In mortgage sale cases court grant generous freedom to the mortgagee to be wrong about value. The mortgagee does not have to actually have to follow any particular liquidation process beyond certain often vague guideposts.
The law was stated in 1427814 Ontario Ltd. v. 3697584 Canada Inc., [2012] O.J. No. 6733
The requirement upon the mortgagee is ‘to take reasonable precautions to obtain the fair market value on sale date’. (para 418)
What does this language mean for the appraisal of a vacant land package where some development steps have been taken?
As to the appraisal of 125 acres of undeveloped land on the Queen Elizabeth Way, half way between Oakville and Burlington (10 kilometers), the mortgagee, having sold the land for $12M, all the appraisers agreed on the ‘direct comparison’ approach (para 503). This required accurate comparators and accurate adjustments.
The game is to find an accurate comparator. Exact comparators are never available in undeveloped land comparisons. This judge took the exact comparison requirement very seriously precisely because of ‘the well advanced but incomplete development status’ of the lands he was dealing with(para 519). ‘It was difficult to virtually impossible to find good comparables for the Burloak Lands because its development process while largely complete, had not been wholly accomplished.’ (para 521)
The point to make here is that the judge gave credit to the partially completed development process as a value attribute and was not prepared to accept comparison to less developed land. For example, in rejecting the mortgagee’s appraisal #1, the judge effectively rejects mortgagee comparator #2 because the mortgagee-appraiser under-valued Burloak’s partially developed status (para.555+592). The judge rejected mortgagee comparator #3 because the mortgagee-appraiser under-valued Burloak’s partially developed status (para.560+596+597). The judge rejected mortgagee comparator #4 because the mortgagee-appraiser under-valued Burloak’s partially developed status (para.566+682).
ultimately the mortgagee’s failure to properly appraise cost it approximately $5M in damages.
