Fair Market Value-What Does It Mean

On the planet of real estate, it prevails to utilize fair market price (FMV) as a way of explaining the worth of realty or leas payable. However, maybe rarely considered is the concern that the term FMV can suggest different things to various people. For some, FMV might be the cost that someone would be willing to spend for the land under its existing use. For others, FMV may be the price that someone would be willing to spend for that very same land under its greatest and finest usage, such as for redevelopment purposes. Alternatively, for certain special properties, FMV might have other significances, such as replacement worth. For instance, if land is to be sold to a neighbour as part of a land assembly which neighbour may want to pay a premium to get the land, is that premium then part of the decision of the FMV and should that premium be computed with a threat premium or as of the date where the development value is secured?


This all begs the question-which approach is proper?


By default, an appraiser would want to the Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP). Under CUSPAP, FMV indicates: "the most possible rate, as of a specified date, in cash, or in terms comparable to cash, or in other exactly exposed terms, for which the defined residential or commercial property rights should sell after affordable direct 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 unnecessary pressure."1


In other words, an appraisal of FMV should, as a beginning point, be based on the assumption of greatest and finest usage of the residential or commercial property. From this beginning point, the appraisal would then take into account the time and danger that goes along with the privileges procedure needed to accomplish the greatest and finest usage (including that it may not be attained). This is typically carried out in conjunction with an organizer who will assess the website in the context of provincial policy and local main strategies.


While the CUSPAP definition seems clear enough, it is not the 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 manager corporations of 2 commercial residential or commercial properties in Whitby, Ontario, which were rented to Ontario H Limited Partnership (the Tenant). The leases each contained an alternative for the Tenant to acquire the residential or commercial properties from the Landlord and consisted of a system for setting the cost at which the Landlord would be required to offer. The arrangement mentioned that the purchase rate would be a "purchase cost equal to the average of the assessed reasonable market worth of the Leased Premises as figured out by 2 appraisers, one picked by the Landlord and one picked by the Tenant."


The Tenant eventually worked out both choices to acquire and the celebrations engaged appraisers as needed. The Landlord got 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 usage presumption, 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 present zoning presumption. 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 challenge the Landlord's appraisal, wiring just $11,746,000 to the Landlord's solicitor on closing, leading to the Landlord refusing to close on the basis that the purchase cost had not been paid.


At trial, the Tenant argued that the Landlord's appraisal was overpriced as it was premised on speculative and inappropriate presumptions about how the residential or commercial property might be developed if rezoned. However, the application judge, depending on the CUSPAP standards, discovered that the leases set out a mechanism that was meant to consider that each celebration may look for an appraisal using sensible presumptions that were most beneficial to that celebration. As such, each celebration was certified with the FMV system set out in the leases and each party had a valid appraisal, meaning that the purchase rate for the residential or commercial properties was the midpoint of the two appraisals and the Landlord had actually truly refused to close on the deal. On appeal, the ONCA concurred with the application judge finding that what constitutes a valid appraisal is a question of reality and missing a palpable and overriding error, there was no basis on which the ONCA might set that discovering aside.


Takeaways


When handling a determination of FMV, genuine estate experts need to be intentional in their preparing. The definition of FMV and the mechanism utilized for figuring out the FMV should 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 must be drafted as such. If the intent is for FMV to show the greatest and best use of the residential or commercial property, then the CUSPAP meaning need to be used, perhaps with any unique modification appropriate to the specific transaction. In addition to a clear definition, it would be prudent for practitioners to consist of a disagreement resolution system to figure out FMV so regarding develop a tidy and effective procedure to resolve a scenario where the FMV definition stops working to provide a clear response and appraisals are greatly different. Taking these actions would allow the celebrations to avoid a failed transaction and potentially 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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