Real Estate MATTERS. In This Issue. Interest Act (Canada) Strata Property Act Amendments in Effect... 8

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1 Welcome to Volume 2, Issue 3 of, a periodic publication of our B.C. Real Property & Planning Group. This publication is intended to give you a summary of recent developments in real estate law in British Columbia and, more importantly, what they mean to you. We hope you will find informative and useful. Please let us know if you have any suggestions to make this publication even more helpful, or if there are topics or issues you would like to see covered in future issues. Scott Smythe and Russ Benson (Editors) In This Issue Title to First Nations Land in British Columbia... 1 Consolidated Disclosure Statements: On the Comeback Trail?... 5 Changes to Mortgage Prepayment Rights Under the Interest Act (Canada)... 7 Strata Property Act Amendments in Effect... 8

2 1 Title to First Nations Land in British Columbia By John A. Doolan, Gillian Piggott What are the different types of First Nations land in the Province? What kinds of interests can a third party obtain and can those interests be mortgaged? How do I obtain property information and are there assurances as to title? Different Types of First Nations Land and Obtaining Leasehold Interests Traditional Reserve Land Under the Indian Act (Canada) (Indian Act), reserve land is held by the federal Crown (Canada) on behalf of First Nations (defined as bands in the Indian Act). There are two types of reserve land: (a) general reserve land, which is held by Canada on behalf of a First Nation community as a whole and administered by the elected First Nation Council on behalf of the membership, subject to the requirements of the Indian Act; and (b) locatee land, which has been allotted to one or more individual First Nation members (Locatees). Leasehold Interests in Reserve Land Generally speaking, the greatest interest that a third party can obtain in reserve land is a lease. For general reserve land, in order for a lease to be granted, the First Nation membership must designate the land for leasing by a referendum vote carried out in accordance with the Indian Act. Applicable policy of the Department of Aboriginal Affairs and Northern Development (Department) limits the lease term to 99 years. Prior to the granting of the lease, the tenant must obtain both an appraisal, demonstrating that the lease will provide for payment of fair market rent, and an environmental assessment under the Canadian Environmental Assessment Act. The lease is negotiated with the First Nation and the Department and granted by Canada on behalf of the First Nation. For Locatee land, Canada will grant a lease at the request of the Locatee. The lease process is administered by the Department, which will want to ensure that the Locatee has obtained independent legal advice and that the First Nation supports the lease, as evidenced by a resolution of the First Nation Council. Department policy limits the lease term to 49 years, unless a greater term (up to 99 years) is approved by the First Nation community at a general members meeting. Again, an appraisal and an environmental assessment are required for leases of Locatee land. Assignments, Mortgages and Subleases Once a lease has been granted, the tenant may assign the lease with the consent of the Minister of Aboriginal Affairs and Northern Development (Minister). In some cases, First Nation Council consent is also required. Canada often will agree, in the lease form, that the Minister s consent will not be unreasonably withheld but, for designated land, the Minister s consent is required under section 54 of the Indian Act and cannot be waived. Most developers and lenders do not object to the consent requirement, particularly where Canada has agreed that the Minister will act reasonably in determining whether to consent.

3 2 A tenant may mortgage its leasehold interest to obtain financing. There is no statutory requirement for the Minister s consent to a mortgage, but many First Nation leases require consent of the Minister and/or the First Nation. In any event, lenders often want the Minister to enter into a mortgage consent agreement by which the Minister agrees to give the lender notice of tenant defaults and an opportunity to cure, as well as providing other protections to enable the lender to keep the lease in full force and effect. Different lenders have different requirements, so it is often necessary to negotiate the mortgage consent agreement with Canada. A tenant also may grant subleases, subject to any consent requirements set out in the lease. In cases where the lease provides for the consent of the Minister or the First Nation, those parties sometimes will agree that consent is not required if a sublease is granted in a pre-approved standard form that is included as a schedule to the lease. Other Interests in Reserve Land There are other lesser interests that can be granted in accordance with the Indian Act, the most common being a Section 28(2) Permit (Permit), which is a non-exclusive license to occupy a portion of reserve land. Neither First Nation membership approval nor a land designation is required for the issuance of a Permit. A Permit might be appropriate for certain temporary purposes (e.g., carrying out on-site surveys or investigations) or where only a non-exclusive use is necessary (e.g., an easement for road access). Department policy does not support a Permit where the Department believes that a lease would be more suitable. Permit holders typically do not seek mortgage financing on the strength of a Permit alone, because Permits are not interests in land and do not grant exclusive rights. Exceptions might include situations where a Permit in the nature of a utility right of way is obtained for a significant infrastructure or energy project where third party financing is required. In such situations, the parties will be required to demonstrate to Canada that the Permit should include terms that will support the financing, such as the right to assign the Permit with the Minister s consent, and the rights of lenders to receive notice of default and to have an opportunity to cure. First Nations With Delegated Authority Some First Nations, such as the Tk emlúps (Kamloops) Indian Band, have been delegated the authority under the Indian Act to negotiate and sign leases on behalf of Canada without Department approval. The designation, appraisal and environmental assessment requirements still apply and lease terms still are limited to 99 years. Land Controlled Under the First Nations Land Management Act Several First Nations have assumed control of their reserve lands in accordance with the First Nations Land Management Act (Canada) (FNLMA). The FNLMA process involves the creation of a Land Code that is approved by Canada and the First Nation. FNLMA lands remain reserve lands under the Indian Act, but the First Nation is granted the right to administer the land and regulate use and development in accordance with its Land Code. Canada is not involved in the First Nation s leasing or development approval processes. The Land Code sets out the First Nation s government and community approval processes for the granting of leases and other interests in community land, and expressly permits the granting of interests by individual members who hold title to their own land. Federal laws regarding environmental and other matters will apply, as will First Nation laws, with respect to matters such as development approvals, cultural and heritage matters and business licensing. The consent of the First Nation Council typically is required for assignments and mortgages of FNLMA leases.

4 3 Westbank First Nation Westbank First Nation (WFN) originally adopted the FNLMA regime and later developed its own Constitution with Canada. The WFN regime is similar in many ways to the FNLMA regime in that both federal laws and WFN laws apply to WFN land and WFN administers and regulates use and development of its land. Of particular note is that, unless there is a specific consent requirement in a lease, a tenant can freely assign, sublet and grant mortgages without consent. The WFN regime, which includes a WFN land registry, has facilitated considerable third party development on WFN land. Tsawwassen First Nation Tsawwassen First Nation (TFN) recently entered into the first modern urban treaty in B.C. Under the treaty (which became effective on April 3, 2009), both federal and provincial laws apply to TFN land and TFN itself has broad law-making powers, including the authority to pass laws in areas such as self-government, land management, environmental management and cultural and heritage matters. TFN s lands are registered under the Land Title Act (British Columbia) and TFN has passed a number of laws, including the TFN Land Act (which provides for the granting of interests in TFN land) and the Land Use Planning and Development Act (which provides for zoning regulation and subdivision and development approval processes). The TFN Land Act provides that only the TFN government or TFN members can own TFN lands in fee simple and that a third party can obtain no greater interest than a lease with a term of 99 years. Other Nations The Sechelt Indian Band has broad self-governing legislation and has registered its lands in the B.C. land title system. The Nisga a Nation adopted a treaty which came into effect on May 11, 2000 under which fee simple ownership of Nisga a Lands was granted to the Nisga a Nation. The Nisga a Nation has registered some of its land in the B.C. land title system and has also recently launched its own land registry system for a portion of its lands, but online searches and registration are not yet possible in this system. First Nation Land Registry Systems Title to most reserve land is registered under the federal Indian Lands Registry System (ILRS). The ILRS provides for the recording of reserve land interests and the filing of plans and encumbrances, but, unlike the B.C. land registration system, there is no assurance as to title to land or interests in land, no requirement to register interests in land, and no assurance as to priority of interests. Registrations are made through the federal IL offices. Some First Nations will attend to registrations for tenants, subtenants, assignees and lenders. The ILRS can be searched online, but there is no online registration system at this time. There are similar systems for WFN and FNLMA First Nations that permit online searches but do not provide any assurance as to title. Given the lack of assurance as to title, most tenants, lenders and other interested parties will want to carry out considerable due diligence as to title matters and property boundaries. In many cases, it is advisable to obtain title insurance. As noted above, TFN, the Sechelt Indian Band and the Nisga a Nation all have some or all of their land registered in the B.C. land title system. This provides holders of leases, subleases, mortgages and other interests with assurances as to title, priority of registration and a statutory assurance fund, thereby facilitating investment without the title work required for First Nation land registered under the ILRS, WFN and FNLMA systems.

5 4 Indian Act Challenges Section 28(1) of the Indian Act presents a challenge to the leasing and development of reserve land. It provides that a lease, contract or agreement whereby a First Nation or member purports to grant the right to occupy or use reserve land to a non-member, is void unless it is issued in accordance with the Indian Act. Therefore, it is not possible to tie up reserve land under a conditional lease or contract pending the completion of due diligence on the land or project by the non-member. There is no binding interest in land until the lease or other instrument has been issued in accordance with the Indian Act. In most cases, we recommend that before proceeding with an appraisal or environmental assessment or preparation of a lease, a potential tenant or developer should negotiate a term sheet or letter of intent with the First Nation or Locatee, setting out the main business terms of the transaction. The agreement on the business terms will guide the formal documentation and ensure that the parties have reached a deal in principle, before incurring the expense of an appraisal and environmental assessment and going through lease negotiations. Other Due Diligence Before committing to a transaction on First Nation land, an interested party will want to carry out due diligence on non-title matters such as the following: a. Access What is the status of legal access to the land? Are access agreements required? b. Services What is the status of water, sewer and other necessary services? In many cases, some services are provided by adjacent municipalities. c. Property Taxation To whom are property taxes payable? Many First Nations have their own property taxation laws, with oversight by the First Nations Tax Commission. d. Development Approval Processes What is the applicable development approval process? Is it a strictly a federal process administered by the Minister and Public Works Canada or does the First Nation have its own process? e. Cultural / Heritage Matters Are there any known cultural/heritage issues regarding the land? Does the First Nation have any applicable cultural/heritage processes? f. First Nation Bylaws Does the First Nation have any zoning or other bylaws that might impact the development or use of the land? Conclusion Although there are a number of different First Nation land and title regimes, all of which differ from what most developers are used to, there are many successful projects on First Nation land. First Nations often control large tracts of developable land in regions where supply may otherwise be low, and developers and lenders who understand the applicable rules and issues often will be able to find good investment opportunities that may be overlooked by their competitors.

6 5 Consolidated Disclosure Statements: On the Comeback Trail? By Russell G. Benson A consolidated disclosure statement combines the original disclosure statement and all subsequent amendments into a single document. Often it is not originally signed, and is not officially filed with the Superintendent of Real Estate, although a copy is generally provided to the Superintendent. Consolidated disclosure statements have typically been used when multiple amendments to a disclosure statement have been filed, thereby making it difficult for purchasers to understand the disclosure statement. Unfortunately, the use of consolidated disclosure statements has been in decline since a B.C. court decision a year and a half ago. The Superintendent s Guide to Disclosure Statements (Guide), issued in April 1995 when Part 2 of the Real Estate Act was in effect, explicitly endorsed the use of consolidated disclosure statements. The Guide stated that [w]here a developer has filed amendment(s) with the Superintendent that may confuse prospective purchasers, the developer may prepare a Consolidated Disclosure Statement for distribution to the prospective purchasers. This language reflected long standing practice in the development industry. Part 2 of the Real Estate Act was replaced by the Real Estate Development Marketing Act (REDMA) in Seeing nothing in the new legislation to cast doubt on the practice of providing consolidated disclosure statements, developers and their lawyers carried on as before. Fast forward to In Pinto v. Revelstoke Mountain Resort Limited Partnership (Pinto), 2010 BCSC 422, the defendant developer argued that, by providing a consolidated disclosure statement (which incorporated the terms of an amendment) to an existing purchaser in lieu of the actual amendment, it had met its obligation to deliver the amendment to the purchaser. The trial judge rejected this argument, rightly in our view, stating that [n]either the clear language nor the general purpose of the [REDMA] is complied with if the existence and nature of an amendment is not drawn to the purchaser s attention. Of concern to developers, though, was his observation that there is no provision in the [REDMA] for such a consolidated disclosure statement as it raised the possibility that consolidated disclosure statements may not be proper to use in any circumstances. In fact, most developers did take care to give existing purchasers the amendment itself, only giving the consolidated disclosure statements to new purchasers. Even so, the uncertainty created by the Court s statement in Pinto, and the favourable treatment given to purchasers in the raft of the REDMA cases that followed the economic downturn of , caused many developers to adopt a conservative approach and stop providing consolidated disclosure statements at all. The Pinto decision was appealed and, on April 21, 2011, the B.C. Court of Appeal affirmed the trial judge s decision on the merits. Regarding the specific issue of consolidated disclosure statements, however, it restricted its reasoning to the fact that a consolidated disclosure statement does not meet the requirements of an amendment under the REDMA. In particular, the Court noted that a consolidated disclosure statement does not clearly identify and correct the defect as required by the REDMA, and that a consolidated disclosure statement, which requires purchasers to make a line-by-line comparison of two lengthy documents in order to locate any amendments, is not sufficient. The Court did remark that the consolidated disclosure statement was not filed with the Superintendent, but the significance of that statement is not made clear and the Court said nothing further to imply that delivering a consolidated disclosure statement to new purchasers would not satisfy a developer s disclosure obligations.

7 6 Five days before the Court of Appeal decision in Pinto, the B.C. Supreme Court decided Watson v. Havaday Developments Inc., 2011 BCSC 505, a case where the purchasers of a condominium unit successfully sued for the return of their deposit. The purchasers were originally given a consolidated disclosure statement and argued that, under the REDMA, the developer should have given them the original disclosure and all amendments so that they would be aware of the specific disclosure contained in the amendments. This argument was resoundingly rejected (although the case was decided on other grounds). According to the judge, [t]he consolidated disclosure statement disclosed the correct state of affairs at the time the purchasers signed the contract. The history of any changes was of no importance to them. But clearly future changes would be, which is why the REDMA obliged [the developer] to file and serve upon them any amendments that were incorporated into the disclosure statement after the point at which those changes became relevant to them, i.e., after the date they signed agreements to purchase their strata properties. The Court s position in Watson is not inconsistent with either the trial or appeal decisions in Pinto; that is, a consolidation clearly does not take the place of providing an amendment to an existing purchaser. However, a consolidation provides all the disclosure that a purchaser needs, and that a developer is required to give, at the time the purchaser signs a purchase contract. Where does that leave us from a practical perspective? On one hand, the B.C. Supreme Court has endorsed the delivery of consolidated disclosure statements to new purchasers and the B.C. Court of Appeal has said nothing directly to invalidate the practice. In addition, the REDMA provides that disclosure statements must be in the form and include the content required by the Superintendent, and the Superintendent has expressed to us (and in the Guide issued under the REDMA s predecessor) support for the clearer disclosure provided to new purchasers by a consolidated disclosure statement. On the other hand, we still have the B.C. Supreme Court s comment in Pinto that the REDMA does not contemplate consolidated disclosure statements, and the B.C. Court of Appeal s subsequent observation in that case that the consolidated disclosure statement was not officially filed with the Superintendent s office: these comments are unsettling because they do leave the impression that the Court of Appeal might not view delivery of an unfiled consolidated disclosure statement as meeting a developers obligations under the REDMA. It is indeed a conundrum. On balance, whether or not consolidated disclosure statements are valid (and we believe there are strong arguments supporting their use for new purchasers), in the current environment where it continues to be standard operating procedure for lawyers to explore ways to extricate their clients from contractual obligations on purely technical grounds, it is advisable for developers to steer clear of giving consolidated disclosure statements to any purchasers, at least until the issue is squarely addressed by the courts, the Legislature or the Superintendent. They do remain useful for internal reference purposes, and possibly for posting on a website with appropriate disclaimers (as long as purchasers receive the original documents, of course), but a better safe than sorry approach is the prudent course of action in these times.

8 7 Changes to Mortgage Prepayment Rights Under the Interest Act (Canada) The Government of Canada recently enacted new regulations under the Interest Act (Canada) (Act) which expand the class of prescribed entities that are not entitled to the statutory prepayment rights accorded to borrowers by section 10(1) of the Act. These new regulations, which will significantly impact the practice of commercial mortgage lending throughout Canada, apply to mortgages and hypothecs granted on or after January 1, Background Prior to January 1, 2012, section 10(1) of the Act provided, in effect, that a borrower (other than a corporation or joint-stock company) could prepay a closed mortgage loan with a term exceeding five years at any time after the first five years of the term upon payment of a penalty equal to three months interest. This provision was originally enacted in 1880 to ensure that individuals were not locked into long-term mortgages with high interest rates, with no ability to prepay without incurring significant penalties. As noted, corporations and joint-stock companies were specifically excluded from section 10(1) of the Act. Although this exclusion denied them the same statutory prepayment right available to individuals, it had the effect of motivating lenders to make long-term loans available to corporations. If lenders were limited by statute to a maximum prepayment penalty of three months interest, they would be less inclined to offer mortgage financing with a term longer than five years. The exclusion of corporations and joint-stock companies did not, however, address other commonly used forms of business organization (such as business trusts, partnerships and unlimited liability corporations), thereby making it more difficult for such business organizations to obtain long-term mortgage financing due to the risk that the lender might be forced to accept prepayment of three months interest as its sole compensation in the event of prepayment. New Regulations The new regulations clarify the rules applicable to the commercial mortgage industry across Canada by explicitly expanding the types of business organizations that may not prepay with a three month penalty. Under section 10(3) of the Act, the Governor in Council may, from time to time, designate other entities (i.e., other than corporations and joint-stock companies) as prescribed entities for the purpose of section 10(2)(b) of the Act, thereby excluding them from the mandatory prepayment penalty regime established in section 10(1). Since January 1, 2012, (i) partnerships, (ii) trusts settled for business or commercial purposes, and (iii) unlimited liability corporations (as they exist in the provinces of Nova Scotia, Alberta and British Columbia) are now prescribed and, therefore, excluded from the statutory prepayment penalty regime.

9 8 Strata Property Act Amendments in Effect Certain amendments to the Strata Property Act (British Columbia) that received Royal Assent on October 29, 2009, as well as certain amendments to the Strata Property Regulation (Regulation 43/2000), were brought into force on December 14, 2011 by Regulation 238/2011. As a result of these amendments: Strata corporations are now required to obtain depreciation reports (prepared by a qualified person after an on-site visual inspection) that, among other things, estimate the repair or replacement costs for major items in the strata corporation and their expected life. Depreciation reports are not required if the strata plan includes less than five strata lots or if, by December 13, 2013 and annually thereafter, the strata corporation waives the depreciation report requirement by a three-quarter vote. Strata corporations may now, by simple majority vote, approve additional contributions to the contingency reserve fund even if the amount in the fund exceeds 25% of the operating budget. Previously, if the contingency reserve fund exceeded 100% of the operating budget, a threequarter vote was required to approve additional contributions. This change is intended to allow the strata corporation to accumulate sufficient funds to pay for work recommended in a depreciation report. As of March 1, 2012, copies of the rules of the strata corporation, the current budget, the owner developer s rental disclosure statement and the most recent depreciation report must be attached to a Form B Information Certificate issued by the strata corporation (and the form itself will be significantly changed as of January 1, 2014 to include specified information about the allocation of parking stalls and storage lockers). The amendments to the Strata Property Act, and numerous others, were originally contained in Bill 12 (Strata Property Amendment Act, 2009) and were outlined in the June 2009 issue of (Volume 1, Issue 2). The progress of Bill 12 was delayed by the 2009 provincial election, and it was subsequently reintroduced to the Legislature, in almost identical form, as Bill 8. As reported in the January 2010 issue of (Volume 2, Issue 1), portions of the Strata Property Amendment Act, 2009 were previously brought into force by Regulation 312/2009 on December 11, 2009, but a number of them are still not in effect. We will be monitoring these and reporting on their status from time to time in future issues of.

10 9 Our BC Real Property & Planning Group Russell Benson Keith Burrell, QC Jonathan Carter John Doolan Beverly Ellingson Greg Fabbro Natalie Garton Jennifer Hayes Glenn Leung Michael Mitchell Gillian Piggott Conrad Rego Craig Shirreff Scott Smythe Lisa Vogt Cameron Whyte Virginia Wigmore Elizabeth Yip Every effort has been made to ensure the accuracy of this publication, but the comments are necessarily of a general nature, are for information purposes only and do not constitute legal advice in any manner whatsoever. Readers are urged to seek specific advice on matters of concern and not rely solely on the text of this publication.