In the world of real estate, it prevails to use reasonable market value (FMV) as a method of explaining the worth of property or rents payable. However, perhaps not typically thought about is the concern that the term FMV can mean various things to various people. For some, FMV may be the price that somebody would be ready to pay for the land under its present use. For others, FMV may be the rate that somebody would want to spend for that very same land under its highest and finest use, such as for redevelopment functions. Alternatively, for particular special assets, FMV might have other significances, such as replacement worth. For example, if land is to be offered to a neighbour as part of a land assembly and that neighbour may want to pay a premium to get the land, is that premium then part of the decision of the FMV and should that premium be calculated with a threat premium or since the date where the advancement value is secured?

This all pleads the question-which technique is appropriate?

By default, an appraiser would want to the Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP). Under CUSPAP, FMV suggests: "the most possible price, since a specified date, in money, or in terms equivalent to money, or in other precisely exposed terms, for which the specified residential or commercial property rights need to sell after reasonable 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 assuming that neither is under excessive duress."1

In other words, an appraisal of FMV should, as a starting point, be based on the presumption 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 danger that accompanies the privileges procedure needed to accomplish the highest and finest usage (consisting of that it may not be attained). This is often performed in conjunction with a coordinator who will assess the website 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 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 property owner corporations of 2 commercial residential or commercial properties in Whitby, Ontario, which were leased to Ontario H Limited Partnership (the Tenant). The leases each consisted of an alternative for the Tenant to acquire the residential or commercial properties from the Landlord and consisted of a mechanism for setting the rate at which the Landlord would be required to sell. The provision stated that the purchase cost would be a "purchase rate equivalent to the average of the assessed fair market worth of the Leased Premises as identified by 2 appraisers, one selected by the Landlord and one picked by the Tenant."

The Tenant ultimately exercised 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 on a greatest and best usage presumption, while the Tenant acquired an appraisal from Equitable Value Inc., valuing the residential or commercial properties at a collective $11,746,000 based upon an existing zoning assumption. While the parties initially contested 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 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 incorrect presumptions about how the residential or commercial property might be established if rezoned. However, the application judge, depending on the CUSPAP requirements, discovered that the leases set out a system that was suggested to consider that each party may look for an appraisal utilizing affordable assumptions that were most beneficial to that celebration. As such, each celebration was certified with the FMV mechanism set out in the leases and each party had a legitimate appraisal, meaning that the purchase price for the residential or commercial properties was the midpoint of the 2 appraisals and the Landlord had actually truly declined 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 mistake, there was no basis on which the ONCA could set that finding aside.

Takeaways

When dealing with a decision of FMV, property professionals ought to be intentional in their preparing. The definition of FMV and the system utilized for figuring out the FMV must 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 needs to be drafted as such. If the objective is for FMV to show the highest and best use of the residential or commercial property, then the CUSPAP definition must be utilized, maybe with any unique modification relevant to the particular transaction. In addition to a clear meaning, it would be sensible for specialists to consist of a dispute resolution mechanism to determine FMV so regarding establish a tidy and efficient process to attend to a circumstance where the FMV meaning fails to supply a clear answer and appraisals are vastly various. Taking these steps would permit the celebrations to avoid a stopped working transaction and possibly expensive 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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