COURT FILE NO.: CV-13-485218

CV-14-00010587-00 CL

CV-13-485219

CV-14-00010588-00CL

DATE: 20141223

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: The Board of Regents of Victoria University, Respondent on Appeal

AND:

GE Canada Real Estate Equity and GE Canada Estate Equity Holding Company, Appellants on Appeal

AND BETWEEN:

The Board of Regents of Victoria University, Respondent on Appeal

AND:

Revenue Properties Company Limited, Appellants on Appeal

BEFORE: Mr. Justice H. Wilton-Siegel

COUNSEL: Scott Maidment, Lisa Parliament and Geoff Moysa, for the Appellant, Revenue Properties Company Limited

Peter Griffin, Anne Posno and Emily Graham, for the Appellants, GE Canada Real Estate Equity and GE Canada Estate Equity Holding Company

Stephen Waqué and Christel Higgs, for the Respondent, The Board of Regents of Victoria University

HEARD: July 21 and 22, 2014

REASONS FOR DECISION

[1] In this proceeding, the tenants under two long-term leases appeal a majority arbitration award dated June 21, 2013 (the “Majority Award”), and a final majority arbitration award dated October 23, 2013 (the “Final Award”), which addressed the rent re-set provisions of both leases.

[2] I have addressed this appeal in five parts. Part I sets out the factual and legal background, including applicable statutory provisions and a review of the Revenue Properties and Musqueam decisions that are central to the determination in the Majority Award. Part II analyses the reasoning and conclusions of the Majority Award. Part III sets out the analysis and conclusions of the Court on this appeal regarding the Majority Award. Part IV then addresses the operation of issue estoppel given the determinations of the Court regarding the grounds of appeal. Lastly Part V addresses certain issues raised by the parties pertaining to any re-hearing of the arbitration.

Part I - Background

[3] By leases dated February 20, 1960, and commencing July 1, 1960, between the respondent, the Board of Regents of Victoria University (“Victoria” or the “Landlord”), and the predecessors of each of Revenue Properties Company Limited (“Revenue”) and of GE Canada Real Estate Equity and GE Canada Real Estate Equity Holding Company (collectively, “GE” and, together with Revenue, collectively the “Tenants”), the Landlord granted 100-year ground leases (collectively, the “Leases”) of two properties known municipally in the city of Toronto as 131 Bloor Street West and 151 Bloor Street West, respectively, (collectively, the “Lands”).

[4] The Leases are substantially the same for the purposes of the issues in this proceeding. The Leases provided for an agreed rent for the first 30 years of the term of the Leases. Thereafter, the Leases provided that the rent would be re-set for successive 20-year terms by reference to the “fair market value of the demised lands” determined by agreement or, failing agreement, by arbitration based on appraised values.

[5] The parties were unable to agree on the rent to be applicable for the first re-set period, commencing in 1990. This resulted in an arbitration award which was the subject of an appeal to the Divisional Court reported as Revenue Properties Co. v. Victoria University (1993), 1993 9432 (ON SCDC), 101 D.L.R. (4th) 172 (Div. Ct.), [1993] O.J. No. 843 [Revenue Properties].

[6] Revenue Properties sets out the material facts pertaining to the negotiation and execution of the Leases, as well as the relevant terms of the Leases, with one exception addressed below. Accordingly, I do not propose to repeat the factual background apart from setting out the rental re-set provision of the two Leases, which reads as follows in the case of the Lease to which Revenue is a party, and substantially as follows in the case of the Lease to which GE is a party (collectively, the “Re-Set Provision”):

For each of the three succeeding periods of twenty years and the last period of ten years during the term of this Lease, in the event that the Lessor and the Lessee cannot, prior to six (6) months before the end of the previous thirty (30), twenty (20), twenty (20) or twenty (20) year periods, as the case may be, agree in writing upon a new rental, the amount of the new annual rental shall be the greater of the rental for the current thirty (30), twenty (20), twenty (20) or twenty (20) year period then ending, or the amount fixed after arbitration, as hereinafter stated.The provisions of Clause 1. of Paragraph VI commencing on page 20 hereof shall apply to the appointment of an arbitrator or arbitrators who shall thereupon, within the six (6) months’ period aforesaid, appraise and determine the fair market value of the demised lands. Six per cent (6%) of such evaluation of fair market value, or the same annual rental as for the current period, whichever is greater, shall be payable in equal monthly instalments in advance as the annual rental for the next succeeding period.

[7] The parties were also unable to agree on the applicable rent under the Leases for the second re-set period commencing June 1, 2010. Accordingly, the parties proceeded to arbitration before a panel comprised of Colter A. Osbourne, Q.C., Jeffrey L. Davies and John Lorne McDougall Q.C. Messrs. Osbourne and Davies issued the Majority Award, which is described in detail later in these Reasons. Mr. McDougall issued a dissenting award.

[8] The Tenants each appeal the Majority Award on two principal questions of law pursuant to s. 45(2) of the Arbitration Act, 1991, S.O. 1991, c. 17 (“Arbitration Act, 1991”). The parties have agreed in the Statement of Submission to Arbitration that there shall be a right of appeal on a question of law, or mixed fact and law, without leave to appeal being required. The issues on these appeals involve questions of law alone. There is no dispute that the standard of review on a question of law is correctness.

Applicable Law

[9] The following statutory provisions of condominium legislation and case law are relevant to the decision reached in the Majority Award and to the conclusions reached in these Reasons.

Applicable Provisions of Condominium Legislation

[10] An important issue in both Revenue Properties and the present proceeding is the operation of the Condominium Act, R.S.O. 1990, c. C.26 (“Condominium Act”), and the Condominium Act, 1998, S.O. 1998, c. 19 (“Condominium Act, 1998”), respectively, respecting the creation of residential condominium units.

[11] The relevant provisions of the Condominium Act as of July 1, 1990, which were considered in Revenue Properties, are the following:

2. (1) Subject to the regulations made under this Act and subsection (2), a declaration and description may be registered on or on behalf of the person who owns the freehold or leasehold estate in the land described in the description.

(2) A declaration and description for a freehold condominium corporation shall not be registered on or on behalf of the person who does not own the freehold estate in the land described in the description.

[12] The relevant provisions of the Condominium Act, 1998 for present purposes are the following:

2. (1) Subject to the regulations made under this Act and subsection (2), a declaration and description may be registered by or on behalf of the person who owns the freehold or leasehold estate in the land described in the description.

(2) A declaration and description for a freehold condominium corporation shall not be registered by or on behalf of a person who does not own the freehold estate in the land described in the description.

164. (1) Subject to the regulations made under this Act, a declarant may register a declaration and description that divide the leasehold estate in the land described in the description into units and common elements.

(2) The type of corporation created by the registration of a declaration and description under subsection (1) shall be known as a leasehold condominium corporation.

(3) Subject to this Part, Parts I to IX and XIV apply with necessary modifications to a leasehold condominium corporation.

165. (1) Each leasehold interest in a unit in a leasehold condominium corporation and its appurtenant common interest is valid even if the lessor is the owner of the leasehold interest and in that case the legal title and the leasehold interest shall be deemed not to merge.

(2) All leasehold interests in units in a leasehold condominium corporation and their appurtenant common interests shall be for the same term.

(3) The term of the leasehold interests before a renewal under section 174 shall be not less than 40 years less a day and not more than 99 years as specified in the declaration.

166. (1) A declaration for a leasehold condominium corporation shall not be registered unless it is executed by the lessor.

(2) In addition to the requirements of subsection 7(2), a declaration for a leasehold condominium corporation shall contain,

(a) a statement of the term of the leasehold interests of the owners;

(b) a schedule setting out the amount of rent for the property payable by the corporation on behalf of the owners to the lessor and the times at which the rent is payable for at least the first five years immediately following the registration of the declaration and description;

(c) a formula to determine the amount of rent for the property payable by the corporation on behalf of the owners to the lessor and the times at which the rent is payable during the remainder of the term of the owners’ leasehold interests following the time for which the schedule described in clause (b) states the amount of rent payable;

(d) a schedule of all provisions of the leasehold interests that affect the property, the corporation and the owners; and

(e) all other material that the regulations made under this Act require.

The Revenue Properties Decision

[13] I consider that Revenue Properties established two important principles in respect of the Re-Set Provision: (1) that the Lands were to be appraised as if they were vacant and unencumbered by the Leases; and (2) that restrictions on the Tenants’ use of the Lands by virtue of the operation of land use legislation, in that case the Condominium Act, are to be taken into consideration in the valuation of the Landlord’s freehold interest in the Lands. I will address each conclusion in turn after first describing the decision of the arbitration panel that was the subject of the appeal.

The Decision of the Arbitration Panel

[14] Before the arbitration panel in 1991, the Landlord argued that the Lands should be valued as vacant and unencumbered; that is, without regard to any buildings on the Lands or the Leases. The Tenants argued that the fair market valuation should take the Leases into account as well as the Tenant’s use of the Lands, the buildings on the Lands, the economic reasonableness of the Lands and statutory requirements pertaining to the use of the Lands, including the Condominium Act.

[15] The majority of the panel noted that the question before it regarding the value of the Lands as vacant lands without regard to the buildings on the Lands did not specify whether the Lands should be appraised as if encumbered or unencumbered by the Leases. The majority of the arbitration panel therefore chose to provide alternative appraisals of the Lands respectively as encumbered by the Leases and as unencumbered by the Leases.

[16] It is clear from the following excerpt that the majority considered that this issue engaged only the issue of the application of the Condominium Act to the Lands. In this regard, the majority of the arbitration panel observed the following:

Leased lands cannot be developed for condominium use. The fair market value of leased lands is therefore less than that of freehold lands by the amount that the potential residential area is worth less if it can be developed only for rental apartment use than it is if it can be developed for condominium use. [emphasis added]

[17] As mentioned, the majority of the panel then proceeded to provide alternative values of the Lands respectively as encumbered or unencumbered by the Leases. They did so by determining a per square foot value for the difference between the fair market value of an area being developed for condominium use and one capable of being developed for rental apartments only, and then applying that value per square foot against the permitted residential area of the Lands (the resulting amount being herein referred to as the “rental constraint deduction”). The value of the Lands on a vacant and unencumbered basis was the value ascribed to them by the appraiser, as adjusted for other purposes, based on the ability to develop the Lands for condominium use. The value of the Lands on the basis that they were vacant but encumbered by the Leases was the foregoing value less the amount of the rental constraint deduction for such Lands calculated as above.

[18] Having provided these two determinations, however, the majority of the panel then held that the Lands should be valued as unencumbered by the Leases.

[19] The minority concluded that the fair market value determination had to take into account all of the terms and conditions of the Leases as well as the existing use of the Lands, the provisions of s. 15 of the Leases pertaining to the use of the Lands, the buildings and improvements on the Lands, and the restrictions under a number of statutes including the Condominium Act. To be clear, the minority arbitrator did not find that the Lands should be valued as vacant but encumbered by the Leases.

[20] Before proceeding, I observe that it is not correct, as a matter of law, that the Lands could not be developed for condominium use, as was suggested in the excerpted passage above. However, from the entirety of the passage as well as the decision of the majority of the arbitration panel, it is clear that the majority was referring to the fact that, as a matter of law, the Tenants could not develop the Lands for freehold condominium use under the provisions of the Condominium Act. It is also clear that the majority did not consider that this was a relevant consideration for the purposes of the fair market value determination of the Lands for purposes of the Re-Set Provision.

Lands to be Appraised as Vacant and Unencumbered by the Leases

[21] Given the determinations of the majority of the arbitration panel, the Divisional Court was effectively faced with three possible answers to the issue of the valuation of the fair market value of the demised lands: (1) vacant and unencumbered by the Leases; (2) vacant but encumbered by the Leases; and (3) having regard to the Leases and taking into consideration the four matters described above. The Divisional Court held that the Lands were to be appraised as if they were vacant and unencumbered by the Leases. However, the Divisional Court also held that such valuation should take into consideration the existence of the Leases, as discussed further below.

[22] In his majority decision, Steele J. began by noting that the Leases provided for a wide range of uses and that the Tenants were to have the risks and rewards of the uses they made of the lands and buildings. He cited with approval the following statement in Bullock’s Inc. v. Security-First Nat. Bank of Los Angeles, 325 P. 2d 185 (Cal. Dist. Ct. App., 1958) at p. 188 [Bullock’s]:

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. The entire context shows that the parties had in mind the property’s worth rather than its utility for a given purpose. The issue should not be confused by the fact that the actual annual rent figure is obtained by taking five per cent of the appraised value. It is obvious from the rental provisions that the parties were contracting for the lessors to receive as rent a fixed percentage return on the value of the land, such value to be redetermined every ten years. They might have agreed on four per cent or six per cent, but they chose five instead. Moreover, it must be remembered that this is a “net” lease -- i.e., the lessee pays all taxes and other expenses in connection with the property. From the method of calculation which the parties agreed upon it may reasonably be inferred that they were thinking in terms of interest rate on a capital investment. They fixed the net rate of return on the lessor’s investment at five per cent, but they also provided for fluctuation in the value of such investment. They realized that this capital asset might fluctuate in value from time to time and therefore provided for periodic reevaluation in order that the lessors might continue to receive a five per cent return on the value of their investment. When the parties referred to the “value” of the land in question they meant its monetary worth or marketable price -- i.e., its market value. [certain italics added]

[23] Mr. Justice Steele then framed the question of law before the Divisional Court as the meaning of the words “demised lands”. He noted that the Tenants submitted that the word “demised” contemplates that the Lands would be valued as encumbered by the Leases and that the Landlord argued that “demised” merely identifies the Lands.

[24] After noting the absence of qualifying words that would have pointed to a valuation on the basis of unimproved lands or unencumbered lands, he concluded, at p. 182, that “the words demised lands are clearly descriptive of the actual lands subject to the lease as set out in the opening paragraph of the lease.” Accordingly, he concluded that the Leases should be read as if the word “lands” were being referred to whenever the term “demised lands” is used so that it is the fair market of the “lands” that was to be determined.

[25] Given Steele J.’s adoption of the Landlord’s position, as described above, it is clear that he rejected not only the Tenants’ position that the Lands should be valued taking into account the four matters described above but also the alternative posed by the majority of the arbitration panel of a valuation of the lands as encumbered by the Leases. In other words, Steele J. concluded that the interest in the “demised lands” to be valued is the freehold interest of the Landlord and that such interest is to be valued as vacant and unencumbered by the Leases.

[26] However, Mr. Justice Steele then concluded that, “there being no words to the effect that the lands are to be considered as unencumbered the value must take into account the fact that the lands are subject to a lease.” The content of this statement is disputed by the parties and is central to the present proceedings.

[27] Mr. Justice Steele set out this conclusion at p. 183 in the context of the arbitrators’ determination, which he accepted, that under the terms of the Condominium Act at that time, the Leases had a detrimental effect on the value of the Lands. In this context, Steele J. states that, in his opinion, the Condominium Act was an encumbrance upon the Lands. The full passage explains in some greater detail what Steele J. had in mind in making this statement:

In my opinion the Condominium Act was an encumbrance upon the lands. The owner should not be entitled to increased value of the lands as a result of the Condominium Act when in fact it does not apply to its lands as a result of the very lease that it entered into. Without clear language to the contrary saying that the lands were to be deemed to be unencumbered it is the fair market value of the lands subject to legal encumbrances applicable to the lands that was to be determined.

It should be emphasized that Steele J. concluded that it is the Condominium Act that constitutes an encumbrance on the Lands not the Leases.

[28] Mr. Justice Steele then summarized his principal conclusions in seven points, of which the following three paragraphs are most significant for present purposes:

2. The entire arbitration is because there is a lease. Therefore it is necessary to acknowledge that the lands are subject to a lease even without considering the specific details of the lease.

3. The fact that there is a lease means that the lands cannot be used for condominium purposes because of the provisions of the Condominium Act.

4. The owner of the lands obtains the benefit of and suffers the detriment of any legislation relating to and affecting the lands. The tenants obtain the benefit of and suffer the detriment of any legislation relating to buildings.

I will return to this summary later in these Reasons.

[29] On the basis of the foregoing conclusions, Steele J. held that the fair market value for each of the Lands should be the value determined by the majority of the arbitration panel as the value of such Lands as vacant lands that were encumbered by the applicable Lease. The use of language to the effect that the Lands should be valued as if encumbered by the Leases is unfortunate. As discussed further below, I agree with the Majority Award (as defined below) that this was not intended to be a substantive statement. Rather, using the specific terminology that the majority of the arbitration panel had used in its award, it is a reference to the specific values determined by the majority for the Lands reflecting the difference in value attributable to the fact that the potential residential area could not be developed for freehold condominiums but instead could only be developed for rental apartments by virtue of the operation of the Condominium Act.

Restrictions on the Tenants’ Use of the Lands by Virtue of the Operation of Land Use Legislation to be Taken into Consideration

[30] For the foregoing reasons and as discussed further below, I conclude that Revenue Properties decided that the Lands were to be valued as freehold land that was vacant and unencumbered by the Leases. However, Steele J. also concluded that the value of the Lands must take into account that the Lands are subject to the Leases. The parties have conflicting views regarding the meaning of this determination and, accordingly, of the manner in which the existence of the Leases is to be taken into account for valuation purposes, giving rise to the dispute in this litigation. The precise finding of the Divisional Court on this issue is of central importance to the present proceeding and therefore warrants a more detailed analysis of the reasoning in respect of the impact of the Condominium Act on the fair market valuation.

[31] At page 183 of Revenue Properties, Steele J. stated, and proceeded on the basis, that the Condominium Act specifically provided that it “was not applicable to lands subject to leases”. It would appear that this statement was intended to restate the finding of the majority of the arbitration panel that leased lands cannot be developed for condominium use. In addition, Steele J. stated that the arbitrators had found that the fair market value of leased lands was less than that of freehold lands when considering the Condominium Act. This finding reflects the similar finding of the majority of the arbitration panel, although Steele J. did not expressly address the extent of the difference in value identified by the majority.

[32] As mentioned, Steele J. then characterized the Condominium Act as an encumbrance upon the lands. He went on to state “[t]he owner should not be entitled to increased value of the lands as a result of the Condominium Act when in fact it does not apply to its lands as a result of the very lease that it was entered into.”

[33] As a legal conclusion, the statement of Steele J. that the Condominium Act specifically provided that it was not applicable to lands subject to leases appears to be too broad. It is important to note that, in 1990, as the freehold owner of the Lands, the Landlord was in a position to register a freehold condominium in respect of its freehold interest and its leasehold interest in the Lands by virtue of s. 2(1) of the Condominium Act. Accordingly, in proceeding on the basis that the Condominium Act did not apply to lands subject to leases, Steele J. must have been referring to the fact that the Condominium Act did not permit a tenant under a ground lease to register a condominium in respect of the subject lands. As I read these passages, therefore, Steele J. concluded that the valuation of the Lands should exclude any value attributable to the potential for development of a freehold condominium on the Lands because it was not legally possible for the Tenants to undertake such a development by virtue of s. 2(2) of the Condominium Act given that they had only leasehold interests in the Lands.

[34] I acknowledge that the decision of Steele J. may be analyzed as being grounded solely in the practical consideration that the Landlord was not in a position to take advantage of the freehold condominium development potential presented by the Condominium Act prior to expiration of the long-term leases granted to the Tenants. However, I do not agree with this analysis for two reasons.

[35] First, I think it is inconsistent with the language of both the majority decision of the arbitration panel in 1991, whose finding Steele J. relied on, as well as the decision of Steele J. itself.

[36] As mentioned, the majority of the arbitration panel in 1991 found as a matter of fact that:

Leased lands cannot be developed for condominium use. The fair market value of leased lands is therefore less than that of freehold lands by an amount that the potential residential area is worth less if it can be developed only for rental apartment use than it is if it can be developed for condominium use.

Insofar as the majority based this conclusion on the development of the residential area, it must have been referring to each Tenant as the developer out of its interest in the Lands. There is no restriction on the development of the potential residential area by the Landlord under the Condominium Act.

[37] In Revenue Properties, Steele J. provided the following analysis which relies on, and is consistent with, the finding of the majority of the arbitration panel:

Between 1960 and 1990 the Condominium Act was enacted. Prior to its enactment individual freehold parts of lands or buildings could not be sold separately with other parts being held in common. There was evidence before the arbitrators that the value of lands would generally increase as a result of the Condominium Act, R.S.O. 1980, c. 84. However, that Act specifically provided that it was not applicable to lands subject to leases. The arbitrators found that the fair market value of leased lands was less than that of freehold lands when considering the Condominium Act. In other words, they found that the lease had a detrimental effect upon the value of the lands.

Whether or not any building was erected on the lands there was a lease. In my opinion, the Condominium Act was an encumbrance upon the lands. The owner should not be entitled to increased value of the lands as a result of the Condominium Act when in fact it does not apply to its lands as a result of the very lease that it entered into. Without clear language to the contrary saying that the lands were to be deemed to be unencumbered it is the fair market value of the lands subject to legal encumbrances applicable to the lands that was to be determined.

Read together, in my view, the principle articulated in these two paragraphs is that the Landlord should not be entitled to the increased value of the freehold interest in the Lands as a result of the Landlord’s right to create a freehold condominium in the Lands when the Condominium Act does not also allow the Tenants to create a freehold condominium out of their respective interests in the Lands.

[38] Second, even if the Landlord was unable to develop a freehold condominium on the Lands prior to the expiration of the term of the Leases, there is no reason why the Landlord should not realize the increase in value in the Lands attributable to such a development if a Tenant was legally entitled to realize the benefit of such a project during the term of a Lease, i.e. if a Tenant could create the equivalent of a freehold condominium project.

[39] Accordingly, I conclude that it is the legal restrictions on the Tenants, not the practical limitation on the Landlord, which is paramount in the conclusion of Steele J.

[40] In his concurring reasons in Revenue Properties, Adams J. drew out the implication of the determination of Steele J. He expressly concluded that, the Leases having been granted, the fair market value should only take into consideration the value attributable to the development of a freehold condominium project on the Lands if the Tenants were able to create such a condominium out of their interests in the Lands. The relevant passages in the concurring reasons of Adams J. are set out below.

Accordingly, each of Steele J. and Adams J. reached the same conclusion – that the Lands should be valued without taking into consideration the potential development of a freehold condominium project. In my reading of this decision, both Adams J. directly, and Steele J. by implication, based this conclusion on the legal inability of the Tenants to develop a freehold condominium project on the Lands. Revenue Properties therefore establishes that, if the Tenants are legally restricted from benefitting from the development potential of provisions in land use legislation affecting the Lands, such development potential should be disregarded in appraising the fair market value of the Lands.

Conclusion

[41] To summarize my review of Revenue Properties, I conclude that the Divisional Court held that, for the purposes of the Re-Set Provision,: (1) the interest to be valued is the Landlord’s freehold interest, which is to be valued as vacant and unencumbered by the Leases; and (2) the Landlord’s interest is to be valued having regard to the impact of land use legislation on the Lands, including in particular the Condominium Act, on the basis that restrictions on the Tenants’ use of the Lands by virtue of the operation of such legislation are to be taken into account.

[42] As the Majority Award notes, given that Revenue Properties addressed the same Re-Set Provision at issue in the present proceedings, an important issue is whether these two determinations govern any subsequent arbitration under the Leases, including the Majority Award. In Parts II and III of these Reasons, I analyze the Majority Award on the basis that these determinations apply in the present proceedings by operation of the doctrine of issue estoppel. In Part IV, I address the significance of these determinations, given my conclusions regarding the findings of the Majority Award, and the extent to which issue estoppel does not, or should not, apply in respect of these determinations.

The Musqueam Decision

[43] The Majority Award relied in part on the decision of the Supreme Court in Musqueam Indian Band v. Glass, 2000 SCC 52, [2000] S.C.R. 633 [Musqueam]. The Majority Award concluded that, for present purposes, Musqueam mandates a determination of the fair market value of the Lands on the basis of vacant and unencumbered land. I therefore propose to summarize the aspects of this decision referred to in the Majority Award, as well as my conclusions regarding the significance of Musqueam for this litigation.

Summary of the Reasons Relied Upon in Musqueam

[44] In Musqueam, the Musqueam Indian Band (the “Band”) surrendered reserve lands owned by the Band to the Crown, which then entered into an agreement with a third party for the subdivision and servicing of the lands. The Crown also provided individual lot leases to the third party which then assigned them for lump sum payments to individuals who built houses on the lots. The individual leaseholders pay an annual rent under the leases to the Band. Under the terms of the leases, the rent was required to be reset in 1995 at an amount that was stipulated to be a percentage of the “current land value.” It should be noted that the typical rent review provisions provided that the rent was to be negotiated on the assumption that, among other things, at the time of such negotiations the lands were “unimproved lands in the same state as they were at the time of the agreement.”

[45] In the effective majority decision, upon which the Majority Award in part relied, Gonthier J. concluded that “unimproved lands” means unserviced lands, not merely lands without buildings. Mr. Justice Gonthier then held that “current land value” in the rent review clauses referred to fee simple or freehold as opposed to leasehold value, and in the circumstances in Musqueam, referred to freehold on the reserve, not off the reserve.

[46] In reaching this conclusion, Gonthier J. began by stating that, in the leases, “land” is not defined as a 99-year leasehold interest in the property, referring to the interest contemplated by the trial judge, Rothstein J. (as he then was). He then approved of the definition of fair market value of land set out in Revenue Properties, among other decisions. He also approved of the statement cited above in Bullock’s that market value is the exchange value of land rather than its use value to the lessee, noting that Bullock’s had been cited in Revenue Properties and that the principle was a part of Canadian law. In reaching this conclusion, he stated that “[l]and 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”.

[47] Mr. Justice Gonthier then endorsed the view set out in the Federal Court of Appeal’s decision in Musqueam, [1992] 2 F.C. 138 at para. 20, that the rent “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 the long-term lease.” I note that McLachlin C.J., while dissenting on other grounds, also specifically cited and approved this passage from the Federal Court of Appeal decision.

Conclusion Regarding the Significance of Musqueam for the Present Proceedings

[48] The Landlord submits that Musqueam provides that the default rule in respect of a rent re-set provision which is silent on the issue of the interest to be valued is that the freehold interest shall be valued. I am not certain that Musqueam purports to set out a general principle of this nature even though such a finding was made on the facts of the case in the course of determining the issue in Musqueam. The issue in Musqueam was, however, very fact specific and distinguishable in several respects from the present proceeding.

[49] First, the issue in Musqueam was not specifically the interest to be valued under a rent re-set provision which is silent on the interest to be valued. While it was necessary to construe the nature of the Band’s interest in the lands before addressing the valuation issue, the issue in Musqueam was the value of the landlord’s lands, i.e. the value of the Band’s lands, given their character as reserve lands. The valuation issue was the significance, if any, to be attributed to the decision of the landlord to maintain the lands as reserve lands, rather than the existence of leases on the lands. The majority and the minority parted company on this issue alone – specifically, with respect to whether the market value of the lands should be discounted as a result of the character of the lands as reserve lands.

[50] Second, all of the judges who heard the case agreed that the interest to be valued was the landlord’s interest, including Bastarache J., notwithstanding that he considered that the landlord’s interest should be valued as the landlord’s fee in the lands, consisting of the value of the lease in the hands of the landlord and of the reversion. There was no suggestion at any level that the interest to be valued was the leasehold interest of the tenants as that term is understood in the present proceedings. The issue of freehold interest versus leasehold interest, as that term is understood in the present proceeding, was not posed in Musqueam. Moreover, although a majority of the Supreme Court held the interest to be valued to be in the nature of a freehold interest, it was not strictly necessary to decide between a freehold interest and the leasehold interest of the landlord as the evidence indicated that the value of the latter approximated the value of the former.

[51] Third, the valuation issue in Musqueam was not related to the existence of the leases on the lands. There is no suggestion in any of the judgments that the valuation of the lands was to proceed on the basis that the leases constituted an encumbrance against the lands. Nor was the issue raised that the existence of the leases affected the value of the lands. To the contrary, Gonthier J. reflected the limited nature of the issue before the Supreme Court in concluding at paragraph 39 that, in the absence of any indication that the leasehold value was to be used to set the rent, “current land value” means freehold value. Similarly, McLachlin C.J. concluded at paragraph 9 that “current land value” means the price a willing buyer would pay for fee simple title to land. As mentioned, Bastarache J. considered that the landlord’s interest to be valued should be the landlord’s fee in the lands. However, he also accepted and proceeded on the basis that a long-term lease in its first years, as was the case in Musqueam, was equivalent in value to a fee simple.

[52] Fourth, as Gonthier J. observed, while the Supreme Court held that the interest to be valued was a freehold interest, freehold title on the reserve did not, in fact, not exist. This determination was conceptual in nature and was intricately connected to the finding of the plurality that the interest to be valued was “freehold on the reserve, not off the reserve”.

[53] Musqueam is therefore important principally insofar as it specifically endorses two basic principles that inform a current market valuation of lands subject to a long-term lease for rent re-set purposes: (1) that market value is the exchange value of land rather than its use value to the lessee; and (2) that the rent derived from a market value calculation 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 it were not subject to the long-term lease. The significance of this latter principle is discussed below.

[54] Insofar as Musqueam does set out a more general rule with respect to rent re-set provisions, however, the result in Revenue Properties is entirely consistent with such a rule. Accordingly, at most, for present purposes, Musqueam does no more than reinforce the decision in Revenue Properties on the issue of the interest in the Lands to be valued. In addition, Musqueam does not address the second principal issue in this proceeding – whether the Landlord’s interest should be valued taking into consideration the impact of land use legislation notwithstanding the existence of restrictions on the Tenants’ ability to benefit from such legislation.

[55] Accordingly, I conclude that Revenue Properties continues to govern the issue of the interest in the Lands to be valued in the present circumstances and the manner and extent to which the existence of the Leases is to be taken into account in such valuation.

Part II - The Majority Award

[56] The following summarizes the relevant findings in the Majority Award pertaining to the principal issues on this appeal. These issues are addressed in Part I of the Majority Award.

Definition of the Issues

[57] The central question to be addressed in the arbitration was the fair market value of the Lands as at July 1, 2012. As the Majority Award stated, embedded in the fair market value determination is the threshold question of what is the interest in the Lands to be valued. In determining this issue, it was also necessary to determine if the doctrine of issue estoppel prevented the Landlord from re-litigating the issue in light of the Divisional Court’s decision in Revenue Properties.

[58] The Majority Award set out the issues in the arbitration in the following terms:

(a) Should the demised lands be appraised as vacant and without reference to a ground lease as an encumbrance, as maintained by Victoria, or are the demised lands to be appraised as vacant but encumbered by a ground lease, as maintained by the Tenants.

(b) If found to be encumbered by a ground lease, what lease terms, if any, are to be considered in the determination of the fair market value of the demised lands and, in particular:

(i) Is the remaining lease term and the rent reset as set out in paragraph 1, citing Clause 11(2) of the Ground Lease, to be considered in appraising the fair market value of the demised lands as submitted by the Tenant, or are these particular terms irrelevant to the determination of fair market value as the Landlord contends.

[59] For purposes of the arbitration, the parties agreed to the following facts:

(a) “demised lands” refers to the Lands described in the two Leases, and

(b) the “fair market value” of the demised lands:

(i) shall be appraised by taking into account all applicable statutes and laws relating to and affecting the Lands, including zoning by-laws, the Planning Act, R.S.O. 1990, c. P. 13, the Condominium Act, 1998, S.O. 1998, c. 19, each as amended, and the regulations thereunder;

(ii) shall not take into account the buildings or structures on the Lands.

Conceptual Approach of the Majority Award

[60] It is not disputed that the determination of the correct approach to valuation of the Lands is a matter of contractual interpretation of the Leases, the principles of which are set out in Ventas, Inc. v. Sunrise Senior Living Real Estate Investment Trust, 2007 ONCA 205, 85 O.R. (3d) 254. The Majority Award also noted that it is well-established that evidence regarding the factual matrix, including the genesis and business purpose of an agreement, is admissible but does not alter, vary or amend clear and unambiguous contractual language. I note that this principle was recently affirmed by the Supreme Court in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at para. 57.

[61] The Majority Award began its analysis with the observation that the Leases do not specifically identify the interest in land that is subject to fair market determination and, to that extent, they are therefore ambiguous. It also found that there was no evidence led that would resolve the ambiguity nor was there any significant evidence of relevant context.

Positions of the Parties

[62] The Majority Award then summarized the positions of the parties as follows:

The Tenants’ position is that what Victoria granted and what the Tenants received was a leasehold estate. They contend that the Divisional Court [in Revenue Properties] determined the fair market value of the leasehold interest arising out of the 1990 rent reset arbitration. The Tenants submit that, by application of the doctrine of issue estoppel, Victoria is estopped from claiming that the interest in land to be subject to fair market value appraisal is other than a leasehold interest.

Victoria contends that as a matter of contractual interpretation, the property interest in the leased lands to be appraised and determined is the freehold (fee simple) interest. Victoria resists the Tenants’ submission that the Divisional Court decided that the interest in lands to be valued is the leasehold interest. Victoria also resists the Tenants’ argument that it is bound by the Divisional Court’s determination by applying the doctrine of issue estoppel.

[63] The Landlord's position regarding the operation of issue estoppel in the present circumstances requires some clarification. The Landlord accepted that the three constituent elements of issue estoppel, as set out in Danyluk v. Ainsworth Technologies Inc., 2001 SCC 44 at para. 25, [2001] 2 S.C.R. 460, had been established in respect of the question of whether the lands should be valued as freehold or leasehold. It argued, however, that to the extent that Revenue Properties is held to determine that the interest in land to be valued is the Tenants’ leasehold interest, given the Musqueam decision which it considers established a different rule, issue estoppel should not be applied in the present circumstances as to do so would work an injustice.

[64] Before addressing the operation of issue estoppel in the present circumstances, the Majority Award then set out the majority arbitrators’ conclusions regarding the 1991 arbitration, as well as their interpretation of each of Revenue Properties and Musqueam.

The Majority Award Review of the Revenue Properties Decision

[65] The Majority Award observed that Steele J. viewed the Condominium Act as an encumbrance upon the Lands. The Majority Award expressed its view of this conclusion as follows:

As can be seen from his reasons, Steele J. concluded that, absent contractual text pointing to the lands being unencumbered, the lands should be taken to be subject to a lease. In our view this was clearly a reference to the Condominium Act, which made the existence of the leases relevant to the fair market value of the lands.

[66] The Majority Award then observed that, in the context of the impact of future legislation “on a risk analysis basis”, Steele J. concluded that only statutes that affect the use of land, such as the Condominium Act, affect the value of land and that legislation that affects the buildings or structures on the land does not. In referring to the concurring reasons of Adams J., the Majority Award stated that it was “telling” that Adams J. referred to the “nature” of the agreement between the parties rather than the terms of the agreement and found that his conclusion does not support the Tenants’ position that the terms of the Leases should be taken into account.

[67] The Majority Award then addressed whether the Divisional Court took a subjective or an objective approach to determining fair market value. It concluded that Steele J. took an objective approach, which it considered meant the establishment of the exchange value of the land in issue, without reference to the position of a particular landlord or tenant, but instead, on the basis of “the highest and best case of the demised premises determined on a fee simple basis.”

[68] I observe that the Majority Award did not set out either the majority arbitrators’ contractual interpretation of the Leases or their interpretation of the decision in Revenue Properties at this point in the Award. Instead, after summarizing its understanding of the position of the parties regarding the proper interpretation of Revenue Properties, the Majority Award proceeded to address the decision of the Supreme Court in Musqueam and its significance for the present circumstances.

The Majority Award Review of the Musqueam Decision

[69] As a preliminary matter, the Majority Award noted that Musqueam is factually distinguishable from Revenue Properties but found that Musqueam involved the same issue of the fair market valuation of land for rent determination purposes. The Majority Award considered that the principal issues in Musqueam were twofold: what was meant by “current land value” and whether the fact that the land in question was reserve land should lower the current land value.

[70] The Majority Award considered the rent re-set provisions in Musqueam, based on current land value, were equivalent to the rent re-set provisions in the present case, based on fair market value. The Majority Award proceeds on the basis that the underlying question in both Revenue Properties and Musqueam was the same – what did the parties mean by the rent re-set provisions of their leases? In both cases, the lands were to be valued as if the lands in question were vacant. The remaining issue in both cases was the interest in land – leasehold or freehold – that was to be valued.

[71] The Majority Award concluded at para. 84 that, in Musqueam, both the majority reasons of Gonthier J. (at para. 35) and the dissenting reasons of McLachlin C.J. (at para. 9) concluded that “the land interest for purposes of establishing current land value for rent reset purposes is a fee simple interest (freehold value), not a leasehold interest”. I note, as well, that the Majority Award concluded that the “real debate” in Musqueam was whether the lands should be valued to take into account the fact that they were reserve lands, which issue the Majority Award accurately concludes was not relevant for present purposes.

The Majority Award Interpretation of Revenue Properties in Light of Musqueam

[72] After reviewing the references to Revenue Properties in the reasons of each of Gonthier J., McLachlin C.J. and Bastarache J., the Majority Award addressed the relationship between Revenue Properties and Musqueam. The Majority Award expressed its conclusion as follows:

We do not read the Divisional Court’s reasons in Revenue Properties in a manner consistent with the Tenants’ submissions. Nor do we agree with Victoria’s position that the Supreme Court of Canada’s judgment in Musqueam overruled or undercut Revenue Properties. Rather, in our view, the plurality and dissenting reasons of the Supreme Court of Canada approved, at least indirectly, what they took to be the Divisional Court’s reasons in Revenue Properties on the issues of the land interest to be subject to fair market value appraisal and the underlying business purpose of rent reset lease provisions such as those found in both Revenue Properties (fair market value of the demised lands) and Musqueam (current land value).

[73] The Majority Award observed that both Gonthier J. and McLachlin C.J. opined that the business objective of rent re-set lease provisions was as follows: “to secure a relatively risk-free market return on the land, a capital asset. This view was consistent with the business purpose that the Divisional Court in Revenue Properties ascribed to the ‘fair market value of the demised lands’ in rent reset provisions”.

[74] The Majority Award then restated its conclusion regarding the principle of Musqueam and its application in the present context as follows at para. 91:

Manifestly, both Gonthier J., for the majority, and McLachlin C.J., in dissent, concluded that the freehold land value better accords with the business purpose of this type of reset contractual provisions, absent clear contractual language to the contrary. As will be discussed further below, there is, in our view, no such language in the ground leases here.

[75] The Majority Award acknowledged that the two passages below in Revenue Properties could be taken to conflict with the majority view in Musqueam that, in the absence of wording to the contrary, the current value of lands subject to a lease is the fee simple value of the lands.

[76] The first is the statement of Steele J. at pp. 182-3 to the following effect:

There being no words to the effect that the lands are to be considered unencumbered the value must take into account the fact the lands are subject to a lease.

To ignore this would be to ignore the very basis of the relationship between the parties as a landlord and tenant and would create a highly artificial situation.

[77] The second passage is Steele J.’s disposition of the appeal at p. 187:

In the result the appeal should be allowed. The answer to question number 3 should be that the lands are to be appraised as of July 1, 1990, as if they were vacant but encumbered by a lease.

[78] The Majority Award concluded that these passages must be read in the context of the reasons of Steele J. as a whole, including in particular his treatment of the term “demised lands”. Further, the Majority Award stated that the majority arbitrators do not think, and do not think that either Gonthier J. or McLachlin C.J. thought, that the Divisional Court concluded that the fact that property is subject to a lease means that the fair market value of the lands should be determined as leasehold property rather than freehold property. Addressing the reference of Steele J. to the Leases as an encumbrance upon the lands, the Majority Award referred to the dicta of Steele J. at p. 183 of Revenue Properties and stated “[t]he clear thrust of his reasons is that legislation affecting the use of the lands – the Condominium Act in particular – is an encumbrance upon the lands for the purpose of determining the fair market value.”

[79] The Majority Award then stated its interpretation of the decision in Revenue Properties as follows, at paras. 96-97:

In our view, the crux of Steele J.’s conclusion is that legislation that affects the use of the land is relevant to determining the fair market value of the lands. His reasons, reasonably read, do not support the conclusion that the interest in land to be determined on a fair market value basis is a leasehold interest. We interpret Steele J.’s decision in Revenue Properties as standing for the principle that the fair market value of the lands must take into account any legal restrictions affecting the use of the lands.

We think this interpretation is consistent with the fact that both Gonthier J. and McLachlin C.J. in Musqueam refer approvingly to Revenue Properties regarding the approach to determining the current value of lands subject to leases. This approval is significant because both the plurality and the dissent in Musqueam plainly reject the notion that “current land value” refers to the leasehold value of land. [footnote omitted] In our view, these members of the Supreme Court did not criticize Revenue Properties because they read that decision as standing for the proposition that legal restrictions on land use affect the market value of land, but the terms of the lease do not.

[80] The Majority Award then concluded that, in its view, Musqueam and Revenue Properties can be read “harmoniously”, provided the decision of Steele J. is read as a whole and consistently with the way Gonthier J. and McLachlin C.J. read that decision. The conclusion in the Majority Award is as follows:

We take Revenue Properties to mean that the existence of a lease is relevant to assessing fair market values not because the lease is an encumbrance per se, but, rather, a lease may affect the fair market value of lands where applicable legislation engaged by the existence of a lease restricts the use of the lands. If this reading of Revenue Properties is accepted, then there is no material inconsistency between it and Musqueam. [italics added]

The Provisions of the Leases

[81] With this background, the Majority Award then addressed the issue of whether any provisions in the terms of the Leases support the conclusion that the parties intended that the terms of the Leases should be considered when determining the fair market value of the demised lands. It concluded that there are no such provisions. Accordingly, the Majority Award applied its understanding of the principle in Musqueam that, where lease provisions do not expressly state whether the lands in question should be valued as encumbered or unencumbered by a lease or the terms of a lease, the default position is that the interest in the lands to be valued is the freehold interest.

[82] In particular, the Majority Award considered and rejected the Tenants’ arguments that the rent floor provisions on a rent re-set, and the lease terms giving the Landlord control over the nature and use of the developed properties, are evidence of the parties’ intention that the land interest to be valued is the leasehold interest.

[83] With respect to the rent floor provisions of the Leases, the Majority Award stated at para. 103:

In our view, a clause imposing a rent floor is not a provision of the lease that has any bearing on the meaning of the phrase ‘fair market value of the demised lands’, or the business purpose of the rent reset valuation exercise. Nor is it an encumbrance on the land.

With respect to the “control” provisions of the Leases, the Majority Award concluded simply that, in the majority arbitrators’ view, the control provisions do not suggest that the parties intended the fair market value of the demised lands should be determined by taking into account the terms of the Leases. The reasoning of the Majority Award respecting these provisions is addressed further below.

The Operation of the Doctrine of Issue Estoppel

[84] To the extent that the decision in Revenue Propertiesis as set out above – that the interest to be valued is the freehold interest – it is not inconsistent with the principle in Musqueam as understood by the Majority Award, and the doctrine of issue estoppel is not engaged.

[85] However, the Majority Award also addressed the operation of the principles in Revenue Properties and Musqueam in the circumstances in which it was held that Revenue Properties was wrongly decided in view of Musqueam – by which I think is meant that Revenue Properties is taken to decide either that the interest to be valued is the leasehold interest or that restrictions in a lease should be treated as affecting the fair market value of the Lands. The Majority Award concluded that, in such circumstances, it would be appropriate to refuse to apply the doctrine of issue estoppel on the grounds of “special circumstances” – in this case a change in law – as contemplated in Minott v. O’Shanter Development Co. (1999), 1999 3686 (ON CA), 42 O.R. (3d) 321 at para. 51 per Laskin J.A. (C.A.), [1999] O.J. No. 5 [Minott].

[86] The Majority Award concluded that, for this purpose, it was bound by its view of the principle in Musqueam that, in interpreting rent re-set provisions in a lease, absent contractual language indicating the contrary, the land interest to be valued is the freehold interest. Given the finding in the Majority Award that there are no lease provisions indicating that the leasehold interest should be valued, the Majority Award concluded that, if it were necessary to address the issue, the principle of estoppel would not apply in the present circumstances.

Conclusions of the Majority Award

[87] The Majority Award therefore considered that the Lands should be appraised as vacant and without reference to the Leases as encumbrances, taking into consideration any applicable statutes and laws, including the Planning Act and the Condominium Act, 1998, that affect the use of the Lands.

[88] The Majority Award also addressed the significance of the current provisions of the Condominium Act, 1998 in the following statement:

For purposes of clarity, we disagree with our colleague’s view expressed at paras. 21-23 of his reasons that, for valuation purposes, it should be assumed that condominiums cannot be built on the Lands because of the requirements of the Condominium Act. Our colleague holds this view only because he is prepared to consider and read in the terms of the ground leases when applying the Condominium Act for valuation purposes. This approach is in contrast with Steele J.’s reasons in Revenue Properties, where he explained that it is the existence of the lease, rather than its terms, that is relevant for valuation purposes….

[89] Accordingly, the Majority Award approached the determination of the fair market value of the Lands on the basis that the valuation should reflect the potential for a freehold residential condominium project on each of the Lands.

[90] Based on the foregoing conclusions, the Majority Award then addressed the fair market value of the Lands as of July 1, 2010, on the basis of an understanding that all parties agreed that, in a freehold scenario, the highest and best use for the Lands is a mixed-use retail development with freehold residential condominium towers. For the most part, the Majority Award favoured the evidence presented by the Landlord in this exercise, although it directed the Landlord to make certain adjustments to its design, and to its various inputs, and to resubmit those to the arbitration panel to allow it to finalize the valuation. Following this process, in the Final Award, the majority arbitrators determined the fair market values of 131 Bloor Street West and 151 Bloor Street West to be $182,700,000 and $37,325,000, respectively.

Part III - Analysis and Conclusions of the Court on this Appeal

[91] In this proceeding, the arbitrators were required to determine the “fair market value of the demised lands”.

[92] The fair market value of lands is commonly determined on the basis of expert appraisal evidence, according to the highest and best use of the lands. A highest and best use must be one that is legally permissible and economically feasible: see Canadian Uniform Standards of Professional Appraisal Practice (Appraisal Institute of Canada), effective January 1, 2010, Section 12.34, pp. 63-64.

[93] In this case, the meaning of “fair market value of the demised premises” in the Leases, which it is agreed is a matter of contractual interpretation, was previously addressed in the Divisional Court decision in Revenue Properties. That decision has given rise to the two issues of law that are reflected in the alternative arguments on appeal of the Tenants, which are discussed herein in turn. Before addressing these two issues, however, I propose first to set out some preliminary observations regarding the Court’s conceptual approach to rent re-set provisions, as they inform the conclusions reached below in certain important respects. I will next address the two issues, assuming that issue estoppel should be applied in respect of the determinations on these issues made by the Divisional Court in Revenue Properties. The final section then addresses whether issue estoppel should operate in respect of such determinations.

Conceptual Approach to the Issues in This Proceeding

[94] In any analysis of the operation of the Re-Set Provision, the point of departure must be the principle underlying the business deal between the parties.

[95] In Musqueam, at para. 10, McLachlin C.J. noted with approval the statement of Sexton J.A., in the decision of the Federal Court of Appeal in that proceeding, that 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.” At para. 40 of Musqueam, Gonthier J. also endorsed this principle. I will refer to this conceptual approach as the “notional sale principle.” It is this principle to which Steele J. also appears to have referred in Revenue Properties at p. 181 in endorsing the statement in Bullock’s that a rent re-set provision in a lease calls for a determination of the value of the land, not the value of the use of the land for any particular purpose, i.e. the exchange value of the land., and that, from such a provision, it may be inferred that the parties were thinking in terms of an interest rate on a capital investment.

[96] The difficulty in this proceeding stems in part from the fact that, notwithstanding the articulation of this governing principle, neither Revenue Properties nor the Majority Award sets out how the final determination in those decisions implements this principle. I think it is useful to attempt such an exercise.

[97] The notional sale principle proceeds on the basis that, on each occasion that rent is to be reset, the landlord/owner of the property could sell the property and could reinvest the monetized proceeds at an agreed rate, in the present case 6%. In granting a ground lease, the landlord gives up the ability to sell the property in return for a rental equal to what the landlord would have received by way of a return on the invested proceeds if the landlord had not done so.

[98] Accordingly, if land values rise, the rent would rise accordingly. Indeed, it is often because rents recoverable by a tenant under a ground lease rise that the land value rises. In such circumstances, the tenant will benefit more or less concurrently from the increased land value of the property. However, an increase in rents obtainable by the tenant is not a pre-condition to an increase in the value of the underlying lands. More generally, typically, there is no express link between the rise in the value of the landlord's freehold interest and the tenant's ability to benefit from the underlying cause of the increase in land value.

[99] Land values could also rise for reasons related to rezoning or the operation of other land use statutes. In such event, the value of a property could rise to reflect a potentially more profitable development opportunity in the hands of the notional purchaser on the notional sale. For example, land could be rezoned from agricultural to commercial during the term of a ground lease. In such event, the development potential of each of the freehold interest of the landlord and the leasehold interest of the tenant would be increased. In such circumstances, the tenant under a long-term ground lease is the party that can most immediately take advantage of such development opportunity, although the landlord also benefits in the longer term from such re-zoning in the same manner. It is not disputed that it would therefore be appropriate that the tenant should pay an increased rent to reflect the enhanced development opportunity.

[100] In the usual case, land use planning decisions or statutory amendments affect the development potential of each of the freehold interest of the landlord and the leasehold interest of the tenant in the same manner. Notwithstanding, it may be that, in certain circumstances, a tenant may not be able to take advantage of a particular development opportunity because it is not economic for the tenant to undertake such a development. This could arise, for example, if the remaining term of the ground lease were such that the tenant could not recover the necessary rent within the remaining term of the lease to make such development profitable. Similarly, the cost of demolition of buildings on the land that have already been erected by a tenant may make such a development uneconomic over the remaining term of the lease. However, these constraints on the tenant’s ability to take advantage of a new development opportunity for the land arise as a result of either the tenant’s use of the lands or the terms of the lease, or a combination thereof. Accordingly, these are considerations that are excluded in the determination of the fair market value of the land.

[101] The issue in this case arises because the particular statutory provisions creating the development opportunity, the Condominium Act and the Condominium Act, 1998, treat the interest of the owner of the freehold differently from the interest of the owner of the leasehold.

[102] Accordingly, the ability to benefit from the development opportunity arising by virtue of such legislation therefore differs as between the freehold interest and the leasehold interest, as was addressed in Revenue Properties and as is further discussed below. As the submissions in this proceeding have made clear, while there are no legal limitations on the right of the owner of a freehold interest to develop a residential condominium on freehold land, there are legal constraints on the ability of a tenant to develop a residential condominium on the tenant’s leasehold estate, set out in sections 2, 164, 165 and 166 of the Condominium Act, 1998, as well as significant practical limitations.

[103] In Revenue Properties, Steele J. treated the Condominium Act as constituting “an encumbrance” on the Lands. While it is clear what Steele J. had in mind in making this statement, I do not think this is the appropriate way to conceptualize the impact of the condominium legislation. Given that condominium legislation permits a development opportunity, and thereby the creation of greater value in property than would otherwise exist, I think it is better to say that condominium legislation disproportionately benefits the owner of a freehold estate as compared to the owner of a leasehold estate. In any event, this discussion underscores the fact that the Leases do not constitute an “encumbrance” on the Landlord’s interest in the Lands by virtue of the operation of condominium legislation in the sense that the concept of an “encumbrance” is typically understood. From the landlord’s perspective, a lease constitutes an “encumbrance” on the freehold estate of a property only in the practical sense that a landlord cannot develop a freehold condominium project on its property until the expiration of any long-term ground lease granted by the landlord in favour of a tenant.

[104] More significantly, the possibility of this disproportionate benefit to the owner of the freehold estate necessarily raises the question of how such a disproportionate benefit is to be factored into the determination of the fair market value of the Lands. In 1960, when the Leases were entered into, condominium legislation did not exist, nor is there any evidence that such legislation was contemplated. It is therefore not surprising that the Leases do not address the question of who was to bear the risk, or take the benefit, in the case of land use legislation that disproportionately benefitted the freehold interest as compared with the leasehold interest.

[105] The decision of Steele J. does not expressly approach the issue in this manner because the question put before the arbitrators and on appeal masked the issue to a certain extent, given that the issue was framed in terms of whether or not the Tenants’ actual use of the property was a relevant consideration in the determination of fair market value. However, in my view, that was the substantive issue before the Divisional Court. As discussed above, the determination in Revenue Properties is, in effect, that the Landlord bore the risk of any such legislation – that is, that the Landlord could not benefit from the provisions of the Condominium Act to the extent that the Tenants could not also do so.

[106] Mr. Justice Steele did not, however, set out any reasoned basis for this conclusion. The closest one gets to a basis for this conclusion is his statement at p. 183 to the effect that “[t]he owner should not be entitled to increased value of the lands as a result of the Condominium Act when in fact it does not apply to its lands as a result of the very lease that it entered into”. Mr. Justice Steele did not, however, point to any language in the Leases as evidence of such an intention on the part of the parties. Nor did he suggest that it is a necessary implication of the business principle that underlies the rent re-set provision, notwithstanding his reference to Bullock’s in his reasons.

[107] Moreover, Steele J. phrased the issue before him in a general manner that, as mentioned, does not address the specific issue of disproportionate treatment. He referred at p. 183 to the absence of any reference in the Leases to any future legislation affecting the Lands, as opposed to the specific reference to the buildings. He then stated that the question is “whether or not future legislation unanticipated by either party such as the Condominium Act and the Rental Housing Protection Act… should have effect upon the value of the land”. He concluded that any detrimental or beneficial effect upon the building of any such future legislation must be borne by the Tenants as it relates to the use of a building that was erected by choice by the Tenants and does not affect the land. By contrast, the Condominium Act affects the land and is binding upon both the Landlord and the Tenants because the fact of the Leases was contemplated by both parties. In addressing the issue in this way, Steele did not specifically refer to the question of the effect of legislation that affects the benefits derived from use of the Lands differently, and therefore disproportionately, as between the Landlord and the Tenants.

[108] I note, however, that the following passages of the concurring reasons of Adams J. appear to address this issue and provide a conceptual basis for the decision in Revenue Properties:

…On the material before us, I am satisfied that the phrase “fair market value of the demised lands” was 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. This approach does not add to the words employed by the parties and instead implements their purpose. See for example Bullock’s Inc. v. Security First-National Bank of Los Angles (1958), 325 p. 2d 185 at p. 188-89 (Cal. Dist. Ct. App.).

Thus, in the absence of specific language to the contrary, laws which regulate the use to which lands may be put, as opposed to those applicable because of the structures placed thereon, are properly considered in assessing fair market value. A landlord should not be benefited or burdened by development decisions independently made and paid for by a tenant lacking specific language demanding this result. Laws applicable because of the structures or developments erected upon the land are not to be taken into account in assessing fair market value unless the landlord, in leasing the land, required or made those specific development choices. Compare Humphries Investments Inc. v. Walsh (1988), 248 Cal. Rptr. 800 at p. 803. Consequently, in the present circumstances, the effect of the Rental Housing Protection Act, the Residential Rent Regulation Act and the Residential Tenancies Act are properly excluded. This landlord did not require a residential development. Similarly, the non-conforming use characteristic of Britannica House also falls within this exclusion notwithstanding its emanation from planning legislation. The value arises from a development decision the tenant made.

On the other hand, legislation which affects fair market value as a result of the very nature of the agreement entered into between the parties must be given consideration absent language to the contrary. In this latter regard, any value associated with the potential development of lands pursuant to the Condominium Act which, however, precludes such development of leased or demised lands ought not be taken into account in the assessment of fair market value without clear language to that effect. This statutory prohibition relating to leased lands brings the situation more within the rationale of Basingstoke and Deane Borough Council v. Host Group Ltd., [1986] 1 All E.R. 824 at p. 828 [Basingstoke and Deane]. It would be unreasonable to assume rent was intended to be based on a value the tenant could never exploit due to the very existence of the lease. [italics added]

[109] In this passage, Adams J. went beyond the decision of Steele J. in four respects.

[110] First, he explicitly stated, in effect, that in respect of unanticipated land use legislation which provides a development opportunity to the Landlord but not the Tenants, the Leases should be interpreted to exclude the value of such development opportunity in the hands of the Landlord.

[111] Second, he provided a rationale for such conclusion. He stated that the Leases should be interpreted to exclude an intention to take the value of such development opportunity into consideration in the absence of clear language to such effect. In other words, in the determination of fair market value, without clear language to the contrary, the court should not find an intention of the parties to take into consideration any potential value that the Tenants could not exploit due to the fact that the nature of their interest is a leasehold interest.

[112] Third, he suggested that the conclusion in Revenue Properties implements the business purpose of rent re-set provisions as contemplated by Bullock’s.

[113] Lastly, he appears to have aligned this approach with the principle in Basingstoke and Deane. It is however noteworthy that the exercise of establishing the ground rent in Basingstoke and Deane, to which Adams J. referred, was fundamentally different from the exercise contemplated by the Re-Set Provision. In Basingstoke and Deane, the valuator was required to determine a reasonable ground rent based on a lease having the terms previously agreed upon between the parties, including the landlord's mandated use restriction. This suggests that Adams J. may have had in mind a very different valuation concept from that contemplated by the Leases.

[114] In approaching the issues on this appeal, I have proceeded on the basis that the decision of Adams J., as concurring reasons, makes explicit by way of a more general principle what is implicit in the decision of Steele J., which is specifically directed to the impact of the Condominium Act on the valuation of the Landlord’s freehold interest. To restate that principle, I consider that Revenue Properties held that, without clear language, the Court should not find an intention of the parties to take into consideration in the determination of fair market of the Lands any potential value that the Tenants could not exploit due to the fact that their interest in the Lands is a leasehold interest.

Issue #1 – The Interest in the Lands to be Valued

[115] A principal issue in this proceeding is whether the interest in the “demised lands” to be valued for the purposes of the Re-Set Provision is the Landlord’s freehold estate or the Tenant’s leasehold estate. The Majority Award held that the interest in the Lands to be valued for the purposes of the Re-Set Provision is the freehold interest, which is to be valued as vacant and unencumbered by the Leases.

Positions of the Parties

[116] The parties agree that the lands should be valued as vacant lands, as was held in Revenue Properties. They also accept that, in accordance with Revenue Properties, the value of the lands “must take into account the fact the lands are subject to a lease.” However, they disagree on the meaning and significance of this statement of Steele J. for the determination of the interest in the Lands to be valued.

[117] The Tenants argue that the Re-Set Provision requires, and Revenue Properties holds, that the interest in the “demised lands” to be valued at fair market value is the leasehold interest of the Tenants, rather than the freehold interest of the Landlord. The Tenants intend the leasehold interest to refer to the development interest of the Tenants in respect of the Lands for the remaining term of the Leases in the hands of the Tenants.

[118] The Landlord supports the Majority Award, arguing that the Leases provide, and Revenue Properties determined, that the interest in the “demised lands” to be valued is the Landlord’s freehold estate, or fee simple interest in the Lands, unencumbered by the Leases. Alternatively, the Landlord argues that Musqueam changed the law, overruling Revenue Properties insofar as the latter held that the fair market value must be determined having regard to the Leases as an encumbrance.

[119] I note that the Tenants also submit that the Majority Award implies a land value on a per square foot basis for each of the Lands that they say is patently unreasonable when compared to the implied per square foot price in the most recent comparable sales of property. Whether or not this is correct, it is not evidence that the parties intended to value the Tenants’ respective leasehold interests rather than the Landlord’s freehold interest. It raises an entirely separate issue that is not before the Court on these appeals.

Analysis Regarding the Majority Award Determination that the Interest in the Lands to be Valued is the Freehold Interest

[120] By way of overview, I consider that the Majority Award reached the five principal conclusions set out below in respect of the issue of whether the freehold or the leasehold interest is to be valued. I acknowledge that this order departs in certain respects from the order in the Majority Award, but I believe it reflects the essence of the decision:

(1) Musqueam holds that in circumstances where a lease does not expressly state whether the lands in question are to be valued as encumbered or unencumbered by a lease or the terms of the lease, absent provisions suggesting an intention to the contrary, the default position is that the freehold interest in the lands is the interest to be valued;

(2) in the present circumstances, the Leases are silent on whether the fair market value of the demised lands is to be valued as encumbered or unencumbered by the Leases or the terms of the Leases, and there are no provisions in the Leases that suggest that the interest to be valued is a leasehold interest;

(3) pursuant to the principle in Musqueam, the effect of the Re-Set Provision is therefore that the interest in the Lands to be valued is a freehold interest;

(4) in any event, Revenue Properties also holds that, in the particular circumstances of the Leases, the interest in the “demised lands” to be valued is the freehold interest; and

(5) to the extent that Revenue Properties would, instead, require that the interest in the Lands to be valued is the leasehold interest or that the Lands be valued as encumbered by the Leases, the principle in Musqueam governs and, accordingly, by virtue of the existence of a special circumstance in the form of a change in the law subsequent to Revenue Properties, a court should exercise its discretion not to apply the doctrine of issue estoppel.

[121] For the reasons discussed above in respect of the decision in Revenue Properties, I agree with the determinations in (2) and (4), which collectively support the determination in the Majority Award that the interest to be valued is the Landlord's freehold interest in the Lands and contradict the Tenants’ interpretation of the Revenue Properties decision. Separately, I also conclude that the Majority Award is consistent with the correct contractual interpretation of the Leases. I will discuss each of these conclusions in reverse order below. Based on my understanding of Musqueam, I am not certain that I agree with the determinations of the Majority Award in (1) or (3) above to the extent that the conclusion is based on a finding that Musqueam established that the default rule in respect of a rent re-set provision that is silent on the interest to be valued is that the freehold interest shall be valued. However, while such findings reinforce the conclusions of the Majority Award, they are not strictly necessary for the result therein. Similarly, I do not agree with the conclusion in (5) above, although I do not consider that the circumstances contemplated by that conclusion have arisen.

Contractual Interpretation of the Leases

[122] First, as mentioned, the Leases are silent on whether the fair market value of the demised lands is to be valued as encumbered or unencumbered by the Leases or the terms of the Leases. I agree with the Majority Award in its conclusion that, as a matter of contractual interpretation of the Re-Set Provision, the intention of the parties in the Re-Set Provision is that the interest to be valued for the purposes of such provision is the Landlord's freehold interest.

[123] The Tenants argue that the absence of language in the Leases to the effect that the Lands are to be considered as unencumbered requires that the valuation of the Lands must take into account that the Lands are subject to the Leases. This argument concentrates solely on the absence of specific language which is, on its own, at best equivocal. Viewed as a whole, however, given the underlying business principle of rent re-set provisions as discussed above, I do not think that the absence of such language requires that the Leases be taken into consideration beyond the extent contemplated by Revenue Properties. Rather, I think that the conclusion that the interest to be valued is the freehold interest is a necessary implication of the notional sale principle.

[124] I note that, given the business principle described above, if the Leases were to be taken into consideration to any greater extent, the more appropriate approach would be to value the Leases in the hands of the Landlord, i.e. the Landlord’s reversion, as part of a valuation of the Landlord’s interest. This was the approach favoured by Bastarache J. in Musqueam. The Tenants do not, however, argue for such an approach. They argue that the Tenants’ respective leasehold interests should be valued. I do not think this is logically related to the absence of wording that requires that the Lands be valued as unencumbered.

[125] Conversely, I am of the opinion that there are no provisions in the Leases that indicate an intention of the parties that the interest in the Lands to be valued for purposes of the Re-Set Provision is the leasehold interest of the Tenants. In this regard, I also do not accept the specific arguments of the Tenants that the “rent floor” and the “control provisions” of the Leases evidence an intention of the parties that the interest to be valued is the leasehold interest.

[126] The Majority Award addressed and rejected the argument that the presence of the rent floor is evidence of an intention that the interest to be valued is the leasehold interest, as set out above. As the Majority Award noted, the fact that rents payable by the Tenants to the Landlord are tied to land values does not mean that rents must be tied to land values under all circumstances. There is nothing inherent in the business deal between the parties that prevented the Landlord from bargaining for downside protection in the event that land values were to fall in the future. I agree with that conclusion.

[127] Before this Court, the Tenants argued that an intention to value each Tenant’s leasehold interest is reflected in the fact that rent would be more likely to be reduced in the later part of the lease term if the leasehold interest were the interest to be valued. While it is correct that the rent floor would likely come into play if the leasehold interest were the interest to be valued, I do not see how this consequence is evidence of an intention of the parties that the interest to be valued is the leasehold interest.

[128] Moreover, as mentioned, in rent re-set provisions, changes in rents are intended to be reflective of changes in underlying land values. The Tenants’ argument implies that the Landlord agreed to a provision that ensured that rent would eventually be capped at the floor, as the formula under the Re-Set Provision resulted in lower rents toward the end of the Leases, even if comparable freehold land values were rising. I note that this would be the case in respect of the Lease to which GE is a party on the present rent re-set if the Tenants’ submission were correct. I think some principle supporting this result, or evidence that such a result was contemplated, would be required to support the Tenants’ argument on this basis beyond the mere existence of a rental floor provision.

[129] Second, the Tenants argued that the provisions in the Leases addressing the uses to which the Lands may be subjected – the “control” provisions – constitute sufficient control that they evidence an intention that the interest to be valued should be the leasehold interest. The Tenants suggested that the purpose of the control provisions was to secure a revenue stream from the Leases and that this, in some way, reflects an intention to determine the rent under the Leases by reference to the leasehold interest.

[130] The Majority Award also addressed and rejected this argument, albeit on general terms. I also agree with this conclusion. While the purpose of the use provisions was undoubtedly, among other considerations, to provide some certainty as to the nature of the revenue stream to be generated from the Lands and thereby some certainty that the rent will be paid by the single-purpose companies who entered into the Leases, I do not see any link between these provisions of the Leases and the intention of the parties regarding the interest in the Lands to be valued.

The Tenants’ Interpretation of Revenue Properties

[131] The Tenants argue that the determination of Steele J. that the value of the Lands “must take into account the fact the lands are subject to a lease” requires that the interest to be valued is the leasehold interest. This argument turns on acceptance of the Tenants’ interpretation of Revenue Properties to the effect that the Divisional Court concluded that the interest to be valued is the Tenants’ leasehold interest. It is also relevant only in the context of issue estoppel – that is, it is an argument that the Majority Award was in error to the extent that it did not recognize that it was bound by the determination in Revenue Properties on this issue.

[132] The Majority Award concluded that Revenue Properties holds that the interest in the Lands to be valued is the freehold interest of the Landlord rather than the leasehold interest of each Tenant. For the reasons set out above, which are in turn based on the Court's earlier analysis of the Revenue Properties decision, I agree with this conclusion in the Majority Award. I therefore do not accept the Tenants’ interpretation of the determination in Revenue Properties on this issue.

[133] I note that the Tenants rely on two passages in the decision of Steele J., referred to in the Majority Award and set out above, as suggesting that the valuation should proceed on the basis that the Lands are encumbered by the Leases. However, I think it is clear that Steele J. intended that the significance of the existence of the Leases was to be limited to taking into consideration the restrictions on the use of the Lands established by the provisions of the Condominium Act in the determination of the fair market value of the Lands. I agree with the analysis of the Majority Award rejecting these submissions of the Tenants. I add two additional observations.

[134] First, the context in which Steele J. expresses his conclusion that the existence of the Leases must be taken into account in the valuation of the Lands supports the analysis of the Majority Award. This conclusion of Steele J. is immediately preceded, not by his conclusion that the Lands are to be valued as vacant and unencumbered by the Leases, but by the following discussion regarding the extent to which applicable statutes and laws should be considered in the valuation of the Lands:

I agree with them that the lands should be valued as if vacant, but I do not agree that they should be valued as unencumbered for the purpose of applicable general law.

As stated by Reid J. in Montreal Trust Co., supra, at p. 3:

An encumbrance is an interest in land that diminishes its value: Clark v. Reynot (1922), 1922 505 (NS CA), 65 D.L.R. 425 (N.S.S.C.); Huyek v. Andrews, 113 N.Y. 81, 20 N.E. 581, 3 L.R.A. 789; Miller v. Schwinn, Inc., 113 F.2d 748 at pp. 751-3, 72 App. D.C. 282.

A lease is an encumbrance if it diminishes the value of the land: Baggett v. Meux, 12 L.J. Ch. 226. It follows that a lease on favourable terms to the lessor will be an embellishment.

There being no words to the effect that the lands are to be considered as unencumbered the value must take into account the fact the lands are subject to a lease.

To ignore this would be to ignore the very basis of the relationship between the parties as a landlord and tenant and would create a highly artificial situation. [italics added.]

The italicized statement indicating that Steele J. did not agree that the Lands should not be valued as unencumbered “for the purpose of applicable general law” is clearly intended to be a reference to the encumbrance constituted by applicable statutes and laws pertaining to the use of the Lands, as opposed to the buildings on the Lands. It is not a conclusion that the Lands should be valued as vacant and “encumbered by the Leases”, as the Tenants submit.

[135] In addition, as discussed above, I think that the use of the language “vacant but encumbered by a lease” in the second passage relied upon by the Tenants was intended to be a reference to the values arrived at by the majority of the arbitration panel in its award using the majority’s own terminology, rather than a substantive comment.

Conclusion Regarding the Majority Award Determination on Issue #1 that the Interest in the Lands to be Valued is the Freehold Interest

[136] Based on the foregoing, I conclude that the Majority Award did not err in law in reaching the conclusion that the interest in the Lands to be valued for the purposes of the Re-Set Provision is the freehold interest, which is to be valued as vacant and unencumbered by the Leases. The Majority Award applied the correct contractual interpretation to the Re-Set Provision in respect of this issue. In addition, the Majority Award is consistent with the determination in Revenue Properties on this issue, with the result that there is no basis for withholding the operation of issue estoppel to the extent that is otherwise applicable in respect of this issue.

Issue #2 - The Significance of the Condominium Act, 1998 for the Valuation of the Lands

[137] The Majority Award correctly proceeded on the basis that the Lands should be appraised taking into consideration any applicable statutes and laws, including the Planning Act and the Condominium Act, 1998, that affect the use of the Lands because of the existence of the Leases (which approach is in accordance with the definition of “fair market value” for the purposes of the arbitration as set out above). The more difficult issue on this appeal is the Majority Award’s determination of the manner in which such legislation is to be taken into account in the valuation of the freehold interest of the Landlord. In particular, the Majority Award approached the determination of the fair market value of the Lands on the basis that the valuation should reflect the potential for a freehold residential condominium project on each of the Lands by virtue of the provisions of the Condominium Act, 1998, notwithstanding the fact that the Tenants were not able to create a freehold residential condominium project out of their respective interests in the Lands.

Positions of the Parties

[138] The Landlord argues that, as a result of the 1998 amendments to the Condominium Act, all condominium uses may be considered in the determination of the fair market value of the Lands because the Condominium Act, 1998 no longer prohibits condominiums on leased land, as its predecessor did in 1990. The Landlord argues that, because of those amendments, Revenue Properties is not determinative in this proceeding in respect of the significance to be attached to the operation of such legislation – that is, the issue of estoppel is not applicable in respect of this issue. On this basis, the Landlord argues that the highest and best use of the Lands, in the case of each of the Lands, is a mixed-use, retail development with freehold residential condominium towers.

[139] The Tenants argue that Revenue Properties held that the “fair market value” of the demised land must be determined excluding consideration of any legislation that restricts the Tenants’ use of the Lands, including the Condominium Act. They argue that, in valuing the Lands based on their use for a freehold residential condominium development, the Majority Award erred in law by failing to apply this principle, or alternatively, erred in law by failing to properly interpret and apply the Condominium Act, 1998. Specifically, the Tenants argue that the approach in the Majority Award to valuation of the Lands fails to recognize and give consideration to the fact that the Condominium Act, 1998, particularly sections 165(3) and 166(1) and (2), does not permit the Tenants to use the Lands for a freehold residential condominium development as a legal matter. They argue that, in this respect, the circumstances are no different from those present in the 1991 arbitration and in Revenue Properties, notwithstanding the amendments to the Condominium Act since that decision.

[140] The Tenants also argue that, insofar as leasehold condominiums are legally possible, there is no evidence that such a development would be practically feasible and, in any event, no evidence as to the value of the Lands based on such a development. In view of the conclusions reached below, it is not necessary to address this argument.

[141] On the foregoing basis, each Tenant argues that the highest and best use of the Lands of which it is the tenant is a high-end, two-storey retail development. As mentioned, in the case of the Lease to which GE is a party, the application of this principle would result in the minimum rent provision in the Re-Set Provision becoming applicable.

Analysis and Conclusions

[142] The only reasons in the Majority Award pertaining to its conclusion on this issue are as follows:

For purposes of clarity, we disagree with our colleague’s view expressed at paras. 21-23 of his reasons that, for valuation purposes, it should be assumed that condominiums cannot be built on the Lands because of the requirements of the Condominium Act. Our colleague holds this view only because he is prepared to consider and read in the terms of the ground leases when applying the Condominium Act for valuation purposes. This approach is in contrast with Steele J.’s reasons in Revenue Properties, where he explained that it is the existence of the lease, rather than its terms, that is relevant for valuation purposes….

[143] The Majority Award is correct insofar as it addresses the issue of whether the contractual restrictions in the Leases would preclude the Tenants from establishing leasehold condominiums. However, that is a different issue from the present issue. As the Tenants submit, there is no need to have regard to the terms of the Leases to determine whether the Tenants can establish freehold condominiums out of their estates in the Lands. That issue is resolved entirely by the language of the Condominium Act, 1998.

[144] With respect to the issue addressed in this section, it is not clear from the passage above whether, in reaching its conclusion, the Majority Award proceeded on the basis that: (1) as a matter of law, the Condominium Act, 1998 does not constitute a restriction on the Tenants' use of the Lands; or (2) that Revenue Properties determined that restrictions on the Tenants’ use of the Lands in applicable land use legislation, in this case the Condominium Act, 1998, are to be disregarded in the valuation of the Landlord’s freehold interest in the Lands. I will address each issue in turn.

The Operation of the Condominium Act, 1998 in Respect of Freehold Condominium Projects

[145] While it is not clear what Steele J. had in mind in stating that the Condominium Act was not applicable to lands subject to leases, it is a necessary implication of the Divisional Court decision that the relevant feature of the Condominium Act was that a tenant could not create a freehold condominium project out of its leasehold estate. As the freehold owner of the Lands, the Landlord was in a position to register a freehold condominium in respect of its freehold interest and its leasehold interest in the Lands by virtue of s. 2(1) of the Condominium Act. Accordingly, as discussed above, in proceeding on the basis that the Condominium Act did not apply to the Lands as a result of the Leases, Steele J. must have been referring to the fact that the Condominium Act did not permit the Tenants to register a condominium in respect of their leasehold interests in the Lands.

[146] The issue in this section is whether, as a result of the amendments contained in the Condominium Act, 1998, the Tenants are now able, as a matter of law, to undertake a freehold residential development project on the Lands. I conclude that they are not able to do so under the Condominium Act, 1998 and that, accordingly, the Condominium Act, 1998 continues to constitute a restriction on the Tenants’ use of the Lands.

[147] The amendments to condominium legislation provided for in the Condominium Act, 1998 permit a tenant to use leased lands for condominium development, but only for the creation of a leasehold condominium, and then only if certain statutory conditions are met. The amendments do not permit a tenant to establish a freehold condominium. A freehold condominium may only be established by a holder of a fee simple, i.e. the freehold interest in lands.

[148] The effect of the Condominium Act, 1998 is therefore to permit a freehold condominium project out of the Landlord’s freehold interest in the Lands but to preclude a freehold condominium project out of the leasehold interests of the Tenants. The Tenants say correctly, therefore, that they are no more entitled to use the Lands for the development of a freehold condominium today than they were in 1990 under the Condominium Act. I agree.

[149] As mentioned, the Landlord argues that the amendments to the Condominium Act, 1998 that give the Tenants the legal ability to create a leasehold condominium out of their interests in the Lands, if not perhaps the practical ability do so, are sufficient to distinguish the present circumstances from those that existed at the time of the arbitration in 1991.

[150] I do not accept this argument for the reason that I think that it improperly equates the potential for development of a freehold condominium with that of a leasehold condominium. There is no evidence that a leasehold condominium project would have the same development potential as a freehold condominium project. Quite apart from the issue of the practicality of a leasehold condominium project on the Lands, such a project would be entirely different from any freehold condominium project on the Lands in a number of respects, including the term and value of any such project.

[151] Moreover, if we return to the business principle governing rent re-set provisions, the notional sale principle mandates a valuation based on the notional sale value of the Landlord’s interest in the Lands. Any such notional sale would be based on the development potential of a freehold condominium on the Lands, not a leasehold condominium. Accordingly, it is the impact of the legislation on the Tenants' legal ability to create a freehold condominium on the Lands that is the relevant touchstone.

[152] Therefore, while the applicable condominium legislation has changed since 1991, it has not changed in any manner that is material for present purposes. In 1991, the Tenants were unable to undertake a condominium development that would have had substantially the same benefit to it as the freehold condominium that the Landlord would have been able to undertake if it had not granted the Leases to the Tenants. The Tenants remain unable to do so today, even if they are able to create a leasehold condominium out of their leasehold estate, a proposition which, as a practical matter, is not clear.

[153] On this basis, I conclude that the Majority Award exhibits an error of law to the extent that the Majority Award based its conclusion regarding valuation on a determination that, under the current legislation, the Tenants are able to develop a freehold residential condominium on the Lands to the same extent as the Landlord. Put another way, I conclude that the Majority Award exhibits an error of law to the extent that it proceeds on the basis that the Condominium Act, 1998 does not constitute a restriction on the Tenants’ use of the Lands.

Are Restrictions on the Tenants' Use of the Lands by Virtue of Land Use Legislation To Be Taken Into Account?

[154] This issue has been addressed above in connection with the Court’s review of the decision in Revenue Properties. I concluded above that Revenue Properties requires that the provisions of the Condominium Act, 1998 be excluded from consideration in the valuation of the Lands to the extent that the Tenants are not able to exploit the development potential of a freehold condominium project on the Lands.

[155] The Majority Award did not, however, address this aspect of Revenue Properties. Instead, the Majority Award focused almost entirely on the issue of the nature of the interest to be valued - freehold or leasehold. Insofar as it addressed the extent to which legal restrictions affecting the use of the lands are to be taken into consideration in the valuation of the Lands, the Majority Award stated only that this was consistent with Musqueam and Revenue Properties and, as noted, was to be taken into consideration pursuant to the definition of “fair market value” by agreement between the parties.

[156] In other words, the Majority Award appears to proceed on the basis that land use legislation affecting the Lands, including in particular the Condominium Act, 1998, is to be taken into consideration in the valuation of the Lands regardless of whether the Tenants are able to take advantage of the development potential afforded by such legislation. This raises two questions which will be addressed in turn: (1) is the Majority Award consistent with the determinations in Musqueam and Revenue Properties? and (2) is the Majority Award correct as a matter of contractual interpretation of the Leases? I will address each issue in turn.

Is the Majority Award Consistent with the Determinations in Musqueam and Revenue Properties?

[157] In my view, for the reasons set out above, Musqueam does not address the issue of whether land use legislation is to be taken into consideration in the valuation of lands regardless of whether a tenant of such lands can benefit from such legislation. The central issue in Musqueam, for which a determination of the conceptual nature of the interest to be valued was a part of the analysis, was the effect on the value of the landlord’s interest of its decision to retain the lands as reserve lands. This did not engage an issue of the application of land use legislation, much less of the disproportionate benefit of such legislation in respect of the lands of the Band. Nor is the Board’s decision to retain the character of the lands in question as reserve lands analogous to land use legislation. There was also no suggestion that the valuation of the freehold interest was to proceed on the basis that the leases in that case constituted an encumbrance on the freehold interest of the Band. Accordingly, the manner in which the existence of the leases was to be taken into consideration in the valuation of the freehold interest of the Band did not arise.

[158] On the other hand, the decision of Steele J. in Revenue Properties dealt with this issue directly. As discussed above, I read Revenue Properties to conclude that the “fair market value” of the Lands must be determined disregarding any land use legislation that restricts the Tenants’ use of the Lands. As Adams J. made express in his concurring reasons, the effect of the decision of Steele J. is that any value associated with the potential development of lands pursuant to land use legislation which, however, precludes such development by a tenant of such lands, ought not be taken into account in the assessment of fair market value without clear language to that effect, language which does not exist in the Leases. As Adams J. stated, the underlying rationale of Revenue Properties on this issue is that it would be unreasonable to assume that rent was intended to be based on a value the Tenants could never exploit due to the very existence of the Leases. On this basis, Revenue Properties held that the provisions of the Condominium Act were to be excluded from consideration in the valuation of the Lands for the reason that the Tenants were not able to exploit the development potential of a freehold condominium project on the Lands under such legislation.

[159] Given the absence of any analysis of the applicable provisions of the Condominium Act, 1998 insofar as they pertain to the Tenants, and any comparison of such provisions with the corresponding regime under the Condominium Act, I think the decision of the Majority Award should be treated as implicitly proceeding on the basis that any restrictions on the Tenants’ ability to benefit from land use legislation should be disregarded in the valuation of the Lands.

[160] The Majority Award is therefore inconsistent with the determination in Revenue Properties insofar as the Majority Award valued the Lands taking into consideration the potential for a freehold residential condominium development on the Lands notwithstanding that, as a matter of law, the Tenants are unable to create a freehold residential condominium project on the Lands under the Condominium Act, 1998. This raises the question of whether the doctrine of issue estoppel applies in respect of the determination of the Divisional Court in Revenue Properties on this issue. This question is addressed below in Part IV.

Is the Majority Award Correct as a Matter of Contractual Interpretation?

[161] It should be noted that, while the reasoning expressed is somewhat different, both the majority of the arbitration panel in Revenue Properties as well as the Majority Award in the present proceeding effectively disagreed with the determination in Revenue Properties regarding the significance of the Condominium Act and the Condominium Act, 1998, respectively, for the purposes of the valuation of the fair market value of the Lands. In each case, in the circumstances in which the Tenants are unable to benefit from the potential of a freehold residential condominium development in accordance with such legislation, the majority of the arbitrators disregarded such restrictions in the valuation of the Lands. Therefore, before proceeding to Part IV, given the preceding determination in these Reasons, I think it is appropriate to consider whether Revenue Properties was correctly decided on the issue of the extent to which restrictions on the Tenants' ability to benefit from land use legislation should be taken into account in the valuation of the Lands.

[162] The answer to this question is a matter of contractual interpretation of the Re-Set Provision, which involves, among other things, an assessment of whether the exclusion of the potential value of any such development available to the Landlord under such legislation is consistent with the business principle of rent re-set provisions. I do not think it is for the following reasons.

[163] The plain language of the Leases, and in particular the Re-Set Provision, is silent on this issue. As the Majority Award notes, there was also no evidence led as to the factual matrix regarding the negotiation and execution of the Leases which informs the interpretation of the Leases on this issue. In my opinion, the only relevant feature of the Re-Set Provision is the manner in which the rent is re-set – as 6% of the fair market value of the Lands. This feature requires that the interpretation of the Leases on this issue should be informed by the business purpose or principle underlying this approach to the re-setting of the rent.

[164] In Musqueam, both Gonthier J. and McLachlin C.J. approved the description of the notional sale principle expressed in the earlier Federal Court of Appeal decision – the notional sale principle reflects the fact that, if the lands were not subject to a long-term lease, the landlord could sell the land at its current land value and reinvest the proceeds at market rates of interest. Any such notional sale must, by definition, proceed on the basis that the existence of the long-term lease is to be disregarded. Otherwise, the value to be derived would be the value of the landlord’s reversion, not the fair market value of the land, the current market value of the land, or the exchange value of the land, as variously referred to in Revenue Properties, Musqueam and Bullock’s.

[165] If the issue is expressed without regard to land use legislation, the application of this principle is straightforward. The fair market value of land subject to a lease for purposes of rent re-set arrangements, i.e. the value of the capital asset, is the value of the land without regard to the existence of a lease. Musqueam is an example of such a situation, despite the complication of the additional reserve land issue.

[166] Given that the existence of any long-term lease is to be disregarded in approaching the notional sale, I see no basis for doing otherwise when considering the impact of applicable land use legislation on the market value of a property. In addition to being inconsistent, the fair market value of lands is determined by reference to its highest and best use. In the case of lands upon which a freehold condominium project can be developed, the highest and best use is such a project.

[167] Moreover, Revenue Properties did not articulate any principle that would support a contrary view. In the present circumstances, the Tenants have received what they bargained for – the right for the term of the Leases to develop and operate the Lands to the extent permitted by applicable legislation from time to time. While they may not have expected that the Landlord’s interest would increase due to legislation of which the Landlord, but not the Tenants, could take advantage, this result could arise under other circumstances as well. More generally, in order to find that the Tenants’ use of the lands, and specifically the Tenants’ ability to take the benefit of changes to land use legislation, should be a factor for valuation purposes, there would need to be some express link in the Leases between any increase in land values and the Tenants’ right to take the benefit of any such increase. There is no such link in the provisions of the Leases.

[168] I also do not see any basis in the notional sale principle for the presumption of Adams J. that leases should be interpreted to exclude consideration of a potential development not available to a tenant in the absence of express language to the contrary. Moreover, as mentioned above, the reference of Adams J. to the principle in Basingstoke and Deane suggests that he may have based such presumption on a contractual context which differs from the concept in the Re-Set Provision in the Leases.

[169] I would also note that this implication of the Revenue Properties decision is inconsistent with the fourth principle or conclusion of Steele J. in that decision – that the owner of the Lands obtains the benefit of and suffers the detriment of any legislation relating to and affecting the Lands. As discussed, the Condominium Act did not prevent the Landlord from registering a freehold condominium as a legal matter. While the existence of the Leases may have made it impossible, from a practical perspective, for the Landlord to undertake such a condominium project prior to expiration of the Leases, there is no basis for taking such practical consideration into account in valuing the lands. With respect to this consideration, it is not the Condominium Act that “means the lands cannot be used for condominium purposes”, but rather practical considerations pertaining to the existence of another party with an interest in the lands for a period of time. In any event, as set out above, I do not think that was what Steele J. intended when he stated that the Condominium Act specifically provided that it was not applicable to lands subject to leases.

[170] Accordingly, if it were open to the Court to determine this issue de novo, I would conclude that, in accordance with the notional sale principle, the fact that the Tenants cannot create a freehold residential condominium on the Lands is not a factor to be taken into consideration of the fair market value of the Lands.

Conclusion on Issue #2

[171] To summarize the foregoing, while I think that the decision of the Majority Award is supportable as a matter of the contractual interpretation of the Re-Set Provision, I conclude that the decision of the Majority Award is problematic in two respects. First, the Majority Award erred as a matter of law to the extent that it based its conclusion regarding valuation on a determination that, under the Condominium Act, 1998, the Tenants are able to develop a freehold residential condominium on the Lands to the same extent as the Landlord. Second, and more significantly, the Majority Award is not consistent with the decision in Revenue Properties insofar as the majority arbitrators failed to take into account the determination in that decision that the freehold interest of the Landlord was to be valued excluding any development potential under land use legislation of which the Tenants were unable to take advantage, including in particular the potential for a freehold residential condominium project on the Lands under the Condominium Act, 1998.

Part IV – The Operation of Issue Estoppel in the Present Circumstances

[172] Given the earlier Revenue Properties decision and the foregoing determinations, the question arises whether the doctrine of issue estoppel should be applicable to either or both of the principal determinations in the Majority Award that are the subject of these appeals. I propose to address the issues after first setting out the relevant legal framework respecting the operation of issue estoppel in the present circumstances.

The Legal framework Regarding the Operation of Issue Estoppel in the Circumstances of This Proceeding

[173] The three conditions for issue estoppel were set out in Angle v. Canada (Minister of National Revenue – M.N.R.), 1974 168 (SCC), [1975] 2 S.C.R. 248 at p. 254 per Dickson J., being: (1) the same question has been decided; (2) the decision that is said to create the estoppel was final; and (3) the parties to the judicial decision are the same parties to the proceedings in which the estoppel is raised, or are their privies.

[174] Subject to one issue addressed below, I think it is clear that these conditions have been satisfied in respect of the determinations of the Divisional Court in Revenue Properties. The dispute involved an interpretation of the Re-Set Provision of the Leases. The Divisional Court determination was a final determination. The parties to the present proceeding are the successors in interest to the parties to the litigation in Revenue Properties.

[175] The Court of Appeal has, however, identified a number of circumstances in which courts have exercised a discretion to withhold application of issue estoppel: see, Minott at paras. 50-51, in which Laskin J.A. summarized the law as follows:

Issue estoppel is a rule of public policy and, as a rule of public policy, it seeks to balance the public interest in the finality of litigation with the private interest in achieving justice between litigants. Sometimes these two interests will be in conflict, or at least there will be tension between them. Judicial discretion is required to achieve practical justice without undermining the principles on which issue estoppel is founded. Issue estoppel should be applied flexibly where an unyielding application of it would be unfair to a party who is precluded from relitigating an issue.

That the courts have always exercised this discretion is apparent from the authorities. For example, courts have refused to apply issue estoppel in “special circumstances”, which include a change in the law or the availability of further relevant material. If the decision of a court on a point of law in an earlier proceeding is shown to be wrong by a later judicial decision, issue estoppel will not prevent relitigating that issue in subsequent proceedings. It would be unfair to do otherwise. In Arnold v. National Westminster Bank plc, [1991] 3 All E.R. 41 at p. 50 (H.L.), Lord Keith wrote:

. . . there may be an exception to issue estoppel in the special circumstance that there has become available to a party further material relevant to the correct determination of a point involved in the earlier proceedings, whether or not that point was specifically raised and decided, being material which could not by reasonable diligence have been adduced in those proceedings. One of the purposes of estoppel being to work justice between the parties, it is open to courts to recognise that in special circumstances inflexible application of it may have the opposite result . . .

The Operation of Issue Estoppel in the Circumstances of This Proceeding

[176] Accordingly, the issue in this section is whether there are “special circumstances” of the nature described in Minott that would justify the exercise of the Court’s discretion to withhold the operation of issue estoppel in the present circumstances in respect of either or both of the two principal determinations in Revenue Properties.

[177] The Majority Award addressed the possible application of the doctrine of issue estoppel in the context of the first issue and, specifically, in the context of a possible conflict between Musqueam and Revenue Properties regarding the interest in the “demised lands” to be valued. It concluded that, if there were a conflict between these decisions, Musqueam is binding on the parties with respect to the interest to be valued. On this basis, the Majority Award concluded that there was a basis for rejecting the issue estoppel claim of the Tenants, since in the view of the Majority Award, Musqueam changed the law by establishing that, absent contractual provisions to the contrary, rent re-set provisions are to be interpreted to provide that the freehold interest is the interest to be valued.

[178] However, there is no need to address the application of issue estoppel in respect of this issue since the Majority Award was correctly decided as a matter of contractual interpretation and was in accordance with the determination in Revenue Properties insofar as issue estoppel is applicable. There is therefore no need to address the exercise of the Court's discretion to withhold the application of issue estoppel on the grounds of a change in law in Musqueam.

[179] On the other hand, the application of issue estoppel is directly raised in respect of the second principal issue on these appeals – the extent to which the valuation of the Lands should take into consideration the potential for a freehold residential condominium project on the Lands notwithstanding the inability of the Tenants to benefit from such a development. There are two possible grounds presented in this case for the exclusion of the operation of issue estoppel.

[180] The Landlord argues that the statutory regime under the Condominium Act, 1998 is sufficiently different from the regime under the Condominium Act to exclude the operation of issue estoppel on the basis that the Majority Award addressed a different question from that determined in Revenue Properties. In addition, I have considered the possibility that the Court should exercise its discretion to withhold the application of issue estoppel to the extent it concludes that the earlier arbitration and the Majority Award were correctly decided, and Revenue Properties was wrongly decided, on the issue of whether, given the legal effect of the Condominium Act, the potential for a freehold residential condominium project should be excluded from consideration in the valuation of the Lands in view of the inability of the Tenants to undertake such a project under such legislation. I will address each possibility in turn.

Is the Statutory Regime Under the Condominium Act, 1998 Sufficiently Different to Exclude the Application of Issue Estoppel?

[181] The Landlord argues that the amendments to the applicable condominium legislation contained in the Condominium Act, 1998 are sufficient to exclude the operation of issue estoppel in the present proceeding. It argues that issue estoppel should therefore not apply because the first requirement of issue estoppel – the same question having been decided in Revenue Properties – would not have been satisfied.

[182] I do not agree. This is a legal issue that is determined as a necessary implication of the conclusion in the previous section regarding the legal effect of the amendments in the Condominium Act, 1998 on the Tenants' ability to create a freehold residential condominium project on the Lands.

[183] I accept that the effect of the amendments contained in the Condominium Act, 1998 is to permit a tenant to create a leasehold condominium project out of its leasehold estate. However, the valuation issue in the present context is not the potential for a leasehold residential condominium project but rather the potential for a freehold residential condominium project. It is the latter which represents the difference in the values attributed to the Lands by the parties.

[184] As discussed above, the legal effect of Condominium Act, 1998 is no different from the legal effect of the Condominium Act which was before the Divisional Court. The Tenants are no more able to create a freehold residential condominium project on the Lands under the present statute than they were in 1990 under the Condominium Act.

[185] Accordingly, since the legal effect of the provisions of the Condominium Act, 1998 is the same as the legal effect of the prior Condominium Act on the specific issue of the ability of the Tenants to create a freehold residential condominium project, there has been no change of law that would justify the exercise of the Court's discretion in the manner contemplated in Minott. There are therefore no “special circumstances” that could invoke the exercise of the Court's discretion to withhold issue estoppel based on the amendments to the Condominium Act since 1990 contained in the Condominium Act, 1998.

Exercise of the Court's Discretion Based on the Court's View of the Merits of the Determination in Revenue Properties

[186] As mentioned, the Court is of the view that the earlier arbitration in 1991 and the Majority Award were correctly decided, and Revenue Properties was wrongly decided, on the issue of whether the development potential under land use legislation – in particular, under the Condominium Act and the Condominium Act, 1998 – should be taken into consideration in the valuation of the Lands to the extent that the Tenants are unable to benefit from such development potential. If the issue were open, the Court would find that, given the plain meaning of the Re-Set Provision as informed by the notional sale principle, the value of any such development opportunity in respect of the Lands available to the Landlord should be taken into consideration in the valuation of the Landlord’s interest in the Lands regardless of whether the Tenants are able to take advantage of any such opportunity.

[187] This raises the question of whether the Court has the discretion in the present circumstances to withhold application of issue estoppel, thereby upholding the decision of the Majority Award.

[188] I have concluded that, notwithstanding the reservations expressed above regarding the determination in Revenue Properties, the Court’s view respecting the merits of that determination does not constitute “special circumstances” of the nature described in Minott that would justify the exercise of the Court’s discretion to withhold the application of issue estoppel in the present circumstances.

[189] The decision of the Divisional Court in Revenue Properties resulted in a final order. The Landlord does not argue that any further relevant material has become available since the decision in Revenue Properties. The decision has governed the relationship between the parties for 20 years. Consistent with that understanding, the arbitration panel in the present proceeding proceeded on the basis that Revenue Properties was binding on the parties except to the extent that Musqueam changed the law. As discussed above, however, I do not think that Musqueam changed the law in any respect that is material to the issue in this Part IV. While Musqueam may have reinforced the notional sale principle as the underlying principle of rent re-set provisions, that principle was before the Divisional Court in Revenue Properties. Even though the decision of Steele J. reflects the fact that the parties chose to frame the issues in that proceeding in a somewhat different manner, the reasons of Adams J. cited above indicate that the specific issue was in the mind of at least one member of the panel and was clearly expressed in his concurring reasons. Moreover, the approach to valuation of the majority of the arbitration panel in 1991 indicates that the issue was also before the panel at that time.

[190] In these circumstances, I see no basis upon which the Court can exercise its discretion to withhold the application of issue estoppel on this issue.

Conclusion Regarding Issue #2 In View of the Application of Issue Estoppel

[191] To summarize, the Court has concluded that Revenue Properties held that, if the Tenants are legally restricted from benefitting from the development potential of provisions in land use legislation affecting the Lands, such development potential should be disregarded in appraising the fair market value of the Lands. On this basis, Revenue Properties would require that the valuation of the Lands be conducted excluding the potential for a freehold residential condominium project on the Lands by virtue of the restrictions in the Condominium Act, 1998 on the Tenants’ use of the Lands for such a project.

[192] The Majority Award is inconsistent with Revenue Properties on this issue. There is, however, no basis for distinguishing the statutory regime under the Condominium Act, 1998 from the regime under the Condominium Act for this purpose. There are also no "special circumstances" that would justify the exercise of the Court's discretion to apply issue estoppel in respect of the determination in Revenue Properties based on either the change to the statutory regime or the Court’s view of the merits of the determination in Revenue Properties on this issue.

[193] In these circumstances, I conclude that the Majority Award erred as a matter of law in taking into consideration the potential value of a freehold residential condominium project on the Lands in the valuation of the Landlord's freehold interest in the Lands.

Conclusion In Regard to These Appeals

[194] Based on the foregoing, the Majority Award is set aside based on the error of law addressed in the preceding section and a new arbitration is ordered.

PART V – ISSUES PERTAINING TO A RE-HEARING OF THE ARBITRATION

[195] Given the foregoing, there are several consequential issues to be addressed regarding the proper disposition of this arbitration. The Tenants have raised two matters in this regard. First, the Tenants seek an order declaring that the fair market value of the Lands should be determined on the basis that neither freehold condominium use nor leasehold condominium use is a permitted use of the Lands by virtue of the Condominium Act, 1998, given the principle in Revenue Properties. They also seek an order directing a new arbitration before a new arbitration tribunal. I will address each issue in turn.

Significance of the Condominium Act, 1998

[196] I think it necessarily follows from the evidence on this appeal and the determination herein that the Tenants are entitled to an order that freehold condominium use is not a permitted use of the Lands by virtue of the Condominium Act, 1998. However, I decline to make a similar order respecting leasehold condominium use for the following reasons.

[197] First, insofar as this is a factual determination – i.e. that, as a practical matter, leasehold condominiums are not marketable given the constraints that would define the nature of title to any such leasehold condominiums, the Majority Award made no determination on the issue. Further, the issue was not fully argued before the Court on the appeal as it was not central to the issues in these appeals.

[198] Second, insofar as the ability of the Tenants to satisfy the requirements of the Condominium Act, 1998 is a determination of mixed fact and law – in particular, the requirement of a formula for the adjustment of rent – the issue was also not fully argued on this appeal. More importantly, I think the proper body to make this determination is the arbitration panel on the re-hearing, as this issue may be significant for a determination of the highest and best use of the Lands. To the extent it may be necessary to address this issue, I think it is preferable to do so on any appeal of the arbitration panel’s decision, given that any appeal would be based on the most complete record possible and may include additional evidence if permitted by the arbitration panel.

Should a New Arbitration Panel be Ordered?

[199] The second issue regarding the disposition of this arbitration raised by the Tenants is whether a new arbitration panel is required to avoid any suspicion or appearance of an injustice. The Tenants argue that an objective observer would conclude that the first arbitration panel, in particular the majority of the arbitrators, could not reconsider the evidence in this proceeding with a completely open mind. They submit that the members of the panel have expressed settled views related to the evidence of certain witnesses and regarding their credibility. They also suggest that the Majority Award expressed a view on the fair market value of the Lands that would prevent the arbitration panel from approaching this issue again with an open mind.

[200] It should be noted, as a preliminary matter, that the Tenants have not appealed under any of the grounds contemplated by s. 46 of the Arbitration Act, 1991. In particular, they have not alleged a denial of natural justice in the conduct of the arbitration. While they suggest that the Court has an ancillary power under s. 46(7) in an appeal under s. 45, I know of no authority for such a proposition. I decline to follow this approach.

[201] Accordingly, the Court’s authority to require a new arbitration on the grounds of avoidance of a perception of a conflict of interest must be based in its common law authority: see United Nurses of Alberta (UNA), Local No. 34 v. Didsbury General & Auxiliary Hospital and Nursing Home District #33 (1994), 1994 8900 (AB KB), 150 A.R. 81 (Alta. Q.B.) at paras. 12 and 21, [1994] A.J. No. 24.

[202] The Tenants make a number of arguments, all directed toward the conclusion that an objective observer “could perceive” that the first arbitration tribunal cannot reconsider the evidence in this proceeding with a completely open mind. I am not persuaded, however, that it is necessary or appropriate to order that the re-hearing be heard by a new tribunal.

[203] In addressing this question, it is important to clarify the nature of the evidence that was before the arbitration panel. As I understand the evidence, expert appraisal reports were prepared for each of the Lands by the Landlord and the applicable Tenant. Such appraisal reports were based on alternative bases: (1) a valuation of the freehold interest; and (2) a valuation of the leasehold interest, which in the case of the Landlord’s expert, took the form of a valuation of the “leased fee” interest of the Landlord and, in the case of the Tenants’ experts, took the form of a valuation of the leasehold interest as described above, being the development interest of the Tenants in respect of the Lands for the remaining term of the Leases. Each of the appraisers determined the highest and best use of the Lands under each such scenario. Broadly, each appraiser concluded that the highest and best use of the Lands when valued on a freehold basis was a mixed-use, commercial retail and freehold residential condominium development, and on a leasehold basis was a two-storey, high-end retail development.

[204] The Majority Award addressed the appraisal reports and related evidence solely in respect of the freehold valuation of the Lands, i.e. in respect of a mixed-use commercial retail and freehold residential condominium development. Given the determination of the Majority Award that the interest to be valued was the freehold interest, it was not necessary to address the evidence in the expert reports respecting the valuation of the leasehold interests of the Tenants and they did not do so.

[205] I turn then to the submissions of the Tenants in support of a re-hearing of the arbitration by a new panel of arbitrators.

[206] First, I do not accept that the evidence in the expert reports is flawed or inadmissible by virtue of this Court’s determination that the Lands must be appraised taking into consideration any legal land use constraints pertaining to the Tenants’ use of the Lands. The expert reports were prepared on alternative bases to allow the Majority Award to address the approach reflective of the determination to be made by the majority of the arbitration panel. The Court has concluded that the Majority Award reflects an error of law. However, that error of law does not taint or otherwise go to the integrity or reliability of the reports. Whether or not the reports should be excluded is a matter for the arbitration panel to be made against the standard of whether the expert reports address the valuation of the Lands on the basis contemplated by these Reasons.

[207] Second, I do not accept that, because the Majority Award reaches a conclusion of fair market value on the basis of a freehold interest, the quantum of that award will somehow influence the final result in the re-hearing. The re-hearing must proceed on a very different basis with respect to the valuation of such interest to take into account the legal restrictions on the Tenants’ use of the Lands. The award of the panel on the re-hearing will have to address the evidence respecting the approach to valuation set out in these Reasons.

[208] Third, while the Majority Award reached conclusions regarding the quality of the evidence of the parties in several respects – in particular, the significance to be attached to the absence of renderings or other three-dimensional depictions of their designs, and the costing estimates – these conclusions pertain to the mixed-use developments that were considered by the Majority Award. I have no basis in the evidence before me for concluding that such determinations would carry over to the evidence on the re-hearing which will address a different development configuration.

[209] Moreover, the arbitration panel will be at liberty to determine the extent to which it is necessary or appropriate to receive new or revised appraisal reports, which, if ordered, may render moot the issues raised by the Tenants in respect of the evidence that was considered in the Majority Award. Further, the parties may themselves choose to use different appraisers. It is therefore premature to suggest that an objective observer would perceive a real possibility of an injustice occurring on the re-hearing.

[210] Fourth, I reject the suggestion that there is a perceived injustice, or probability of injustice, evidenced by the questions put by one of the members of the arbitration panel. This is really a disguised argument of a denial of natural justice, which is not before the Court on this appeal. Further, it is entirely premature, given that a re-hearing must be conducted. The Tenants must await that decision before bringing any such appeal. In addition, it is fundamental that the content of questions posed by an adjudicator, by itself, cannot be the basis for a finding of a denial of natural justice. Any such claim must be rooted in the decision actually made by the trier of fact. The questions of a trier of fact are only probative in respect of a claim of bias if the decision itself is unreasonable.

[211] I would add two additional considerations.

[212] First, the arbitration panel has extensive knowledge of all facets of this matter. There is good reason to retain the benefit of such knowledge. It will ensure an expeditious and informed determination of the arbitration. There must therefore be a real concern for an inability to conduct an impartial arbitration before the Court will consider ordering that a new arbitration panel be convened. The Tenants can establish no more than a possibility. That is insufficient in the present circumstances.

[213] Second, as a related matter and as alluded to above, the Tenants retain the right to raise all of these issues after the determination of the arbitration panel on the re-hearing. It is premature to raise the Tenants’ concerns at this stage, given the absence of any determination under s. 46 of the Arbitration Act, 1991 of a denial of natural justice. Conceptually, I consider the present circumstances to be analogous to a mid-trial, or a mid-arbitration, motion based on similar claims of a denial of natural justice. For the reasons addressed above, I consider that it is preferable to have the arbitration completed in order that all issues of concern to any of the parties can be raised by way of appeal.

[214] Based on the foregoing, I conclude that the proper disposition of this matter is to remit the determination of the fair market value of the Lands to the same arbitration panel for a re-hearing in accordance with these Reasons.

Costs

[215] If the parties are unable to agree on costs, it is agreed that they will schedule a 9:30 a.m. conference with the Court to address the timing and nature of any costs submissions.

Wilton-Siegel J.

Date: December 23, 2014