In Kumagai v. Campbell Estate, 2018 BCCA 24 (“Kumagai”) the BC Court of Appeal has provided useful clarification on the law as it relates to the valuation of reserve lands subject to Certificates of Possession (“CPs”). While the case touches on many family law issues, this case brief focusses on the findings relating to the valuation of CPs and the implications this may have on future valuations of reserve land.
BACKGROUND
Ms. Kumagai was married to Mr. Campbell, a band member of the Tzeachten First Nation (the “Band”). In 2013, Ms. Kumagai initiated divorce proceedings against Mr. Campbell, who died shortly thereafter. At the time of their separation and his death, he held six registered CPs.[1]
The Band had enacted a land code, pursuant to the First Nations Land Management Act, which provides the Band “exclusive jurisdiction over its reserve lands and authorizes the Band to create and enforce its own land laws.[2] The Band has zoning and land use laws in place as well as a Land Use Plan for land management and governance purposes.
Located within Mr. Campbell’s CPs were the family residence and several businesses Mr. Campbell operated (collectively, the “CP Lands”). One of the issues in this case was the valuation of the CP Lands. To determine their value, the parties jointly retained an expert in the valuation of First Nations’ lands to provide an appraisal and expert evidence at trial (the “Expert”). The Expert valuated the CP Lands by treating them as if they were subject to fee-simple ownership, determining their market value based on their “highest and best use” according to the Band’s zoning and land use laws.
ANALYSIS
The Court accepted the Expert’s decision to equate the CP Lands with comparable lands held off-reserve in fee simple. The Court notes that the Band has become “a leader in market housing for its members and the broader community.”[3] The Band achieved this through 99-year leases between CP holders and non-Band individuals or developers. The Court writes:
The 99-year leases to non-Band developers are typically pre-paid at values comparable to what they would pay for fee simple ownership. It makes little difference to non-Band member parties whether the return on their investment is through ownership or long-term leases. For these reasons, the 99-year lease is generally equated with fee-simple ownership for appraisal purposes.[4]
Both the trial court and the Court of Appeal reviewed and accepted the evidence put forward by the Expert: the fair market value of lands subject to 99-year leases should be the equivalent, or near equivalent, to properties subject to fee-simple ownership. While the expert conceded that a 10% reduction in value might be appropriate for CPs, “he clarified that this conclusion was based on one study only he had completed that compared leasehold condominium units to fee simple condominium units.”[5]
The Court also found that, in an appraisal, fair market value should reflect legal restrictions on the land but should ignore any restrictions imposed by the lease itself. While legal impediments would include the Band’s zoning and land use laws, they do not include the owner’s intentions or desires, which are irrelevant, or the executrix’s inability, as a non-Band member, to facilitate the highest and best use of the land, which can be rectified.[6]
WHY THIS CASE MATTERS
Since the Supreme Court of Canada decision in Musqueam[7] in 2000, appraisers have been deeply discounting reserve lands and prospective developers have been offering less than the the lands are likely worth. This case confirms that long-term leases of reserve lands should be equated with fee simple ownership. First Nations and CP holders should not accept less than fair market value when entering into long-term leases with developers.
[1] Para 3.
[2] Para 26.
[3] Para 23.
[4] Para 24.
[5] Para 38.
[6] Para 65.
[7] Musqueam v. Glass, [2000] 2 S.C.R. 633.