PRESENTATION BY
THERESA M. ARSENAULT
OF PUSHOR MITCHELL LLP
“UNDERSTANDING INDIAN ACT CONVEYANCING"
APRIL 14, 2000
UNDERSTANDING THE DEVELOPMENT PROCESS FOR ON RESERVE LANDS
In order to better understand issues of importance to purchasers and lenders in conveyancing transactions On Reserve, we must consider a number of development process issues, which are of importance to the end purchaser and lender.
I. Head Lease Structures for On Reserve Land Development
On Reserve development may be undertaken by the First Nation itself, by a non-aboriginal party or by a joint venture or partnership consisting of both the First Nation and a non-aboriginal party.
Whether one is proceeding as a joint venture with a First Nation or is developing a project On Reserve without the participation of a First Nation, the legal vehicle which will be used is a Head Lease between Her Majesty the Queen in Right of Canada as represented by the Minister of the Department of Indian and Northern Affairs (“Her Majesty”) and the developer entity. Because the Head Lease creates the leasehold title from which all purchasers’ subleasehold titles will flow, the terms of the Head Lease are critical to the success of the venture. Assuming we are discussing a residential project (which could include recreational aspects), the Head Lease could take one of several forms:
A. A long term Head Lease with five year rent review periods;
B. A long term fully prepaid Head Lease;
C. An unprepaid Head Lease with a trust fund set up to secure payment of rent under the Head Lease;
D. A series of Head Leases, one for each phase of development, which are fully prepaid as each Head Lease commences and as each phase commences construction;
E. A long term Head Lease of a single parcel, which permits development in blocks;
F. A long term Head Lease which is prepaid as to each parcel subleased as the parcels are subleased and in any event, fully prepaid within a limited period of time.
We will look at some of the benefits and draw backs from the developer’s, purchaser’s and lender’s point of view in each of the above structures.
A. Long Term Head Lease with Five Year Rent Review Periods
This particular structure has fallen out of favour for residential developments because of the uncertainty it creates for the sublessees with respect to the level of future rents. Especially since the Musqueam matter has gained media attention and people have seen the actual effects of rent reviews which are tied to fair market value, it would be very difficult to do a residential development where one expects to sell subleases using a rent review model. These types of leases are still used in developments which have an on-going cash flow such as mobile home parks and golf courses.
B. Long Term Fully Prepaid Head Lease
This vehicle provides the ultimate in security for purchasers and lenders, but is less attractive to the developer because of the very large outlay of funds required to fully prepay a long term Head Lease.
C. Unprepaid Head Lease with Trust Fund
Another attempt to provide security to sublessees is the situation in which the Sublease provides that a portion of the prepaid sublease price be paid into trust until the Head Lease has been fully prepaid. Because the trust fund may not contain enough money to fully prepay the Head Lease at any particular time, this does not answer all the concerns of a purchaser or lender.
D. Series of Head Leases
Another way a developer may chose to keep his initial land investment costs down while preserving to himself the right to acquire additional lands to complete the development if the market demand is there, is by entering into a Head Lease and a series of options attached to Head Leases for land in phases as it would be developed. This permits the developer to fully prepay the land for the initial phase, which creates the security of tenure for the purchaser and financier, while having binding options to acquire leases for subsequent phases as market demand dictates. Because each Head Lease is separate and fully prepaid when the option is exercised, the concern about the failure of the Head Lease resulting in losses to the sublessees and lenders is lessened considerably.
E. Long Term Head Lease of a Single Parcel which Permits Development in Blocks
A variation which incorporates a combination of the above features, is a Head Lease for a very large parcel of land, which permits portions of the development to be subdivided off in blocks as they are developed and developed either by the original developer or assigned to a new developer by way of a Replacement Head Lease. The advantage of this type of structure is that for projects with a long term build-out, such as 20 years, the terms of the Subleases for the final portion of the project will still be 99 years because the term recommences with the registration of each Replacement Head Lease. In order to tidy up the terms of the entire development, the Head Lease would provide that upon registration of the last Replacement Lease, the terms of all of the prior Replacement Leases and the residual Head Lease will be extended to the termination date of the last Replacement Lease, not to exceed a certain date. The marketing advantages of this sort of arrangement are obvious, although it does create further complications by way of multiple Homeowner Associations within the same development.
F. Long Term Head Lease Prepaid by Parcels as Parcels are Subleased
A Head Lease which requires an initial prepayment, together with payments of rent as each sublease is sold and registered in the Indian Lands Registry can be very attractive to the developer and to the First Nation as an on-going source of revenue. It creates less certainty for the purchaser and lender and, therefore, requires modification of the Head Lease and Sublease to build in a safety net to permit the portion of the Head Lease which has been prepaid (that is, the portion upon which the subleases have been registered and sold to third parties) to be subdivided off from the main parcel and assigned to the sublessees through a Homeowner Corp. or a Homeowner Association. This safety net feature has been developed and used successfully on both the Westbank and Kamloops First Nations Lands.
Because of the safety net, CMHC has agreed to insure the financing of subleases in projects having this structure, which increases the marketability of the projects considerably. The availability of CMHC insurance makes the chartered banks more comfortable in lending and makes the purchasers more comfortable in purchasing subleasehold interests.
The safety net is created by a provision in the Head Lease, permitting the prepaid lands to be assigned to the Homeowner Association in the event of a default by the developer. The subleases also provide that each sublessee becomes a member of the Homeowner Association automatically as they purchase a subleased lot. A portion of both a Head Lease and a Sublease containing the applicable provisions creating the safety net are attached as Appendix A and Appendix B.
II. Negotiating the Head Lease
The process for application for a Head Lease was dealt with in Lynda Leming’s presentation and paper. In this paper, we will deal specifically with the issues that are important to the developer (because of their importance to the end purchasers and lenders) in the negotiation of the Head Lease.
A. Length of Term
For purposes of both marketability and security of tenure, the longer the term for the Head Lease the better. The developers of most residential developments will try to obtain a 99 year lease, which in Westbank and in Kamloops are still available. Other First Nations will not permit a lease of their lands for more than 49 years.
B. Payment of Rent
As discussed above, having the rent fully prepaid either for the entire Head Lease or at least for the portions as they are subleased with the safety net provisions, will be extremely important to the developer for marketability. If such an arrangement is not possible, then at the very least, one would want to tie any increases in on-going rents to the Consumer Price Index, rather than having them set in reference to fair market value at subsequent intervals.
C. Environmental Assessments
It is preferable to negotiate that an environmental assessment is only required on the entire project rather than on each individual sublease as is provided in the standard Department of Indian Affairs subleases.
D. Uses
The “Uses” section of the Lease is fundamental to the developer’s ability to develop on the lands as it, in effect, creates the zoning for the lands and will dictate what can and cannot be done at a later date on the lands. It is, therefore, important that the “Uses” section be drawn as broadly as possible to permit the developer flexibility as the development proceeds.
E. Mortgageability of the Subleases
The Head Lease must provide the right for the developer to mortgage the Head Lease for development financing purposes and the Subleases must permit the sublessees to mortgage the Sublease. In order to make the Head lease and Sublease attractive to lenders, a number of provisions must be included, such as:
(1) prepayment of the rent or the safety net outlined above;
(2) the ability to get notice of and cure defaults;
(3) ensuring that covenants regarding bankruptcy or insolvency of the Tenant or other incurable defaults do not result in the termination of the sublessees’ and lenders’ rights;
(4) provisions relating to application of insurance proceeds must meet the lender’s requirements;
(5) the Head Lease must be assignable in the event of realization.
In addition to specific provisions of the Head Lease and Sublease, which will be required by lenders, the lenders may also wish to obtain an Agreement between Her Majesty, the First Nation, the developer and the lender, to give the lender privity rights with respect to certain covenants and processes which are in the Head Lease or Sublease.
An important part of ensuring the mortgageability of the Lease is to obtain CMHC approval of both the form of Head Lease and form of Sublease prior to the forms being finalized, executed and registered. Once the form has been agreed upon between the First Nation and the developer, a draft of it must be sent to CMHC for their legal department’s review and approval prior to execution. CMHC will be looking for the ability of the subtenants to cure defaults under the Head Lease, the ability of the subtenants to take over control of the portion of the Head Lease relating to their property in the event of a default under the Head Lease, provisions relating to CMHC not being required to cure in order to realize on its security, provisions for disposition of insurance proceeds and an agreement to allow assignments to Homeowner Associations if the default is an incurable default and all curable defaults have been remedied.
III. Development and Servicing Agreement Issues
Because the First Nation Council has powers similar to a municipality with respect to zoning and bylaw creation, and because, often, First Nations may not have their entire development approval process and zoning bylaws in place at the time the developer wishes to proceed with its project, it is of the utmost importance for certainty and long term viability of the project, that a Development Agreement be entered into between the First Nation and the developer. The First Nation can be made a party to the Head Lease and certain additional matters can be incorporated into the Head Lease or a separate Development Agreement between the First Nation and the developer can be executed.
The following matters should be dealt with in the Development Agreement:
A. Zoning under the Master Development Plan
To create certainty with respect to uses that are permitted for the lands, a Master Development Plan for the project should be created and agreed to by the First Nation and the developer early on in the process. The Master Development Plan can incorporate zoning types of provisions such as densities, can expand on the Head Lease with respect to specific uses, and can build in a degree of flexibility from the developer’s stand point while creating permission to respond to market demands flexibly. The developer may also seek to limit conflicting uses on lands immediately surrounding the project if the surrounding lands are within the First Nation’s control.
B. Jurisdictional Matters
The developer will also want to ensure that the provisions of its Development Agreement will govern even if the First Nation subsequently passes a bylaw which is contradictory to what the First Nation has agreed to under the Development Agreement. Issues of conflicts between First Nation bylaws and the Development Agreement and conflicts between the Head Lease and the Development Agreement (if separate) should be dealt with in the Development Agreement.
C. Development Approval Process
If the First Nation has not yet created a Development Approval Process, the developer may wish to outline in the Development Agreement what process will be followed in order that the applications for development, subdivision, building and occupancy permits can be dealt with in a certain and expedited way. For the purposes of both administrative ease and cost control, the concept of using “Registered Professionals” to certify completion of different parts of the project is attractive to First Nations and can also give the developer some assurance of being able to move ahead in a timely manner, even in the event of administrative delays at the First Nation office.
D. Services and Facilities
Prior to commencing any development, the developer will have checked on the availability of services to the lands, and the Development Agreement should outline who is providing the services, at whose cost, and what happens in the event of interruption of services. In many cases, there are Servicing Agreements between the neighboring municipalities and the First Nations, which, in turn, the developer may become party to or may derive services under. All of these agreements must be reviewed to ensure that adequate servicing is available for the developer.
E. Parks Requirement
The provisions of the Municipal Act relating to dedication of parks as part of a development may be covered in the Development Agreement. Because the Municipal Act does not apply to On Reserve lands, the parks requirement will be a matter of agreement between the Developer and the First Nation and the requirement for dedication of land as park or contributions in lieu will be covered in the Development Agreement.
F. Access Requirements
Section 28(2) Permits for access from Her Majesty may be required if access to the lands is over any part of First Nation lands. If access is directly from a Provincial Highway, then an access permit from the Ministry of Transportation and Highways will be required. Agreements relating to access matters may be covered in the Development Agreement. The Development Agreement may even contain a requirement by the First Nation to take steps to remove any impediment to access to the lands in the event of a road block or blockade, or at least to request the RCMP to take such steps.
G. Heritage Matters
Any First Nations lands which are developed will be subject to a heritage survey prior to commencement of any development. It may be helpful to confirm the exact process that will be followed in the event heritage items are discovered in the course of development and to pre‑determine the cost contributions that will be required from the developer for heritage matters.
H. Cost Contributions
First Nations can, by bylaw, create development cost charges, and the developer may wish to create certainty for its future costs by agreeing in the Development Agreement as to exactly what those development cost charges will be. The developer may also be required to make up‑front capital contributions for water systems or other required services infrastructure as part of the Development Agreement.
I. Latecomer Charges
The Development Agreement can contain provisions for latecomer charges for the benefit of the developer, in the event the developer is required to over-size or up-grade services beyond what is required for its specific development. A modified version of what is in the Local Government Act may be useful for that purpose.
J. Property Taxes
A matter of concern to eventual purchasers of On Reserve projects is the amount of property taxes payable. It is possible in the Development Agreement to agree with the First Nation that assessments will be done in a manner comparable with the assessments being done in the adjacent municipality or regional district by the B.C. Assessment Authority and that the mill rates will be comparable to those of the adjacent fee simple lands, and that a grant similar to the then current Homeowner Grant will be available to purchasers. For marketability purposes, it is important that the developer, as closely as possible, approximate the effects for the Homeowner of owning fee simple land in the immediate market area.
K. Rights of Ways
The requirement to grant rights of ways to utility providers, both internal and external, may be covered in the Development Agreement. The developer will want to ensure that the First Nation will give rights of ways to the utility providers wishing to deliver utilities to the project and the First Nation will wish to reserve to itself the right to grant permits to utility providers on the project lands if required for future developments beyond the lands.
L. Assignability
This provision may be covered in the Head Lease as it is ultimately the assignability of the Head Lease which is important, but if it is not adequately covered there, the Development Agreement may deal with what consents are required for an assignment of the lands or a portion of them and what are reasonable pre-conditions to providing such consents.
M. No Discrimination
The First Nation will be interested in providing employment opportunities to its members and may ask the developer to make some assurances to provide such employment opportunities. The First Nation may also, if the development contains recreational facilities, wish to ensure availability of those amenities to its members and the developer needs to be prepared to deal with those requests. The First Nation may also ask the developer to agree not to discriminate against the First Nation’s members if they wish to purchase portions of the project.
N. Dispute Resolution
To avoid the expense and time delays associated with traditional litigation, and to more closely track the usual First Nations’ method of resolving disputes, it is advisable to provide for mediation and arbitration in the event of disputes between the parties.
