This week the Court of Appeal overturned what was considered to be a landmark decision of the High Court in which it was held that a valuer was liable for having negligently overvalued a substantial commercial property that had been used as collateral for a securitised loan.
The High Court judgment was significant for 2 reasons:
- It held that Titan Europe 2006-3 plc (Titan) - a SPV incorporated as part of a securitisation process instigated by the original lender - who had purchased the loan from the original lender and issued commercial mortgage backed securities (CMBS) to fund the acquisition, could pursue a professional negligence claim against the valuer who had advised the original lender at the time of loan origination; and
- It provided some useful guidance on the legal principles the court will apply when dealing with the question of whether a valuer has been negligent.
Colliers appealed both the finding of negligence and the court’s decision that Titan (as opposed to the investors in the securities) had the right to sue Colliers for damages in respect of that negligence.
Summary of Court of Appeal decision
The Court of Appeal first considered the question of negligence and found that Colliers’ valuation had not been negligent, hence overturning the High Court decision.
On the question of Titan’s ability to sue; as Colliers’ appeal was allowed on the basis of a finding of no negligence, the Court of Appeal did not have to make a finding on this issue. However Lord Justice Longmore commented that in the light of the importance of this issue to the securitisation industry, it was important for the Court of Appeal to express a view. He therefore stated (obiter) that had Colliers been negligent, the Court of Appeal would have upheld the trial Judge’s decision on this issue.
In December 2005, Credit Suisse instructed Colliers to provide a valuation of a property in Nuremberg that was to be provided as security for a loan to Valbonne Real Estate VB (Valbonne). Colliers valued the property at €135 million and on that basis, Credit Suisse advanced a loan of €110 million to Valbonne.
Shortly after, Credit Suisse incorporated Titan as a SPV as part of a securitisation process that involved the transfer of €99 million of the Valbonne loan, packaged together with 17 other loans, to Titan. The loans were secured against a pool of commercial mortgages relating to several properties in Europe, including the Nuremberg property. In order to fund the acquisition of the loans, Titan issued CMBS to noteholders to the value of almost €1 billion.
In September 2009, both Quelle and Valbonne became insolvent and in due course, Valbonne’s administrator sold the Nuremberg property for €22.5 million.
Titan claimed that it relied on Colliers’ valuation when it purchased the loan from Credit Suisse and sought to recover from Colliers the difference between Colliers’ valuation of the Nuremberg property at €135m and what Titan argued was the true market value at that time of €76.6m.
High Court decision
The trial judge held that the true market value of the property was €103 million, that Colliers were negligent in making their valuation of €135 million and that Titan was the correct claimant and entitled to sue for damages assessed at €32 million.
On appeal, Colliers did not challenge the legal principles applied by the trial judge in relation to valuer’s negligence or his basic findings of fact in arriving at the true value of the property, but rather his inferential conclusions as to the correct value based on the facts.
In considering the “correct” value of property (at the time of valuation), the Court of Appeal placed emphasis on the transactions and valuations of the property itself - in particular the fact that there had been an actual sale of the property for €127 million six months before Colliers’ valuation, and the fact that the valuation was prepared in a rising market. This meant that it was inconceivable that the “correct” value of the property could be as low as €103 million, as determined by the trial judge. The Court of Appeal also found an inherent inconsistency in the judge saying, on the one hand, that the minimum “credible” value in the market for the property was €100 million but at the same time, fixing a bracket or margin of error of a non-negligent valuation at 15% when he had determined that the true value of the property was €103,000.
On this basis, and also having regard to the relevant yields for the property (also the subject of debate), the Court of Appeal found that the “correct” value of the property was just over €118 million and not €103 million. Applying the bracket of 15%, Colliers’ valuation of €135 million was (very narrowly) within the acceptable margin of error applied in the case of complex valuations and they were found not to have been negligent.
Title to sue
On appeal, Counsel for Colliers argued:
- That the noteholders (of the CMBS) had their own right of action and it could not have been intended that Titan should also have a cause of action against Colliers; and
- Even if Titan did have a theoretical right to sue, it had suffered no loss because it laid off the risk of Colliers’ negligence (if applicable) to the noteholders who had no recourse to Titan under the securitisation agreements.
The Court of Appeal was not persuaded for the following reasons:
- Even though the risk had passed to the noteholders, Titan had retained the property in the loans and the securities and therefore had title to sue Colliers for their negligence, if any.
- Colliers had expressly assumed responsibility to Titan as the “purchaser or transferee” of the loan pursuant the “Liability and Publication” section of their valuation report.
- Even if in theory, Colliers could be exposed to a claim by both the noteholders and Titan, the court pointed out that there were numerous difficulties inherent in a claim by the noteholders, such as the fact that the notes were secured against a pool of mortgages on 18 separate properties and it would be difficult to establish the precise interest that the noteholders had in the Nuremberg property, and the fact that it was difficult to see how any action brought by a Noteholder now would not be time-barred.
- It was not correct to say that Titan had not suffered any loss. Assuming that Colliers had overvalued the Nuremberg property, Titan suffered a loss when it bought the loans and securities because the price it paid was too high.
The Court therefore commented (obiter) that if it had found that Colliers had been negligent, it would have upheld the trial Judge’s decision that Titan could recover from Colliers the difference between Colliers’ valuation and the “correct” valuation.
So where does this leave us?
In relation to the issue of title to sue, although the High Court decision is no longer a binding authority, the real estate finance and CMBS market should not be downcast as the Court of Appeal gave a very clear indication that this issue was correctly decided by the trial judge.
Insofar as valuer’s negligence is concerned, it has been said in case law that “valuation is an art not a science”, and the competence or otherwise of a valuer cannot be judged mechanistically. Factor in a complex property with a bespoke tenant and experts whose evidence is a long way apart, and the court has a very difficult task indeed, as was clearly illustrated by this case.