Fair Market Value-What Does It Mean

In the world of realty, it prevails to utilize fair market price (FMV) as a way of explaining the value of realty or leas payable. However, perhaps rarely thought about is the problem that the term FMV can suggest various things to various individuals. For some, FMV may be the cost that somebody would want to spend for the land under its present use. For others, FMV may be the cost that someone would want to spend for that very same land under its greatest and best use, such as for redevelopment purposes. Alternatively, for certain distinct assets, FMV may have other meanings, such as replacement value. For example, if land is to be sold to a neighbour as part of a land assembly which neighbour may be willing 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 or as of the date where the advancement worth is secured?


This all pleads the question-which method is appropriate?


By default, an appraiser would seek to the Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP). Under CUSPAP, FMV indicates: "the most likely rate, as of a specified date, in cash, or in terms comparable to money, or in other precisely exposed terms, for which the specified residential or commercial property rights need to offer after affordable direct exposure in a competitive market under all conditions requisite to a reasonable sale, with the buyer and the seller each acting prudently, knowledgeably, and for self-interest, and presuming that neither is under unnecessary duress."1


To put it simply, an appraisal of FMV should, as a beginning point, be based upon the presumption of highest and best usage of the residential or commercial property. From this starting point, the appraisal would then take into account the time and threat that supports the entitlements process needed to accomplish the highest and finest use (including that it might not be accomplished). This is typically carried out in conjunction with an organizer who will assess the website in the context of provincial policy and regional official plans.


While the CUSPAP definition seems clear enough, it is not the universal technique as was explained 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. (collectively referred to as the Landlord) were the proprietor corporations of 2 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 consisted of a mechanism for setting the price at which the Landlord would be needed to sell. The arrangement mentioned that the purchase cost would be a "purchase cost equivalent to the average of the appraised reasonable market price of the Leased Premises as identified by two appraisers, one picked by the Landlord and one picked by the Tenant."


The Tenant eventually worked out both alternatives to purchase and the parties engaged appraisers as needed. The Landlord acquired an appraisal from Colliers International Group Inc., valuing the residential or commercial properties at a cumulative $31,200,000 based upon a highest and best usage assumption, while the Tenant got an appraisal from Equitable Value Inc., valuing the residential or commercial properties at a collective $11,746,000 based on an existing zoning assumption. While the parties initially challenged each other's appraisals, the Landlord eventually 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 declining 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 predicated on speculative and improper presumptions about how the residential or commercial property might be developed if rezoned. However, the application judge, counting on the CUSPAP standards, discovered that the leases set out a system that was meant to consider that each celebration might look for an appraisal using affordable 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 celebration had a valid appraisal, indicating that the purchase rate for the residential or commercial properties was the midpoint of the two appraisals and the Landlord had rightfully declined to close on the transaction. 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 mistake, there was no basis on which the ONCA might set that finding aside.


Takeaways


When dealing with a determination of FMV, realty specialists need to be intentional in their drafting. The meaning of FMV and the system used for determining the FMV needs to be clear. If the objective is for FMV to reflect the "as is" usage of the residential or commercial property and the "where is" state of it, it must be prepared as such. If the objective is for FMV to reflect the greatest and finest use of the residential or commercial property, then the CUSPAP definition need to be used, perhaps with any special modification applicable to the specific transaction. In addition to a clear meaning, it would be sensible for specialists to consist of a dispute resolution mechanism to identify FMV so as to develop a clean and efficient process to resolve a circumstance where the FMV definition stops working to provide a clear answer and appraisals are greatly various. Taking these actions would permit the parties to avoid a stopped working deal and possibly expensive 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.


Please note that this publication presents a summary of notable legal patterns and associated updates. It is planned for educational functions and not as a replacement for detailed legal recommendations. If you require assistance customized to your specific scenarios, please contact one of the authors to check out how we can assist you navigate your legal requirements.