Worldwide of realty, it is typical to use reasonable market worth (FMV) as a way of explaining the value of realty or rents payable. However, maybe rarely thought about is the problem that the term FMV can imply various things to different individuals. For some, FMV may be the rate that someone would be prepared to pay for the land under its current usage. For others, FMV may be the rate that somebody would want to pay for that exact same land under its greatest and finest usage, such as for redevelopment purposes. Alternatively, for specific distinct properties, FMV may have other meanings, 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 computed with a danger premium or since the date where the advancement value is protected?
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This all asks the question-which approach is proper?

By default, an appraiser would seek to the Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP). Under CUSPAP, FMV implies: "the most probable cost, as of a specified date, in cash, or in terms comparable to cash, or in other specifically revealed terms, for which the defined residential or commercial property rights need to offer after sensible 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 assuming that neither is under undue duress."1

To put it simply, an appraisal of FMV should, as a point, be based upon the assumption of greatest and finest use of the residential or commercial property. From this starting point, the appraisal would then consider the time and threat that supports the entitlements procedure needed to attain the highest and finest use (including that it may not be accomplished). This is typically carried out in combination with a planner who will evaluate the website in the context of provincial policy and regional main plans.

While the CUSPAP meaning seems clear enough, it is not the universal approach 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. (collectively described as the Landlord) were the proprietor corporations of 2 business 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 purchase the residential or commercial properties from the Landlord and consisted of a system for setting the rate at which the Landlord would be needed to offer. The provision stated that the purchase cost would be a "purchase rate equivalent to the average of the appraised reasonable market worth of the Leased Premises as determined by two appraisers, one picked by the Landlord and one selected by the Tenant."

The Tenant eventually exercised both alternatives to purchase and the parties 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 upon a greatest and finest use assumption, while the Tenant obtained an appraisal from Equitable Value Inc., valuing the residential or commercial properties at a cumulative $11,746,000 based on a current zoning presumption. While the parties at first disputed each other's appraisals, the Landlord ultimately 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, circuitry only $11,746,000 to the Landlord's solicitor on closing, resulting in the Landlord refusing to close on the basis that the purchase rate had not been paid.

At trial, the Tenant argued that the Landlord's appraisal was overpriced as it was premised on speculative and inappropriate presumptions about how the residential or commercial property could be established if rezoned. However, the application judge, relying on the CUSPAP standards, discovered that the leases set out a mechanism that was meant to take into consideration that each party might look for 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 party had a valid appraisal, meaning that the purchase cost for the residential or commercial properties was the midpoint of the 2 appraisals and the Landlord had actually truly refused to close on the deal. On appeal, the ONCA concurred with the application judge finding that what makes up a legitimate appraisal is a question 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 experts need to be intentional in their preparing. The meaning of FMV and the mechanism utilized for figuring out 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 needs to be drafted as such. If the intent is for FMV to show the greatest and best use of the residential or commercial property, then the CUSPAP meaning need to be used, maybe with any special modification applicable to the specific transaction. In addition to a clear definition, it would be sensible for practitioners to consist of a conflict resolution mechanism to figure out FMV so regarding develop a tidy and effective process to deal with a scenario where the FMV definition fails to provide a clear response and appraisals are greatly various. Taking these actions would permit the celebrations to prevent a stopped working transaction and potentially costly 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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