On the planet of property, it is typical to utilize fair market price (FMV) as a method of explaining the value of property or rents payable. However, possibly not typically thought about is the problem that the term FMV can mean various things to different individuals. For some, FMV may be the cost that somebody would be prepared to pay for the land under its current use. For others, FMV may be the price that somebody would be willing to pay for that exact same land under its greatest and best use, such as for redevelopment functions. Alternatively, for specific distinct possessions, FMV might have other meanings, such as replacement worth. For instance, if land is to be sold to a neighbour as part of a land assembly and that neighbour might be ready 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 risk premium or since the date where the development worth is protected?

This all asks the question-which approach is correct?

By default, an appraiser would want to the Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP). Under CUSPAP, FMV means: "the most possible rate, as of a specified date, in money, or in terms comparable to money, or in other precisely revealed terms, for which the defined residential or commercial property rights must offer after sensible 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 unnecessary pressure."1

To put it simply, 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 consideration the time and risk that accompanies the entitlements process needed to accomplish the highest and best use (consisting of that it might not be achieved). This is often done in combination with a coordinator who will examine the website in the context of provincial policy and regional main plans.

While the CUSPAP meaning appears clear enough, it is not the universal technique as was made clear 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 property manager corporations of 2 industrial 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 purchase the residential or commercial properties from the Landlord and consisted of a system for setting the rate at which the Landlord would be required to sell. The arrangement mentioned that the purchase price would be a "purchase cost equal to the average of the appraised fair market price of the Leased Premises as determined by 2 appraisers, one picked by the Landlord and one picked by the Tenant."

The Tenant eventually worked out both options to buy and the parties engaged appraisers as needed. 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 usage presumption, 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 celebrations initially contested each other's appraisals, the Landlord ultimately accepted the Tenant's appraisal, setting the purchase rate at the midpoint of the 2. However, the Tenant continued to dispute the Landlord's appraisal, electrical wiring only $11,746,000 to the Landlord's lawyer on closing, leading to the Landlord declining 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 postulated on speculative and improper assumptions about how the residential or commercial property could be established if rezoned. However, the application judge, depending on the CUSPAP requirements, found that the leases set out a mechanism that was implied to take into account that each party may seek an appraisal utilizing reasonable presumptions that were most beneficial to that celebration. As such, each celebration was compliant with the FMV mechanism set out in the leases and each celebration had a valid appraisal, implying that the purchase price for the residential or commercial properties was the midpoint of the 2 appraisals and the Landlord had truly declined to close on the transaction. On appeal, the ONCA agreed with the application judge finding that what makes up a legitimate appraisal is a concern of truth and absent a palpable and overriding mistake, there was no basis on which the ONCA might set that finding aside.

Takeaways

When dealing with a decision of FMV, real estate specialists must be deliberate in their preparing. The definition of FMV and the system utilized for identifying the FMV needs to be clear. If the intention is for FMV to reflect the "as is" usage of the residential or commercial property and the "where is" state of it, it should be drafted as such. If the intention is for FMV to show the highest and best use of the residential or commercial property, then the CUSPAP meaning must be utilized, maybe with any special modification applicable to the specific deal. In addition to a clear definition, it would be prudent for specialists to consist of a dispute resolution mechanism to figure out FMV so as to develop a tidy and effective procedure to resolve a situation where the FMV meaning stops working to supply a clear response and appraisals are vastly various. Taking these actions would allow the celebrations to avoid a stopped working transaction 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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