News & Events

How “fair” is the “fair market value”?

Loosely worded contracts, especially options to purchase and rights of first refusal, can easily lead to litigation, as evidenced by the recent opinion of the Mississippi Court of Appeals in Martha Crow v. Crow’s Sports Center, Inc., No. 2011-CA-01233-COA (11-13-12).  In that case, Crow’s Sports Center had an option to purchase certain leased property upon the occurrence of a triggering event

for a fair market value as determined by appraisal by a licensed real estate appraiser or such other term as the parties renegotiate between themselves, which options shall be first evidenced by a written notice by LESSEES to the succeeding LESSORS with proof of the appraisal and evidence of the ability to exercise same ….

A triggering event occurred, and within the permitted time Crow’s Sports Center sent Lessors evidence of ability to purchase and an appraisal by a licensed real estate appraiser finding that the fair market value of the subject property was $47,000.  However, Lessors disputed that valuation and produced their own appraisal of fair market value at more than $100,000.  Litigation ensued. The Chancellor found that the contract was unambiguous, and that Crow’s Sports Center had tendered a fair market value appraisal.  Thus, he enforced the option at the $47,000 price.

The Court of Appeals, in a 6-4 ruling, affirmed the Chancellor’s finding that the option was enforceable, but reversed and remanded for a hearing on the actual fair market value.  Four dissenting Judges believed that the option language in the lease only required the Lessees to produce a fair market value appraisal by a licensed real estate appraiser, which they had done.  The majority, however, apparently believed that the option called for a fair “fair market value” appraisal, not just any “fair market value” appraisal. Such disputes, and the attendant cost of resulting litigation, which may well ultimately exceed the value of the property, can be avoided by carefully drawn and precise language.

-Bob Galloway