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Worldwide of real estate, it is common to utilize fair market price (FMV) as a way of explaining the value of genuine estate or leas payable. However, perhaps not typically considered is the issue that the term FMV can suggest various things to different individuals. For some, FMV might be the price that someone would be ready to spend for the land under its present use. For others, FMV might be the price that somebody would want to pay for that very same land under its greatest and best usage, such as for redevelopment purposes. Alternatively, for certain unique properties, FMV may have other significances, such as replacement value. For example, if land is to be offered to a neighbour as part of a land assembly and that 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 risk premium or as of the date where the advancement worth is protected?

This all begs the question-which technique is correct?

By default, an appraiser would look to the Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP). Under CUSPAP, FMV implies: "the most possible rate, since a defined date, in money, or in terms comparable to money, or in other exactly exposed terms, for which the specified residential or commercial property rights need to sell after sensible direct exposure in a competitive market under all conditions requisite to a fair sale, with the purchaser and the seller each acting wisely, knowledgeably, and for self-interest, and presuming that neither is under excessive duress."1

In other words, an appraisal of FMV should, as a beginning point, be based on the assumption of greatest and best usage 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 accomplish the highest and best usage (including that it might not be attained). This is frequently carried out in conjunction with a coordinator who will evaluate the website in the context of provincial policy and local official plans.

While the CUSPAP definition appears clear enough, it is not the universal method as was made clear 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 proprietor corporations of 2 commercial residential or commercial properties in Whitby, Ontario, which were rented to Ontario H Limited Partnership (the Tenant). The leases each included an option for the Tenant to buy the residential or commercial properties from the Landlord and consisted of a system for setting the price at which the Landlord would be required to offer. The arrangement specified that the purchase price would be a "purchase price equivalent to the average of the assessed reasonable market price of the Leased Premises as identified by two appraisers, one chosen by the Landlord and one picked 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 collective $31,200,000 based upon a highest and best 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 present zoning presumption. While the parties initially challenged each other's appraisals, the Landlord eventually accepted the appraisal, setting the purchase rate at the midpoint of the 2. However, the Tenant continued to challenge the Landlord's appraisal, electrical wiring just $11,746,000 to the Landlord's lawyer on closing, resulting in the Landlord refusing 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 predicated on speculative and improper assumptions about how the residential or commercial property might be established if rezoned. However, the application judge, relying on the CUSPAP standards, discovered that the leases set out a system that was implied to take into consideration that each party might look for an appraisal utilizing sensible presumptions that were most beneficial to that party. As such, each party was certified with the FMV mechanism set out in the leases and each party had a legitimate appraisal, indicating that the purchase rate for the residential or commercial properties was the midpoint of the two appraisals and the Landlord had truly declined to close on the deal. On appeal, the ONCA agreed with the application judge finding that what constitutes a valid appraisal is a concern of fact and absent a palpable and overriding mistake, there was no basis on which the ONCA might set that finding aside.

Takeaways

When handling a determination of FMV, real estate professionals must be intentional in their preparing. The meaning of FMV and the mechanism used for determining the FMV needs to be clear. If the intent is for FMV to show the "as is" use of the residential or commercial property and the "where is" state of it, it should be drafted as such. If the objective is for FMV to reflect the greatest and best usage of the residential or commercial property, then the CUSPAP meaning ought to be utilized, maybe with any special modification appropriate to the particular transaction. In addition to a clear meaning, it would be prudent for specialists to include a dispute resolution mechanism to identify FMV so regarding establish a tidy and efficient process to address a situation where the FMV definition fails to offer a clear response and appraisals are greatly different. Taking these steps would enable the celebrations to prevent a stopped working deal and potentially pricey lawsuits 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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