Secured lending for businesses on First Nation reserves

Lending to businesses on First Nation reserves involves unique legal and practical considerations, particularly in relation to secured financing. This article provides an overview of the types of security that may be available in such transactions, with a focus on the implications of the Indian Act (the “Act”) and how it shapes both financing structures and enforcement rights.

Throughout this article, the terms “Indian” and “band” are used in their legal sense as defined under the Act. References to “Indian” are limited to status Indians and do not include non-status Indians, Métis, or Inuit. This article does not address security considerations for loans made to those groups.

Impact of the exemption provisions

These provisions were originally designed to protect Indigenous peoples from dispossession and exploitation, but in practice they also limit access to conventional financing tools available off-reserve.

Businesses in off-reserve loan transactions have the option to leverage their assets as collateral to secure loans from lenders. Sections 29 and 89(1) of the Act limit the ability for a business located on a reserve to obtain financing. In particular, reserve lands are exempted from seizure and the real and personal property of an “Indian or band” on reserve lands are not subject to charge, mortgage, or seizure, among other restrictions.

As a result, businesses on reserve have difficulties finding suitable collateral and lenders are hesitant to give unsecured or undercollateralized loans. This limits the access to capital for on-reserve First Nation or Indian-owned businesses, impeding long-term economic development.

Security options for businesses

The current options for securing financing for on reserve businesses are certificates of possession, leasehold interests, business personal property, off-reserve assets, and loan guarantees.^[1]

A. Real and personal property on reserve land

i. Real property regimes

Designated lands are reserve lands that have been approved by the community and the federal government for specific uses, such as commercial leasing. The designation process under section 38(2) of the Indian Act requires community consent and approval by the Governor in Council.

The legal regimes under the Act and the Framework Agreement on First Nation Land Management Act (the “Framework Agreement”) grant limited abilities for businesses to use real property to secure loans. While neither regime allows First Nations to hold legal title to the land, they do allow them to use certificates of possession and leasehold interests as collateral.

Under s. 20(1) of the Act, individual band members can request lawful possession of reserve land from the Minister of Indigenous Services and the First Nations Band Council. If an allotment of land is granted, it is evidenced through certificates of possession to signify that the land remains in lawful possession of the band member for life and that it can be transferred through their estate. Although allotted land may be used as collateral, it can only be transferred to, or enforced by, an individual with legal status under the Act or a Band. As a result, this form of collateral is better suited for First Nation creditors.

Provisions of the Act and the Framework Agreement share similarities in allowing for leasehold interests in designated reserve land to be used as collateral. Under the Act, s. 89(1.1) specifies that leases in designated lands are not subject to the s. 89(1) exemptions, which allows them to be used for securing loans. Under the Framework Agreement, First Nations were granted the power to free themselves of the land management provisions of the Act and establish their own regimes using land codes. While title to the reserve lands remains with the Crown, the Framework Agreement also allows First Nations to grant leasehold interests to third parties as collateral. Importantly, these interests differ as they can be created with third-party creditors without obtaining approval from the federal government.^[2]

ii. Exceptions for separate legal entities

The question of whether a lender must obtain band permission to enforce against non-exempt property on reserve has been treated inconsistently by courts and may depend on band policies or practices. It is therefore prudent to secure band approval in advance, where possible.

The form of business structure also dictates the security available to prospective lenders.

As previously mentioned, s. 89(1) of the Act prevents “Indians and bands” from using on-reserve personal property as collateral. This creates difficulty for businesses without legal distinction from their Indian or band owners (i.e., sole proprietorships) as the business’ personal property remains subject s. 89(1).

One way around s. 89(1) is available through business structures that create separate legal entities that do not meet the definition of Indian or band. Various provincial courts have found that personal property owned by corporations and limited partnerships where the general partner is a corporation on reserve lands is not subject to s. 89(1).

While this form of personal property remains free from the s. 89(1) exemption, prospective lenders should be aware of the intricacies of enforcement and access to the reserve. In certain circumstances, the seizure of personal property situated on a reserve not captured by s. 89(1) has been found not to be trespassing under the Act.^[3] Further, it is “questionable” whether written permission from a band is required, especially for debtors who are not captured by the exemption provision (i.e., corporations).^[4] Despite this, it remains best practice for lenders to seek written permission from a band prior to entering a reserve (i.e., in the form of Band Council Resolutions and Peaceful Access Letters). Such permissions should be sought at the time of entering into the loan and not when seeking to enforce.

iii. Waiver of rights

Businesses may also have the option to waive the seizure protection afforded to their assets under s. 89(1).

This waiver is possible as it is not expressly prohibited by the Act, and courts have acknowledged that credit regimes apply universally to First Nation property without such protection.^[5] Qualifying businesses that wish to make a waiver in order to use personal property as collateral are required to act voluntarily and be fully informed of the rights being waived. However, it is worth noting that there is limited case law on this topic, and courts have only allowed such a waiver in narrow circumstances (i.e., business property).^[6]

B. Off-reserve collateral

Indian moneys include funds held in trust by the Crown for the use and benefit of bands or status Indians, often derived from land use agreements, natural resource royalties, or other transactions involving reserve lands.

Business assets situated off reserve lands are not subject to the exemption provisions, allowing for lenders and borrowers to enter into secured loans without influence from the Act. However, it is important to be aware of instances where off-reserve property is deemed to be “situated on a reserve” and therefor still subject to the s. 89(1) exemption.

When dealing with tangible personal property, the lender will need to determine its paramount location. The pattern of use and safekeeping of the property will be used to determine whether the paramount location of the property is “situated on a reserve.” For example, moveable property (i.e., a vehicle) that travels on reserve roads during the day, yet remains off reserve when not in use, would not be subject to s. 89(1).^[7]

While the paramount location test cannot be used for intangible property, courts have applied a more “concrete common law interpretation.” As a result, the phrase “situated on a reserve” is limited to the ordinary and common sense meaning without including notional concepts. Therefore, in situations where the location is objectively easy to determine, such as a bank account, the location of the intangible asset would be the debtor’s location. 

The circumstances that led to acquiring personal property is also a relevant consideration. Under s. 90(1) of the Act, personal property that was “purchased by Her Majesty with Indian moneys or moneys appropriated by Parliament for the use and benefit of Indians or bands” or that was given to “Indians or to a band under a treaty or agreement between a band and Her Majesty” shall always be deemed to be situated on a reserve. As a result, such personal property cannot be used as collateral to secure loans.

C. Conditional sales

A conditional sales agreement, according to s. 89(2) of the Act, allows for a more asset-based form of secured lending. A conditional sale occurs when a seller transfers possession of a good to a purchaser while retaining title until the purchaser has met its payment obligations.

Under s. 89(2) of the Act, First Nations can purchase goods “on credit” from non-First Nation sellers. In the event of a default, the seller similarly maintains the right to repossess the purchased goods given that there was no title transfer. Unlike other personal property, the location of the goods is of no concern as the seller can exercise their rights even if the goods are situated on reserve. Despite this, it remains best practice for lenders to seek written permission from a band prior to entering a reserve (i.e., in the form of Band Council Resolutions and Peaceful Access Letters). Such permissions should be sought at the time of entering into the conditional sale and not when seeking to enforce.

This option is helpful for businesses seeking to acquire necessary equipment (i.e., a tractor or trailer) and make gradual loan repayments to the seller, rather than resorting to using financial loans to make the purchase outright. For non-First Nation sellers, the goods become enforceable security interests in personal property situated on reserve.

D. Loan guarantees

In addition to formal security, lenders may consider including commercial arbitration or alternative dispute resolution mechanisms in their agreements to provide clarity and enforceability in the event of disputes involving on-reserve transactions.

Aside from the options discussed above, on-reserve businesses can use loan guarantees to accommodate for their lack of personal collateral. Possible guarantors include personal guarantees from the shareholders, the band, non-First Nation individuals, or in certain instances, the federal and provincial governments and their respective agencies.

Certain provincial governments and the federal government have established various funds and loan guarantee programs that provide security in defined circumstances. Many initiatives center around the housing industry, such as Ministerial Loan Guarantees for First Nation bands that require loans to construct, renovate, and acquire residential housing on reserve lands. A recent initiative, the Canada Indigenous Loan Guarantee Corporation, was announced in Budget 2024 and provides loan guarantees to Indigenous groups or their wholly owned subsidiaries. However, eligibility is limited to those in the natural resource and energy sectors. Alberta also has a loan guarantee program under the Alberta Indigenous Opportunities Corporation which offers loan guarantees to Indigenous Nations and groups with commercially viable projects in certain sectors.

Conclusion

This article offers a high-level overview of the exemption provisions under the Act and outlines various security options available in the context of on-reserve lending. Given the complexity of this area, lenders are encouraged to seek legal advice tailored to the specific circumstances of the transaction.