On the planet of real estate, it is typical to utilize fair market worth (FMV) as a method of describing the value of property or leas payable. However, maybe seldom considered is the concern that the term FMV can imply various things to various people. For some, FMV might be the price that someone would be prepared to pay for the land under its present use. For others, FMV may be the cost that someone would want to pay for that exact same land under its highest and best usage, such as for redevelopment purposes. Alternatively, for certain distinct possessions, FMV may have other significances, such as replacement value. 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 determination of the FMV and should that premium be computed with a risk premium or as of the date where the advancement worth is secured?

This all begs the question-which approach is proper?

By default, an appraiser would look to the Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP). Under CUSPAP, FMV indicates: "the most probable price, as of a defined date, in money, or in terms comparable to cash, or in other precisely revealed terms, for which the specified residential or commercial property rights should sell after sensible direct exposure in a competitive market under all conditions requisite to a reasonable sale, with the purchaser and the seller each acting wisely, knowledgeably, and for self-interest, and assuming that neither is under unnecessary duress."1
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In other words, an appraisal of FMV should, as a beginning point, be based on the assumption of highest and best usage of the residential or commercial property. From this starting point, the appraisal would then take into consideration the time and danger that supports the privileges process needed to accomplish the highest and best usage (consisting of that it may not be achieved). This is frequently carried out in combination with a planner who will evaluate the site in the context of provincial policy and local main plans.

While the CUSPAP meaning appears 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. (jointly referred to as the Landlord) were the property manager corporations of two industrial residential or commercial properties in Whitby, Ontario, which were rented to Ontario H Limited Partnership (the Tenant). The leases each consisted of an option for the Tenant to acquire the residential or commercial properties from the Landlord and included a mechanism for setting the rate at which the Landlord would be required to sell. The arrangement specified that the purchase cost would be a "purchase rate equal to the average of the evaluated reasonable market worth of the Leased Premises as identified by two appraisers, one picked by the Landlord and one selected by the Tenant."

The Tenant eventually worked out both choices to acquire and the celebrations engaged appraisers as required. The Landlord got an appraisal from Colliers International Group Inc., valuing the residential or commercial properties at a cumulative $31,200,000 based upon a greatest and finest 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 upon a current zoning assumption. While the celebrations initially challenged each other's appraisals, the Landlord eventually accepted the Tenant's appraisal, setting the purchase price at the midpoint of the two. However, the Tenant continued to challenge the Landlord's appraisal, wiring only $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 presumptions about how the residential or commercial property might be established if rezoned. However, the application judge, relying on the CUSPAP standards, found that the leases set out a system that was indicated to take into account that each party might look for an appraisal utilizing affordable presumptions that were most beneficial to that party. As such, each celebration was certified with the FMV system set out in the leases and each party had a legitimate appraisal, suggesting that the purchase cost for the residential or commercial properties was the of the 2 appraisals and the Landlord had actually truly refused to close on the transaction. On appeal, the ONCA concurred with the application judge finding that what constitutes a valid appraisal is a concern of truth and absent a palpable and overriding error, there was no basis on which the ONCA could set that discovering aside.

Takeaways
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When dealing with a determination of FMV, realty professionals must be intentional in their drafting. The definition of FMV and the system used for identifying 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 drafted as such. If the intention is for FMV to reflect the highest and best usage of the residential or commercial property, then the CUSPAP meaning must be used, possibly with any unique adjustment appropriate to the particular transaction. In addition to a clear meaning, it would be sensible for practitioners to include a dispute resolution mechanism to determine FMV so as to establish a clean and effective procedure to attend to a circumstance where the FMV definition fails to supply a clear response and appraisals are significantly different. Taking these actions would allow the parties to prevent a failed deal 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.

Please note that this publication presents a summary of significant legal patterns and related updates. It is meant for educational functions and not as a replacement for in-depth legal guidance. If you require assistance customized to your specific scenarios, please contact one of the authors to explore how we can help you browse your legal needs.