On the planet of realty, it is common to utilize reasonable market value (FMV) as a method of explaining the worth of property or rents payable. However, possibly seldom considered is the issue that the term FMV can indicate different things to various people. For some, FMV may be the cost that someone would be willing to pay for the land under its current usage. For others, FMV may be the rate that somebody would be ready to spend for that very same land under its highest and finest usage, such as for redevelopment purposes. Alternatively, for specific special properties, FMV might have other meanings, such as replacement worth. For instance, if land is to be offered to a neighbour as part of a land assembly which neighbour might 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 as of the date where the development value is secured?

This all begs the question-which approach is correct?

By default, an appraiser would seek to the Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP). Under CUSPAP, FMV implies: "the most possible rate, since a specified date, in cash, or in terms comparable to cash, or in other specifically revealed terms, for which the specified residential or commercial property rights must sell after reasonable direct exposure in a competitive market under all conditions requisite to a reasonable sale, with the buyer and the seller each acting prudently, knowledgeably, and for self-interest, and presuming that neither is under undue pressure."1

In other words, an appraisal of FMV should, as a starting point, be based upon the presumption of highest 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 procedure required to attain the highest and finest use (including that it may not be achieved). This is typically carried out in combination with a planner who will evaluate the site in the context of provincial policy and regional main strategies.

While the CUSPAP meaning appears clear enough, it is not the universal method as was explained 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 referred to 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 a choice for the Tenant to acquire the residential or commercial properties from the Landlord and consisted of a mechanism for setting the cost at which the Landlord would be needed to offer. The arrangement specified that the purchase price would be a "purchase price equivalent to the average of the appraised reasonable market worth of the Leased Premises as determined by 2 appraisers, one chosen by the Landlord and one chosen by the Tenant."

The Tenant ultimately exercised both options to acquire and the celebrations 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 highest and best usage presumption, while the Tenant obtained an appraisal from Equitable Value Inc., valuing the residential or commercial properties at a collective $11,746,000 based on a present zoning presumption. While the celebrations initially challenged each other's appraisals, the Landlord ultimately accepted the Tenant's appraisal, setting the purchase rate at the midpoint of the two. However, the Tenant continued to contest the Landlord's appraisal, wiring only $11,746,000 to the Landlord's solicitor on closing, leading to the Landlord declining to close on the basis that the purchase price had actually 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 might be established if rezoned. However, the application judge, counting on the CUSPAP requirements, found that the leases set out a mechanism that was implied to take into account that each party might seek an appraisal utilizing reasonable assumptions that were most beneficial to that celebration. As such, each celebration was compliant with the FMV system set out in the leases and each party had a legitimate appraisal, indicating that the purchase price for the residential or commercial properties was the midpoint of the two appraisals and the Landlord had actually truly declined to close on the transaction. On appeal, the ONCA concurred with the application judge finding that what makes up a legitimate appraisal is a concern of fact and absent a palpable and overriding error, there was no basis on which the ONCA could set that finding aside.

Takeaways

When handling a decision of FMV, property professionals should be intentional in their preparing. The definition of FMV and the mechanism utilized for figuring out the FMV needs to be clear. If the objective is for FMV to show the "as is" use of the residential or commercial property and the "where is" state of it, it ought to be drafted as such. If the objective is for FMV to show the highest and finest use of the residential or commercial property, then the CUSPAP meaning should be used, possibly with any unique adjustment appropriate to the particular deal. In addition to a clear definition, it would be prudent for practitioners to consist of a conflict resolution system to identify FMV so regarding establish a tidy and effective procedure to address a circumstance where the FMV meaning stops working to provide a clear answer and appraisals are vastly different. Taking these actions would enable the parties to prevent a stopped working transaction and possibly expensive lawsuits as was the case 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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