“Fair Market Value,” or FMV, is often referenced, and frequently capitalized in lease documents and therefore looks like a defined term in a contract. Most lessees reading a lease contract which contains FMV assume it’s defined in some reasonable and straightforward manner. In many leases, FMV is not defined and when it is defined it is often defined in a manner which is extremely lessor-favorable. Many apparently benign elements of the definition such as “as mutually agreed” actually create material risk for the lessee and can result in extensions since the lessor’s incentives are affected by the fact that monthly rents continue to be paid while negotiations go on. Other contractual approaches to more tightly defining FMV like hiring an appraiser or a few appraisers have similar risks – the whole process leads to extensions since these definitions rarely include a time frame. The bottom line is that while FMV can be well structured to reflect the lessees understanding of Fair Market Value –this is almost never properly addressed in lease documentation from the lessee’s point of view. If you want to put your FMV definition to the true test– just ask your lessor for an FMV quote on all of your remaining leases and see what you get back. If the number is surprising you may need help from an expert.
