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Fair Market Value-What does it Mean?

On the planet of real estate, it is common to utilize reasonable market price (FMV) as a method of explaining the value of realty or leas payable. However, maybe seldom thought about is the problem that the term FMV can suggest various things to various people. For some, FMV may be the price that someone would be willing to spend for the land under its present usage. For others, FMV may be the rate that somebody would want to pay for that exact same land under its highest and best use, such as for redevelopment functions. Alternatively, for particular unique possessions, FMV might have other meanings, such as replacement worth. For example, if land is to be offered to a neighbour as part of a land assembly and that neighbour might be prepared to pay a premium to get the land, is that premium then part of the decision of the FMV and should that premium be determined with a threat premium or since the date where the development value is protected?

This all pleads the question-which approach is right?

By default, an appraiser would look to the Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP). Under CUSPAP, FMV means: “the most possible cost, since a defined date, in cash, or in terms comparable to cash, or in other precisely revealed terms, for which the defined residential or commercial property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a reasonable sale, with the buyer and the seller each acting wisely, knowledgeably, and for self-interest, and presuming that neither is under excessive pressure.”1

To put it simply, an appraisal of FMV should, as a starting point, be based upon the presumption of highest and best use of the residential or commercial property. From this starting point, the appraisal would then take into account the time and risk that accompanies the entitlements process required to attain the greatest and finest usage (consisting of that it may not be accomplished). This is frequently done in conjunction with a planner who will assess the website in the context of provincial policy and local main plans.

While the CUSPAP meaning seems clear enough, it is not the universal technique as was made clear in the current 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 two business residential or commercial properties in Whitby, Ontario, which were leased to Ontario H Limited Partnership (the Tenant). The leases each consisted of a choice for the Tenant to purchase the residential or commercial properties from the Landlord and included a system for setting the price at which the Landlord would be required to sell. The arrangement mentioned that the purchase price would be a “purchase cost equal to the average of the evaluated fair market price of the Leased Premises as figured out by 2 appraisers, one picked by the Landlord and one selected by the Tenant.”

The Tenant ultimately exercised both alternatives to purchase and the parties engaged appraisers as required. The Landlord obtained an appraisal from Colliers International Group Inc., valuing the residential or commercial properties at a cumulative $31,200,000 based on a highest and finest use assumption, while the Tenant acquired an appraisal from Equitable Value Inc., valuing the residential or commercial properties at a cumulative $11,746,000 based upon a current zoning assumption. While the parties initially contested each other’s appraisals, the Landlord ultimately accepted the Tenant’s appraisal, setting the purchase cost at the midpoint of the two. However, the Tenant continued to dispute the Landlord’s appraisal, wiring just $11,746,000 to the Landlord’s solicitor on closing, leading to the Landlord declining to close on the basis that the purchase rate had not been paid.

At trial, the Tenant argued that the Landlord’s appraisal was overpriced as it was postulated on speculative and improper assumptions about how the residential or commercial property could be developed if rezoned. However, the application judge, depending on the CUSPAP requirements, found that the leases set out a system that was suggested to take into consideration that each party may look for an appraisal using sensible presumptions that were most beneficial to that party. As such, each celebration was compliant with the FMV mechanism set out in the leases and each party had a valid appraisal, indicating that the purchase price for the residential or commercial properties was the midpoint of the 2 appraisals and the Landlord had actually truly declined to close on the transaction. On appeal, the ONCA concurred with the application judge finding that what constitutes a legitimate appraisal is a question of reality and missing a palpable and overriding mistake, there was no basis on which the ONCA could set that finding aside.

Takeaways

When handling a decision of FMV, real estate professionals need to be intentional in their drafting. The meaning of FMV and the system utilized for identifying the FMV needs to be clear. If the intention is for FMV to show the “as is” use of the residential or commercial property and the “where is” state of it, it needs to be drafted as such. If the objective is for FMV to reflect the highest and best use of the residential or commercial property, then the CUSPAP definition need to be used, possibly with any special modification suitable to the specific transaction. In addition to a clear definition, it would be sensible for professionals to consist of a disagreement resolution system to determine FMV so as to develop a clean and effective process to address a circumstance where the FMV definition fails to supply a clear response and appraisals are greatly various. Taking these actions would enable the parties to avoid a failed deal and possibly expensive lawsuits as was the case in 1785192 Ontario.

1 Appraisal Institute of Canada, Canadian Uniform Standards of 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.

Please note that this publication provides a summary of noteworthy legal patterns and related updates. It is planned for informative purposes and not as a replacement for comprehensive legal advice. If you need assistance tailored to your specific circumstances, please contact one of the authors to check out how we can help you navigate your legal needs.