Titan Europe 2006 – 3 plc v Colliers International UK plc (in liquidation) EWHC 3106 (Comm)
In an important decision, the High Court has held that a property valuer was liable in negligence to the issuer of securitised bonds. The Court’s judgment that the claim was correctly brought by the issuer of the bonds rather than the bondholders may make such claims more likely in the future. Despite the fact that the issuer was a non-recourse special purpose vehicle, the Court held that it had suffered loss and could bring the claim because it was contractually obliged to distribute any damages recovered to the bondholders.
The judgment also contains useful guidance on the factors to be taken into consideration when deciding whether property valuations are negligent.
Titan Europe 2006 – 3 plc (“Titan”) was the issuer of commercial mortgage-backed securities (“CMBS”) under which 18 loans secured by 40 commercial properties were securitised. Titan was a special purpose vehicle (“SPV”) set up for the purpose by Credit Suisse. One of the properties was a property in Nuremberg, Germany (the “Property”) which had one large corporate tenant. The property was valued at €135 million for Credit Suisse by Colliers International UK plc (“Colliers”) in 2005. Credit Suisse agreed to lend €110 million to the owner of the Property, Valbonne. As part of the securitisation, the SPV issued bonds to investors to raise funds for Credit Suisse’s loan which was then transferred to the SPV.
In 2009, the tenant of the Property became insolvent and Valbonne defaulted on its loan. The Property was eventually sold for €22.5 million in 2014. The SPV sued Colliers, claiming their valuation had been negligent.
The judge had to decide two main questions:-
- Was the SPV the correct claimant or should the claim have been brought in the name of the bondholders?
- Was the valuation negligent?
- for standard residential property, the margin of error could be as low as 5%;
- for valuation of a one-off property, the margin of error could be 10%; and
- if a property had exceptional features, the margin of error could be 15%, or even higher in appropriate cases.
Was the SPV the correct claimant?
The Judge decided that the SPV was the correct claimant because it was unrealistic to expect the bondholders to bring a claim since it was difficult both for them to act in unison and to establish their individual losses relating to only one of the securitised properties.
Colliers claimed that the SPV had suffered no loss because it was “non-recourse” (meaning that the bondholders agreed that they would have no recourse to the SPV’s assets other than the net proceeds of the loans and the assets securing those loans). The Judge rejected that argument and decided that the SPV had suffered loss by acquiring an asset worth less than the price it had paid for it. Furthermore, it could bring the negligence claim because it was contractually obliged to pass the proceeds of such a claim on to the bondholders.
The Judge also accepted that the claimant would not have entered into the transaction if the value of the property had not been negligently overvalued. It was clear that Credit Suisse had relied on the valuation in inducing it to enter into the securitisation but the evidence showed that the valuation report had not been read by the SPV. Nonetheless, the Judge concluded that the SPV had relied on the amount of the valuation, which was the important point, rather than on the detailed reasons given in the valuation report.
Was the valuation negligent?
The Judge recognised that property valuation involved a considerable degree of judgment. This meant there would always be an acceptable margin of error. However, he considered that the range of reasonable values could be as follows:
The Judge decided that the correct valuation was €103 million and on the basis that the acceptable margin of error in this case was 15%, Colliers’ valuation of €135 million had been negligent.
This case is important because it is the first negligence claim to be brought against a valuer in the context of a securitised loan. The fact that the SPV was allowed to make the claim because it was held to have suffered loss and to have relied on the valuation is a significant departure. In particular, the Court’s reluctance to prevent the claim on the grounds that the SPV was “non-recourse” may facilitate other similar claims in the future.