In a landmark decision, the High Court has held that Colliers International plc (in liquidation) (“Colliers”), was liable in relation to its negligent valuation of a commercial property that was collateral for a securitised loan.
The judgment is of significant interest to participants in the real estate finance and commercial mortgage backed securities (CMBS) market because it provides guidance as to circumstances in which a SPV Issuer, as the assignee of a loan, can pursue a negligence claim against a valuer who had acted negligently in advising the original lender at the time of loan origination.
Titan v Colliers: The Facts
- In December 2005, Credit Suisse instructed Colliers to provide a valuation of a commercial property in Nuremberg, Germany. Colliers valued the property at €135 million. On the basis of that valuation, Credit Suisse advanced a loan of €110m to the freeholder of the property, Valbonne.
- Around €99 million of the loan, was transferred to Titan, who in turn issued CMBS to a value of just under €1 billion secured against a number of properties including the Nuremberg property.
- In June 2009, Valbonne defaulted under the original facility agreement and the loan was placed into special servicing. Shortly thereafter, in September 2009, the tenant of the property, the German mail order company Quelle, entered into insolvency proceedings.
- The property was subsequently valued at a staggeringly low €12.47 million. By 11 September 2013, the insolvency administrator for Valbonne had agreed to sell the Property for €22.5 million.
- Titan claimed that it relied on Colliers’ valuation when it purchased the loan and the security over the property from Credit Suisse.
- Titan sought judgment against Colliers for damages of €58.4 million, being the difference between Colliers original valuation of the property at €135 million, and what Titan claimed was the true market valuation of €76.6 million.
The two principal questions for the Court in the litigation were:
- Was Titan, as issuer of the CMBS, the correct claimant? Had it suffered any loss as a result of Colliers’ alleged negligent overvaluation of the property?
- Was the valuation of the property by Colliers a negligent overvaluation?
Was Titan the correct claimant?
The Court found that Titan was entitled to bring a claim in negligence against Colliers. The judge caveated his decision by stating that in the case of a securitisation transaction of this kind, the circumstances in which legal claims could be brought depended on the facts and the contractual terms of the various transaction documents. However, the judgment is groundbreaking as it is the first case in which an Issuer has been held to have legal standing to bring a claim in negligence against a valuer, even though it was the originator (Credit Suisse) who instructed the valuer and obtained the valuation report.
Was the valuation negligent?
The judge concluded that the Colliers valuation of €135 million was plainly out of line with the market evidence in 2005. Based on the expert valuation evidence presented in the case, the correct valuation was €103 million and that the appropriate bracket to apply was 15%. This allowed for a range of non-negligible values between €87.55 million and €118.45 million. Colliers’ valuation of €135 million was 28% higher than the correct valuation, and was therefore negligent.
Implications of the judgment
It is clear that lenders, issuers and note holders are likely to be the possible beneficiaries of numerous high value professional negligence cases which could in fact be successfully pursued, however the CMBS sector has been slow to progress such claims. This has in part been due to the fact that many losses have not yet crystallised but it has also been due to a lack of knowledge about when and how such claims can be pursued and who is the appropriate party in the transaction to commence the litigation. In light of the Titan judgment, this could all be about to change.
Colliers are seeking leave to appeal to the Court of Appeal and a hearing is set for the end of November.
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