Introduction
The Ontario Court of Appeal has ended the long-running saga of how to value income generating properties in light of the Assessment Act’s requirement that the value should be of the “fee simple, if unencumbered”. BCE Place Limited v. Municipal Property Assessment Corporation, 2010 ONCA 672 , (October, 2010) saw the owners of large bank towers in downtown Toronto argue that they should be valued as if they were vacant, which would have imposed a notional (ie. articficial) two year lease-up period on the valuation.
History
In 2008, the Assessment Review Board agreed with the landlords’ assertion the phrase “fee simple, if unencumbered,” (contained in the definition of “current value” under the Assessment Act) required the bank towers be valued as if they were vacant at the date of assessment. The Assessment Review Board held that all leases in place at the time of the valuation had to be disregarded because they were “encumbrances”. Due to the entirely vacant nature of this hypothetical scenario, the Municipal Property Assessment Corporation would be required to allow for a notional two year lease-up period during which the building would be slowly leased-up at market rents. The impact of the value to be returned was large, since it assumed that there would be significantly less income available to a purchaser of that property than would in fact be the case if the property was actually sold. This decision was a significant victory for the bank tower owners and resulted in a reduction of the assessed values of all bank towers in the amount of approximately $1.5 billion, collectively.
The decision of the ARB was appealed by the City of Toronto and the Municipal Property Assessment Corp (MPAC) to Divisional Court. Not surprisingly, many other municipalities intervened in support of MPAC and Toronto’s position. The Divisional Court allowed the appeal, ruling that the purpose of the phrase “fee simple, if unencumbered” as applied to income-producing properties, was to arrive at a value calculated without reference to any anomalous leases at other than market value. It held that the legislation did not require the assessed value of the land to be based on the wholly artificial notion that the buildings were vacant at the time of assessment, because this would significantly undervalue them as compared to other real property types and undermine the purpose of the Act.
The owners appealed to the Ontario Court of Appeal.
Court of Appeal Decision
The Ontario Court of Appeal dismissed the landlords’ appeal.
It has probably been definitively settled that “current value” means, in relation to the assessment of land in Ontario, the amount of money the fee simple would realize if sold at arm’s length by a willing seller to a willing buyer without reference to any non-market value encumbrances of the land. The Court has determined at least in the context of income-producing property, that the phrase “fee simple, if unencumbered” simply instructs the assessor to ignore unusual encumbrances, such as leases that are not at market rent. The court considered what the impact of holding in favour of the landlords would mean, both in terms of what those buildings would probably sell for and in terms of the relationship between the market value of the buildings and their assessment and how that would differ from other types of property. Consequently, the income approach was to be used with market rents and only a normal vacancy rate, rather than the lengthy lease-up period advanced by the landlords.
Also influential in the Court’s decision was its finding that the legislative wording being considered was designed specifically to confirm two court decisions which had the effect of permitting the assessor to ignore non-market rent leases which encumbered those properties.
Also at issue was the proper standard of review of the Assessment Review Board, whether that is correctness or reasonableness, two administrative law concepts that can affect whether a decision is altered by a higher court. The Court followed the line of cases which held that in circumstances like this, where the Assessment Review Board is interpreting legislation and acting much as a court would, the correct standard of review is whether it was correct in its determination.
This case settles an intriguing provision, which did engender a innovative interpretation which would have had a significant effect on how property would be assessed in Ontario. It would however, as the courts noted, resulted in differences in how properties in different situations and valued under either the sales comparison or value approaches would have been treated. In the end, what was probably common-sense prevailed with the courts.