On the planet of realty, it prevails to use fair market price (FMV) as a method of explaining the value of property or rents payable. However, maybe rarely considered is the concern that the term FMV can mean different things to various individuals. For some, FMV may be the cost that someone would be willing to spend for the land under its existing usage. For others, FMV might be the cost that someone would want to spend for that exact same land under its highest and best use, such as for redevelopment purposes. Alternatively, for particular unique properties, 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 which neighbour might be prepared to pay a premium to get the land, is that premium then part of the determination of the FMV and should that premium be computed with a danger premium or since the date where the development value is secured?

This all pleads the question-which approach is appropriate?

By default, an appraiser would want to the Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP). Under CUSPAP, FMV implies: "the most possible cost, as of a specified date, in money, or in terms comparable to money, or in other exactly exposed terms, for which the defined residential or commercial property rights should offer after affordable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and the seller each acting prudently, knowledgeably, and for self-interest, and assuming that neither is under excessive pressure."1

To put it simply, an appraisal of FMV should, as a starting point, be based upon the assumption of greatest and finest usage of the residential or commercial property. From this beginning point, the appraisal would then consider the time and risk that accompanies the entitlements procedure required to attain the highest and best use (consisting of that it might not be accomplished). This is frequently carried out in combination with a coordinator who will examine the website in the context of provincial policy and local main strategies.

While the CUSPAP meaning appears clear enough, it is not the universal method 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. (collectively referred to as the Landlord) were the landlord 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 an option for the Tenant to purchase the residential or commercial properties from the Landlord and included a system for setting the cost at which the Landlord would be needed to sell. The arrangement mentioned that the purchase price would be a "purchase price equal to the average of the evaluated reasonable market price of the Leased Premises as figured out by 2 appraisers, one chosen by the Landlord and one picked by the Tenant."

The Tenant eventually worked out both choices to buy and the parties engaged appraisers as needed. The Landlord obtained an appraisal from Colliers International Group Inc., valuing the residential or commercial properties at a collective $31,200,000 based on a highest and finest usage assumption, while the Tenant got an appraisal from Equitable Value Inc., valuing the residential or commercial properties at a cumulative $11,746,000 based on an existing zoning presumption. While the celebrations at first contested 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 contest the Landlord's appraisal, electrical 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 price 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 might be developed if rezoned. However, the application judge, relying on the CUSPAP standards, discovered that the leases set out a mechanism that was meant to take into consideration that each party might seek an appraisal utilizing reasonable assumptions that were most favorable to that party. As such, each party was certified with the FMV system set out in the leases and each celebration had a legitimate appraisal, meaning that the purchase cost for the residential or commercial properties was the midpoint of the 2 appraisals and the Landlord had actually rightfully refused to close on the deal. On appeal, the ONCA agreed with the application judge finding that what makes up a legitimate appraisal is a question of truth and absent a palpable and overriding error, there was no basis on which the ONCA could set that finding aside.

Takeaways

When dealing with a determination of FMV, genuine estate experts ought to be intentional in their drafting. The meaning of FMV and the system utilized for figuring out the FMV should be clear. If the intention is for FMV to show the "as is" usage of the residential or commercial property and the "where is" state of it, it should be prepared as such. If the intent is for FMV to show the highest and finest use of the residential or commercial property, then the CUSPAP meaning ought to be utilized, possibly with any unique adjustment applicable to the particular deal. In addition to a clear definition, it would be sensible for specialists to consist of a conflict resolution mechanism to determine FMV so regarding establish a tidy and effective procedure to resolve a circumstance where the FMV meaning fails to offer a clear answer and appraisals are vastly different. Taking these steps would enable the parties to avoid a failed deal and potentially expensive litigation as held true 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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