Fair Market Value-What Does It Mean
On the planet of real estate, it is typical to use reasonable market value (FMV) as a way of explaining the worth of realty or rents payable. However, perhaps rarely considered is the problem that the term FMV can indicate different things to different people. For some, FMV might be the price that somebody would want to spend for the land under its present use. For others, FMV might be the price that somebody would want to pay for that same land under its greatest and best use, such as for redevelopment functions. Alternatively, for certain special properties, FMV may have other meanings, such as replacement worth. For example, if land is to be offered to a neighbour as part of a land assembly which neighbour might want to pay a premium to get the land, is that premium then part of the determination of the FMV and should that premium be determined with a threat premium or since the date where the development worth is secured?
This all asks the question-which method is proper?
By default, an appraiser would look to the Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP). Under CUSPAP, FMV suggests: "the most probable rate, as of a defined date, in cash, or in terms equivalent to cash, or in other precisely exposed terms, for which the defined residential or commercial property rights need to offer after affordable direct exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and the seller each acting wisely, knowledgeably, and for self-interest, and presuming that neither is under excessive duress."1
To put it simply, an appraisal of FMV should, as a beginning point, be based upon the assumption of highest and best use of the residential or commercial property. From this starting point, the appraisal would then consider the time and threat that supports the entitlements process needed to accomplish the greatest and best use (including that it might not be accomplished). This is frequently done in combination with a planner who will assess the website in the context of provincial policy and regional official plans.
While the CUSPAP definition appears clear enough, it is not the universal approach as was explained in the recent Ontario Court of Appeal (ONCA) case of 1785192 Ontario Inc. v. Ontario H Limited Partnership (1785192 Ontario).2
1785192 Ontario Inc. and 1043303 Ontario Ltd. (jointly described as the Landlord) were the property owner corporations of 2 commercial residential or commercial properties in Whitby, Ontario, which were leased to Ontario H Limited Partnership (the Tenant). The leases each contained a choice for the Tenant to acquire the residential or commercial properties from the Landlord and consisted of a mechanism for setting the price at which the Landlord would be needed to offer. The provision mentioned that the purchase price would be a "purchase cost equivalent to the average of the appraised reasonable market worth of the Leased Premises as identified by two appraisers, one picked by the Landlord and one chosen by the Tenant."
The Tenant eventually worked out both choices to acquire and the parties engaged appraisers as needed. The Landlord got an appraisal from Colliers International Group Inc., valuing the residential or commercial properties at a collective $31,200,000 based on a highest and best use assumption, while the Tenant obtained an appraisal from Equitable Value Inc., valuing the residential or commercial properties at a cumulative $11,746,000 based on a current zoning presumption. While the parties initially contested each other's appraisals, the Landlord ultimately accepted the Tenant's appraisal, setting the purchase rate at the midpoint of the 2. However, the Tenant continued to dispute the Landlord's appraisal, electrical wiring just $11,746,000 to the Landlord's lawyer on closing, resulting in the Landlord refusing to close on the basis that the purchase cost had actually not been paid.
At trial, the Tenant argued that the Landlord's appraisal was overpriced as it was postulated on speculative and incorrect assumptions about how the residential or commercial property could be developed if rezoned. However, the application judge, relying on the CUSPAP requirements, found that the leases set out a mechanism that was implied to take into consideration that each celebration might seek an appraisal using sensible assumptions that were most beneficial to that celebration. As such, each party was compliant with the FMV mechanism set out in the leases and each party had a legitimate appraisal, meaning that the purchase rate for the residential or commercial properties was the midpoint of the 2 appraisals and the Landlord had rightfully refused to close on the deal. On appeal, the ONCA agreed with the application judge finding that what constitutes a legitimate appraisal is a concern of truth and absent a palpable and overriding error, there was no basis on which the ONCA might set that discovering aside.
Takeaways
When dealing with a determination of FMV, realty professionals must be deliberate in their preparing. The definition of FMV and the system utilized for determining the FMV must be clear. If the objective is for FMV to show the "as is" use of the residential or commercial property and the "where is" state of it, it should be drafted as such. If the intent is for FMV to show the highest and finest use of the residential or commercial property, then the CUSPAP definition should be used, maybe with any special modification suitable to the specific deal. In addition to a clear meaning, it would be prudent for practitioners to include a conflict resolution system to determine FMV so as to a clean and efficient procedure to address a circumstance where the FMV definition stops working to provide a clear response and appraisals are vastly various. Taking these actions would allow the celebrations to prevent a stopped working transaction and possibly pricey litigation as was the case in 1785192 Ontario.
1 Appraisal Institute of Canada, Canadian Uniform Standards of Professional Appraisal Practice (Ottawa: AIC, 2024) online: chrome-extension:// efaidnbmnnnibpcajpcglclefindmkaj/https:// www.aicanada.ca/wp-content/uploads/CUSPAP-2024.pdf
2 1785192 Ontario Inc. v. Ontario H Limited Partnership, 2024 ONCA 775.
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