In the world of real estate, it prevails to use fair market worth (FMV) as a method of explaining the value of realty or rents payable. However, possibly rarely considered is the concern that the term FMV can suggest different things to various people. 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 price that someone would want to pay for that exact same land under its greatest and finest usage, such as for redevelopment purposes. Alternatively, for particular special properties, FMV might have other significances, such as replacement value. For instance, if land is to be sold to a neighbour as part of a land assembly and that neighbour might want 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 danger premium or as of the date where the development worth is protected?
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This all begs the question-which technique is correct?
By default, an appraiser would want to the Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP). Under CUSPAP, FMV suggests: "the most possible rate, since a specified date, in money, or in terms comparable to cash, or in other specifically exposed terms, for which the specified residential or commercial property rights must offer after affordable direct exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and the seller each acting wisely, knowledgeably, and for self-interest, and presuming that neither is under undue duress."1
To put it simply, an appraisal of FMV should, as a starting point, be based on the assumption of highest and finest use of the residential or commercial property. From this beginning point, the appraisal would then take into account the time and danger that supports the entitlements process needed to accomplish the highest and finest usage (including that it might not be attained). This is often performed in combination with a coordinator who will assess the website in the context of provincial policy and regional official strategies.
While the CUSPAP meaning seems clear enough, it is not the universal technique 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 landlord corporations of two industrial residential or commercial properties in Whitby, Ontario, which were rented to Ontario H Limited Partnership (the Tenant). The leases each contained an alternative for the Tenant to acquire the residential or commercial properties from the Landlord and included a system for setting the price at which the Landlord would be needed to sell. The arrangement mentioned that the purchase cost would be a "purchase price equivalent to the average of the assessed reasonable market worth of the Leased Premises as identified by 2 appraisers, one chosen by the Landlord and one picked by the Tenant."
The Tenant ultimately worked out both options to buy 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 upon a highest and finest use 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 a present zoning assumption. While the celebrations at first disputed each other's appraisals, the Landlord eventually accepted the Tenant's appraisal, setting the purchase rate at the midpoint of the two. However, the Tenant continued to dispute 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 price had not been paid.
At trial, the Tenant argued that the Landlord's appraisal was overpriced as it was predicated on speculative and inappropriate assumptions about how the residential or commercial property could be developed if rezoned. However, the judge, depending on the CUSPAP requirements, found that the leases set out a system that was implied to take into account that each celebration may look for an appraisal using affordable presumptions that were most beneficial to that party. 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 rate for the residential or commercial properties was the midpoint of the two appraisals and the Landlord had rightfully refused to close on the deal. On appeal, the ONCA concurred with the application judge finding that what constitutes a valid appraisal is a concern of truth and absent a palpable and overriding mistake, there was no basis on which the ONCA could set that discovering aside.
Takeaways
When handling a determination of FMV, property specialists ought to be intentional in their preparing. The definition of FMV and the system utilized for determining the FMV should be clear. If the objective is for FMV to show the "as is" usage of the residential or commercial property and the "where is" state of it, it must 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 should be utilized, maybe with any special adjustment suitable to the specific transaction. In addition to a clear meaning, it would be sensible for practitioners to include a disagreement resolution system to figure out FMV so regarding establish a clean and efficient process to address a scenario where the FMV definition fails to supply a clear response and appraisals are greatly different. Taking these steps would enable the parties to prevent a stopped working deal and potentially pricey 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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Fair Market Value-What does it Mean?
felishatietjen edited this page 2025-08-20 18:23:42 +08:00