Worldwide of real estate, it is typical to use reasonable market worth (FMV) as a method of explaining the worth of realty or leas payable. However, maybe not often considered is the concern that the term FMV can suggest different things to various individuals. For some, FMV might be the cost that somebody would want to spend for the land under its existing use. For others, FMV may be the cost that someone would want to pay for that same land under its greatest and best usage, such as for redevelopment purposes. Alternatively, for certain 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 may 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 protected?

This all pleads the question-which method 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 cash, or in terms equivalent to cash, or in other exactly revealed terms, for which the specified residential or commercial property rights need to offer after reasonable exposure in a competitive market under all conditions requisite to a reasonable sale, with the purchaser and the seller each acting prudently, knowledgeably, and for self-interest, and presuming that neither is under unnecessary duress."1

Simply put, an appraisal of FMV should, as a starting point, be based upon the assumption of highest 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 supports the entitlements process needed to attain the greatest and finest use (including that it may not be achieved). This is typically carried out in conjunction with a coordinator who will examine the website in the context of provincial policy and regional main strategies.

While the CUSPAP definition seems 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. (jointly described as the Landlord) were the property manager corporations of two commercial residential or commercial properties in Whitby, Ontario, which were leased to Ontario H Limited Partnership (the Tenant). The leases each included an option for the Tenant to acquire the residential or commercial properties from the Landlord and included a system for setting the cost at which the Landlord would be required to sell. The provision mentioned that the purchase cost would be a "purchase rate equal to the average of the evaluated fair market value of the Leased Premises as identified by two appraisers, one picked by the Landlord and one picked by the Tenant."

The Tenant eventually exercised both alternatives to buy and the celebrations engaged appraisers as needed. The Landlord got an appraisal from Colliers International Group Inc., valuing the residential or commercial properties at a cumulative $31,200,000 based on a greatest and finest use assumption, while the Tenant obtained 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 at first contested each other's appraisals, the Landlord eventually accepted the Tenant's appraisal, setting the purchase price at the midpoint of the 2. However, the Tenant continued to dispute the Landlord's appraisal, electrical wiring just $11,746,000 to the Landlord's lawyer on closing, leading to the Landlord refusing to close on the basis that the purchase cost had not been paid.
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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, counting on the CUSPAP requirements, found that the leases set out a system that was meant to consider that each celebration may look for an appraisal utilizing sensible presumptions that were most favorable to that celebration. As such, each party was compliant with the FMV system set out in the leases and each party had a legitimate appraisal, indicating that the purchase cost for the residential or commercial properties was the midpoint of the two appraisals and the Landlord had rightfully declined to close on the deal. On appeal, the ONCA concurred with the application judge finding that what makes up a valid appraisal is a question of fact and absent a palpable and overriding error, there was no basis on which the ONCA could set that discovering aside.
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Takeaways

When dealing with a determination of FMV, realty professionals ought to be intentional in their drafting. The definition of FMV and the mechanism used for identifying the FMV needs to be clear. If the objective is for FMV to reflect 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 intention is for FMV to reflect the greatest and finest use of the residential or commercial property, then the CUSPAP meaning must be utilized, maybe with any unique adjustment applicable to the specific transaction. In addition to a clear meaning, it would be prudent for professionals to include a disagreement resolution system to figure out FMV so regarding develop a clean and efficient process to deal with a situation where the FMV definition fails to supply a clear response and appraisals are vastly various. Taking these actions would permit the parties to avoid a stopped working deal and potentially expensive lawsuits as was the case in 1785192 Ontario.

1 Appraisal Institute of Canada, 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 provides a summary of notable legal trends and associated updates. It is planned for educational functions and not as a replacement for in-depth legal advice. If you require guidance tailored to your specific situations, please contact among the authors to check out how we can help you browse your legal needs.