Worldwide of realty, it is typical to utilize reasonable market price (FMV) as a way of describing the worth of realty or leas payable. However, possibly rarely considered is the issue that the term FMV can indicate various things to different people. For some, FMV might be the rate that someone would be willing to spend for the land under its existing usage. For others, FMV might be the cost that somebody would want to spend for that exact same land under its greatest and finest usage, such as for redevelopment purposes. Alternatively, for certain distinct properties, FMV might have other meanings, such as replacement worth. For example, if land is to be sold 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 computed with a risk premium or as of the date where the development worth is secured?

This all asks the question-which technique is correct?

By default, an appraiser would seek to the Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP). Under CUSPAP, FMV means: "the most possible cost, as of a defined date, in money, or in terms comparable to money, or in other specifically exposed terms, for which the defined residential or commercial property rights ought to sell after reasonable direct 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 presuming that neither is under undue duress."1

Simply put, an appraisal of FMV should, as a beginning point, be based on the presumption of greatest and best use of the residential or commercial property. From this starting point, the appraisal would then consider the time and threat that accompanies the entitlements process required to achieve the highest and finest use (consisting of that it might not be attained). This is often carried out in conjunction with a planner who will examine the website in the context of provincial policy and regional official plans.

While the CUSPAP definition seems clear enough, it is not the universal approach 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. (collectively described as the Landlord) were the property manager corporations of two commercial residential or commercial properties in Whitby, Ontario, which were rented 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 system for setting the rate at which the Landlord would be required to sell. The arrangement mentioned that the purchase rate would be a "purchase rate equal to the average of the assessed reasonable market worth of the Leased Premises as determined by 2 appraisers, one picked by the Landlord and one picked by the Tenant."

The Tenant ultimately worked out both choices to acquire and the parties engaged appraisers as needed. The Landlord obtained an appraisal from Colliers International Group Inc., valuing the residential or commercial properties at a collective $31,200,000 based on a highest and best usage assumption, 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 celebrations initially contested each other's appraisals, the Landlord eventually accepted the Tenant's appraisal, setting the purchase rate at the midpoint of the 2. However, the Tenant continued to contest 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 actually 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 might be developed if rezoned. However, the application judge, counting on the CUSPAP requirements, discovered that the leases set out a mechanism that was indicated to take into consideration that each party might seek an appraisal using affordable assumptions that were most favorable to that party. As such, each celebration was certified with the FMV mechanism set out in the leases and each celebration had a legitimate appraisal, meaning that the purchase price 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 agreed with the application judge finding that what makes up a legitimate appraisal is a question of fact and missing 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, realty experts must be deliberate in their preparing. The meaning of FMV and the mechanism utilized for determining the FMV should be clear. If the intent is for FMV to reflect the "as is" usage of the residential or commercial property and the "where is" state of it, it ought to be drafted as such. If the intent is for FMV to reflect the greatest and best use of the residential or commercial property, then the CUSPAP meaning should be utilized, maybe with any unique modification appropriate to the particular transaction. In addition to a clear definition, it would be prudent for practitioners to consist of a dispute resolution mechanism to identify FMV so regarding develop a clean and efficient process to attend to a circumstance where the stops working to supply a clear answer and appraisals are greatly different. Taking these steps would allow the celebrations to avoid a failed deal 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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