Market Value: Is the global consensus under threat?

In the early 1990s international agreement on what Market Value represented was widely recognised as essential for cross border trade and investment. Two groupings of the then recently formed organisations from most of the major economies, the International Valuation Standards Council (IVSC) and the European Group of Valuer Organisations (TEGoVA) came together in an effort to agree a common definition. This proved to be a drawn out and sometimes heated debate but by 1994 an accord was reached.

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Since then both the IVSC and TEGoVA have promoted this definition in their respective standards, and after

a transitional period of allowing it to be used alongside its previous definition, the RICS has used it as its default expression of the price achievable in a market transaction in the Red Book since 2002. Over the past quarter of a century the use of this definition has become more widely recognised, often way beyond its origins in the real estate markets. An example is how TEGoVA successfully lobbied for it to be embedded in the EU Capital Requirements Regulation (CRR). Its interpretation has been examined and tested in the courts of different jurisdictions in commercial disputes. The explanations in the supporting Conceptual Framework have also been frequently cited where courts have to establish the assumed motivation or relationship between the hypothetical parties. For a profession that is still fragmented and unevenly organised around the world Market Value counts as a rare success. However, this is now threatened.

At its “General Assembly” in October, TEGoVA announced that it was seeking to change the definition. There is nothing wrong with this, but it is doing so without collaboration or even consultation with the other major stakeholders in the definition. Indeed, it not only announced its preferred new definition but also that it was to seek a corresponding change in the CRR before changing its own standards.

Its justification for making the change was that the English idiom "in an arm’s length transaction" has been inappropriately translated in several languages. With hindsight the mainly anglophone founders of Market Value could have adopted a better expression but since each phrase within the definition is clearly explained in the Conceptual Framework the risk of misunderstanding is minimal. In its place TEGoVA is proposing to use the words “…acting freely and independently of each other...”. The explanation of the phrase in the current Conceptual Framework is more comprehensive but includes the words “The … transaction is presumed to be between unrelated parties, each acting independently.”. Thus, while an “arm’s length transaction” may be nonsensical if translated literally, a glance further down the page to the framework should indicate the appropriate meaning for the translator. Indeed, it is a question I have been asked more than once by translators who have been perfectly happy that they can find appropriate words to indicate the parties are unrelated and acting independently.

If this was the only change the fact that there were two English versions of the definition would just be a minor irritant given that with proper reading of the definition and its framework there would be no difference in meaning. However, the TEGoVA proposal does not stop there. It is also proposing to remove the adjective “willing” from the hypothetical buyer and seller and to add the words “…and excluding any particular value to a party.” to the end of the definition. These changes are far more problematic.

The motivation of the parties is fundamental to understanding the correct approach to Market Value. Often an actual party will claim that they would not be willing to sell or willing to buy at a given price. The current definition counters this by clearly defining the respective characteristics of the “willing” buyer and seller. Not only are these explanations useful to valuers applying the definition, they have also proved useful when courts in many jurisdictions have had to determine the extent to which the characteristics and motivations of actual parties to a dispute are relevant in the assessment of Market Value.

Historically, one of the problems that RICS originally had with the definition is that it does not explicitly disregard “special value. The additional words TEGoVA want to add may be an attempt to address the same issue. However, RICS eventually accepted the current definition once it realised that, firstly, it is addressed in the Conceptual Framework and, secondly, that “special value” is not a concept that can be explained concisely or easily isolated from other factors that legitimately influence the price under the definition. Indeed, the explanation of the exclusion in the framework is longer that the whole MV definition. Simply excluding “particular value to a party” might seem like a useful shorthand but it opens a whole new area of uncertainty, as what is Market Value if it is not the coincidence of the particular value to either party?

Besides proposing alternative words that are either unnecessary or that undermine the consistent interpretation of Market Value, by creating an alternative definition TEGoVA risks confusing the markets in which its member organisations operate. It will also create complications for the many members of organisations of TEGoVA who are also members of IVSC and thus expected to follow the current definition. If TEGoVA really feel a change is needed, surely the more constructive approach would be to seek to agree any change with the other key stakeholders such as the IVSC and RICS?

The above article originally appeared in the Estates Gazette on 5 January 2019