The High Court decision in Titan Europe 2006-3 plc v Colliers International UK plc [2014] EWHC 3106 (Comm) will not be welcomed by surveyors and their professional indemnity insurers as it may open the gates to more securitisation disputes after it was found that a valuer  was liable in negligence to the issuer of securitised bonds.

Facts

In 2005, Credit Suisse instructed Colliers to value a commercial property before agreeing a loan of  EUR 110 million to the owner. Colliers valued the property at EUR 135 million. The loan was  securitised along with other loans and transferred to Titan, a special purpose vehicle incorporated  by Credit Suisse. To raise funds for the loan, Titan issued bonds to investors. In 2009, the tenant  of the property became insolvent, which led the owner to default on the loan. The property was  eventually sold in 2014 for EUR 22.5 million. Titan issued a claim against Colliers on the ground  that it had negligently overvalued the property. Colliers argued in its defence that Titan had no  cause of action as it had suffered no loss and that the claim should have been brought by the  individual investors.

Decision

Considering first whether Titan was the correct claimant, although it accepted that it was the  investors that had suffered loss in economic terms, the Court found that Titan had suffered a loss  because it had acquired a chose in action worth less than the price it paid for it. Titan could  therefore claim against Colliers. Crucial to the Court’s decision was the fact that, under the  terms of the securitisation, Titan was contractually bound to distribute any amount received if its  claim was successful, to the investors, in accordance with the payment waterfall terms of the  bonds.

The Court then considered whether Colliers had been negligent. Whilst the Court acknowledged that valuations are subjective and that a certain margin  of error should  be permissible, it found that in this case Colliers had been negligent. It  considered that Colliers had failed to properly consider the real risk of the tenant vacating the  property and the fact that, because the property was very large, old and built for the needs of the  existing tenant, it was likely to attract poor demand. On that basis, the Court estimated the proper value of the property at the  time at EUR 103 million and was prepared to allow a 15% margin of error for a commercial property  with exceptional features such as this. However, Colliers’ valuation well exceeded this. The Court  further accepted Titan’s argument that, although it would not have read the entire valuation report, it still relied upon the valuation figure when it  purchased the loan from Credit Suisse. Colliers was therefore found negligent and was ordered to  pay Titan the EUR 32 million difference between its valuation and the Court’s valuation of the  property.

Comments

This is the first case against a valuer involving complex financial arrangements and it could open  the door to  more litigation in relation to commercial mortgage backed securities. Although the  Court made it clear that the important facts of this case were that the contractual structure  allowed the issuer of the securities to bring a claim and provided for the distribution of any  proceeds arising from the claim, the Court also showed its willingness to take a pragmatic  commercial approach and its reluctance to accept no loss arguments.