lease for CP Land specifically permits mortgaging with the consent of the Minister.

Nevertheless, the holders of mortgages of CP Land leases granted by third party borrowers should be concerned about the possibility of an assignment of the lease to a First Nation or First Nation member because the lease might then become exempt from seizure in accordance with Section 89(1). The mortgage holder will want to put into place adequate measures to ensure that the CP Land lease was not assigned without the mortgage holder’s consent.

The regulation of use and development on reserves is subject to the Act, other federal laws and the bylaws of the First Nation government. The federal system is administered by the Department, with input from other federal departments, including the Department of Public Works. First Nations have powers under the Act to pass a wide variety of bylaws. Some First Nations are very active in the regulation of the development and use of their lands.

With some exceptions, provincial and municipal laws relating to the use of land do not apply on reserves. However, an adjacent municipality might be able to exercise a degree of control over reserve land development if the developer is required to obtain utility services or access rights from the municipality.

Environmental matters on reserve land are governed by the Canadian Environmental Assessment Act ("CEAA"), which provides that an environmental impact assessment must be carried out before Her Majesty grants a lease of reserve land. In addition, the Department requires either an environmental site assessment or an environmental audit, depending on the history of the property, the proposed uses and any apparent risk factors. At the end of the term of the lease, the tenant is required to return the leased lands to the condition they were in on the commencement date under the lease.

CEAA arguably does not apply to subleases, so the Department’s standard form of lease incorporates the CEAA requirements for the granting of subleases and the carrying out of work by subtenants. If a head tenant has obtained CEAA approval for a specific development project, subtenants should not be required to repeat the head tenant’s environmental work so long as the subtenant’s activities are within the scope of what was contemplated under the head tenant’s environmental approval. This matter should be investigated with the Department in appropriate circumstances.

The premises demised under leases and subleases of reserve land are defined by the preparation and registration of a survey plan. Survey plans must satisfy Indian Land Registry requirements, but there is no federal equivalent of local government approving officer requirements. The Registry requires evidence of access in order to register a lease, but the requirements are much more flexible than those under typical provincial legislation. On-site roads are described by survey plans and created by easements or other interests, as described above. For access over general reserve land, the Registry may accept a Council resolution approving access. Off-site roads sometimes involve dealings with provincial highways ministries or adjacent local governments.

The provision of utility services to the development is always critical. Some First Nations provide some or all utility services and levy taxes and utility charges directly to tenants and subtenants. In other cases, services are provided by the adjacent local government, either directly or through an agreement with the First Nation.

Given some of the complications of reserve land transactions and the relative inexperience of most developers with the federal and First Nations regulatory regimes, it is important to keep the structure of a reserve land transaction as simple as possible. In some cases, however, the leasing and subleasing structure will need to be somewhat complex. For example, in some residential projects developers will want to replicate in the leasing and development documents some aspects of provincial condominium legislation, which do not apply to reserve land developments.

Joint ventures with First Nations are becoming more common. A joint venture arrangement should be kept simple and clearly defined. It is often advantageous to use a term sheet or letter of intent to identify and settle the main business issues as early in the transaction as possible. Both parties should obtain good tax and structuring advice. First Nations and First Nation members have broad exemptions from taxation under the Act and some Councils can avail themselves of governmental exemptions from taxation under the Income Tax Act (Canada). If the First Nation is directly involved in a transaction, the First Nation will need to consider measures to protect itself from liability. The developer will need to consider measures to address the First Nation’s exemptions from pledge and seizure under Section 89(1) of the Act.

There are many successful residential and commercial developments on reserve land. Qualified developers who are willing to invest the time in learning about the federal and First Nations regulatory systems and developing their relationships with First Nations will be in a good position to pursue development opportunities on First Nations’ lands. While there are still a number of significant challenges facing the reserve land developer, the federal leasing and development approval processes are improving and becoming more streamlined. All levels of government are becoming more flexible in their approaches to economic development on reserves and First Nations are becoming more proactive in pursing new relationships with developers.

1. Some First Nations are governed by other statutes and treaties, but this article focuses on the implications arising under the Act.

2. See, for example, Section 210 of the Strata Property Act (British Columbia), which provides that at the end of the terms of a ground lease from a public authority the leasehold landlord has the option of either renewing the term or purchasing the leasehold tenant’s interest in the property. The Nisga’a First Nation was recently added as a public authority authorized to grant ground leases in accordance with this legislation.

3. See the House of Commons Debates (2 June 1988) at 16047 (S. Schellenberger): "Section 89 is proposed for amendments so that leasehold interests in designated land would be made mortgageable. This will mean that an Indian person holding a lease on designated land would be able, just as a non-Indian is, to use the lease as security for a loan. There would be no risk to the ultimate reserve status of the land nor any possible loss of the ultimate Indian interest. Only the lease would be at risk."

During the course of 2005 we sent out 548 questionnaires to respected property development practitioners across Canada. We received 255 replies, giving us a national response rate of 46.5 per cent. The provincial breakdown is as follows: Ontario 44.6 per cent, Quebec 50.8 per cent, British Columbia 60.5 per cent, Alberta 39.1 per cent, Saskatchewan and Manitoba 41.7 per cent, and Atlantic Canada 43.6 per cent.

In property development matters, Ontario is unique amongst Canadian provinces in that the province’s land use planning tribunal, the Ontario Municipal Board (OMB), exercises a broad, almost plenary jurisdiction. Similar types of tribunals, in one form or another, exist in most other provinces, but none with an armoury of powers comparable to the OMB. The end result is that there exists a separate Bar, apart from but working in conjunction with property development and finance lawyers, which specializes in advocacy in land use planning matters before the OMB, municipal councils and other such decision makers. For this reason, for Toronto only, we have set out in separate tables below those firms and lawyers best known for their work in each field. Outside of the Greater Toronto Area the dichotomy begins to break down, with property development lawyers frequently practising in both fields and, for this reason, the same distinction has not been drawn. As almost all Toronto firms with significant real estate practices will have lawyers in both fields, we have also merged the survey results to profile those firms having the best bench strength in all aspects of property development.

Goodmans LLP
McCarthy Tétrault LLP

Aird & Berlis LLP
Blake, Cassels & Graydon LLP
Goodman and Carr LLP
Osler, Hoskin & Harcourt LLP

Borden Ladner Gervais LLP
Davies Ward Phillips & Vineberg LLP
Fraser Milner Casgrain LLP
Stikeman Elliott LLP
Torys LLP
WeirFoulds LLP

Blake, Cassels & Graydon LLP
McCarthy Tétrault LLP
Osler, Hoskin & Harcourt LLP

Borden Ladner Gervais LLP
Davies Ward Phillips & Vineberg LLP
Goodman and Carr LLP
Goodmans LLP
Torys LLP

Bennett Jones LLP
Cassels Brock & Blackwell LLP
Fasken Martineau DuMoulin LLP
Fraser Milner Casgrain LLP
Stikeman Elliott LLP

Aird & Berlis LLP
Goodmans LLP
McCarthy Tétrault LLP

Blake, Cassels & Graydon LLP
Goodman and Carr LLP
Osler, Hoskin & Harcourt LLP
WeirFoulds LLP

Borden Ladner Gervais LLP
Cassels Brock & Blackwell LLP
Stikeman Elliott LLP

Bratty and Partners, LLP
DelZotto, Zorzi LLP
Fogler, Rubinoff LLP

Bratty and Partners, LLP
DelZotto, Zorzi LLP

Harris, Sheaffer LLP
Minden Gross Grafstein & Greenstein LLP

Bogart Robertson & Chu
Fogler, Rubinoff LLP
Torkin Manes Cohen Arbus LLP, Barristers and Solicitors
Traub, Moldaver

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.