What Does Fair Market Value Mean?

Generally, fair market value is the price an asset would sell for on the open market between a willing buyer and a willing seller. Though the wording may vary, the definition is fairly consistent across the various fields the phrase is used. 

Recently, the Supreme Court of Virginia considered the specificity of this phrase in the case of Ann M. Wilburn, et al. v. Anthony John Mangano. The phrase “fair market value” appeared in a will and codicil’s option to purchase real property. The codicil provided the deceased’s son the option to purchase real property at “an amount equal to fair market value at the time of [his mother’s] death.” After mother died, son gave notice of intent to exercise the purchase option, but ultimately failed to follow through. His sisters brought suit for specific performance asking the Court to force son to purchase the property. In opposition, son argued, in part, that fair market value was not a sufficiently specific enough term to allow sisters to enforce the option. 

The trial court and the Supreme Court agreed. 

An option contract is incomplete and unenforceable if it does not provide a fixed price or it provides a mode of fixing the price necessitating further negotiation and agreement between the parties. Here, the Supreme Court held that the date of mother’s death was not sufficiently specific to determine or define “fair market value” of the property. The phrase still required son and sisters to negotiate and agree upon the specific purchase price of the property, rendering the option unenforceable. 

So, what does this mean for you? 

Well, if enforcement of a purchase price for a specific asset is what you seek, avoid the indefinite, uncertain, inexact, or obscure. Be specific – identify the specific numerical value – when buying or selling any asset, whether that be real or personal property, a whole business, or even just its stock or shares. 

For further information, here is a link to the case: http://www.courts.state.va.us/opinions/opnscvwp/1191443.pdf.

Visit our corporate practice group page to learn more about our attorneys who can assist with business law matters.