For the first time in the history of European commercial mortgage-backed securitisations (CMBS), it has been held that an issuer of a CMBS was entitled to pursue a negligence claim against a valuer over inflated property valuations, with a view to making recoveries that ultimately benefit noteholders. A fundamental question appears to have been answered, namely, who has standing to claim for losses against a valuer in a CMBS?
On 30 September 2014, the Queen's Bench Division Commercial Court decided in Titan Europe 2006-3 plc v Colliers International UK plc (in liquidation)  EWHC 3106 (Comm) (Titan) that Colliers International UK plc (Colliers), was negligent in its valuation of a commercial property backing a securitised loan.
Based on Colliers' valuation, Credit Suisse entered into a loan secured by a commercial building in Germany. The loan was subsequently transferred into a pool of assets backing the Titan Europe 2006-3 CMBS. The disparity between the value estimated at the time the CMBS closed and the value when the property owner became bankrupt eight years later was substantial.
The underlying property was purpose-built for a single tenant, and once the tenant became insolvent, the borrower under the loan defaulted, rendering the special purpose vehicle (SPV) that purchased the loan unable to make payments under the CMBS.
At issue was whether or not the SPV was the wrong claimant because the losses were in fact suffered by the holders of the notes issued by the SPV. In making its decision, the court looked at the following:
- Duty of care: reliance by a party other than the instructing lender was successfully established because the valuation report played a "real and substantial part" in inducing the SPV to purchase the loan. If the valuation had been correct, the loan to value ratio would have been so high that the loan would not have been made, and the SPV would not have bought the loan. The reliance was foreseen by Colliers, who agreed to make the valuation report available to potential investors in the CMBS.
- Standard of care: Colliers failed to consider that the property was unlikely to find new tenants because it was aging and purpose built for the original tenant.
- Causation of loss: while the noteholders did experience an economic loss, the court held that they were not the appropriate parties to claim damages because it would be difficult to quantify the loss in terms of lost cashflow on the notes, a mark-to-market loss or loss on disposal of the notes. The securitisation was structured so that all proceeds of action received by the SPV would be distributed to noteholders. Also, the High Court held that the SPV suffered a loss the moment it purchased the loan because it acquired a chose in action worth less than the price it paid for it. The amount of loss crystallised once the insufficiency of the security became known.
- Damages: the damages ordered was the difference between the valuation and the true market value of the underlying property.
Titan demonstrates that the distribution of loss can be tricky to pin down in complex CMBS transactions. In determining a duty of care, the court examined the series of transactions as a whole, beginning at the valuation predicating the underlying commercial mortgage, all the way to the end investment in the CMBS.
Following Titan, a key aspect of this kind of claim seems to be whether the contractual structure of a CMBS allocates the bringing of a type of claim to a particular party, that party brings the claim and complies with any conditions for doing so, and the proceeds are dealt with according to the contractual requirements.
Has this decision paved the way for historical CMBS transactions leading to claims against negligent property valuers? This may be very fact dependent and Mr Justice Blair observed that a different answer to the “correct claimant” question might arise in a different case, depending upon the transaction documentation.
That being said, similar claims are before the courts, such as: Windermere X CMBS Limited v Warwick Street (KS) LLP and Gemini (Eclipse 2006-3) Plc v CBRE Limited and Warwick Street (KS) LLP. This may also not be the final word on Titan. On 28 November 2014, Colliers will make its case to be allowed an appeal. Surely investors and valuers alike will be watching closely.