Playing Fair (or not) when Determining Fair Market Value
When parties are unable to establish the future value of property in an agreement – for example, options to purchase or lease renewal options – they typically agree that the transaction will be based on the property’s fair market value (“FMV”) at the time, then set out a process for determining FMV should they fail to see eye-to-eye on what’s “fair” when the time comes.
Such provisions, which range from simple to very complex, often involve appraisal of the property by an accredited real estate appraiser - in other words, someone who will be neutral and knows what he or she is doing. And, of course, the appraisal will be final and binding. Now what could be fairer than that?
In many jurisdictions, creative people – sometimes successfully – have turned to legislation governing commercial arbitration to challenge appraisals. That usually requires them to argue that the appraiser is an “arbitrator” and the disagreement regarding FMV a “dispute”, as defined in the legislation.
Once caught in the net of the applicable legislation, the appraisal becomes vulnerable to the many ways in which arbitrations can be challenged, based on rules that were never even contemplated by the parties.
The lesson? If you’re concerned whether the other party will play fair after an appraisal has been delivered, you need to ensure that the provision setting out the process to determine FMV is drafted in a way that reduces the risk of the appraisal being viewed as subject to commercial arbitration legislation.
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