Titan Europe 2006-plc v Colliers International (UK) Plc (in liquidation)
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On 30 September 2014 the Commercial Court in London issued a judgment against Colliers International (UK) plc in respect of its negligent valuation of a commercial property in a test case that will have major implications for the commercial mortgage-backed securities (CMBS) market.
Rosling King LLP were legal advisers to the claimant, Titan Europe 2006-3 plc, securing a damages award of €32m in its claim against Colliers following its valuation of a commercial property in Germany.
The case concerns the valuation by Colliers International (UK) PLC (now in liquidation) (“Colliers”) of a commercial property in Nuremberg, Germany in December 2005. Colliers valued the property at €135m. In reliance upon the valuation, Credit Suisse advanced a loan of €110m. A senior tranche of the loan (of circa €100m), along with a number of other loans secured on commercial real estate across Europe, was subsequently securitised and transferred to Titan Europe 2006-plc (“Titan”), the Issuer, in a securitisation of circa €1bn.
The property was let to German mail order company Quelle AG, who subsequently became insolvent and vacated the property. Following the tenant’s insolvency the loan was put into special servicing. The special servicer, Hatfield Philips International, progressed the case (as agent of Titan) in order to recover losses incurred.
It was Titan’s case that Colliers was negligent in its preparation of the valuation in 2005. Titan claimed that Colliers substantially overvalued the property causing loss to Titan for which Colliers was liable. It was Titan’s alternative argument that if Titan had not itself suffered a loss, the noteholders in the Titan Europe 2006-3 securitisation had suffered a loss and Titan should be permitted to recover such losses on their behalf, otherwise the claim would fall into a “legal blackhole”. Colliers denied any liability and alternatively contended that the Credit Suisse loan and/or the subsequent securitisation of the senior tranche by Titan would have gone ahead even if they had known the true value of the property.
In his Judgment, Mr Justice Blair concluded that true value of the property as at December 2005 was €103m. Colliers had therefore negligently overvalued the Property by €32m and this is the figure that Colliers (through their insurers) are required to pay to Titan.
Mr Justice Blair had to consider two key issues in deciding this case: Firstly, did Colliers negligently overvalue the Property and, secondly, had Titan suffered a loss so as to entitle it to pursue a claim against Colliers. The Court found in favour of Titan on both counts.
The property was let to Quelle AG on a lease with 10 years remaining. A key focus of the case was what would happen to the property when the lease term expired. Mr Justice Blair commented that Colliers
“failed to give sufficient weight to the fact that the property was likely to attract poor demand because it was very large, old, and built to the needs of Quelle’s particular business. Although I have concluded that it was open to a reasonably competent valuer in December 2005 to conclude that it was probable that Quelle would stay in the property after the expiry of the lease, a reasonably competent valuer would have concluded that there was a real risk that it might leave, and Colliers did not give sufficient weight to the attendant problems which this building would then pose, in particular the difficulties that ought to have been foreseen in attracting a single occupier, the difficulties in re-letting the whole property, and the costs of sub-division.”
Mr Justice Blair concluded that:
- the value of the property as at December 2005 was €103m; i.e. a €32m, or 31%, overvaluation;
- in light of the 31% overvaluation, the question of the appropriate “bracket” which a reasonably competent valuer is permitted did not arise; Colliers contended that the appropriate bracket in this case was 20% whilst Titan contended that the appropriate bracket was 15%. Under either approach, Colliers’ valuation was negligent. Mr Justice Blair commented that, despite the “very real difficulty” in valuing the property, he preferred Titan’s submission;
- upon considering the evidence given by Titan’s witnesses, Credit Suisse would not have advanced a loan on the property based on a valuation of €103m.
Loss to Titan
In relation to the second point, Colliers argued that the securitisation was structured in such a way as to confer a right of action upon the individual noteholders, and thus, if Colliers had acted negligently, it was the noteholders who have suffered a loss and the noteholders who would have to bring the claim. Mr Justice Blair disagreed. In his Judgment he concluded that it was indeed Titan who had suffered a loss, that it was the correct claimant and that it was therefore entitled to bring the claim.
Colliers were ordered to pay Titan damages in the sum of €32m plus costs (with interest to be the subject of a further hearing if not agreed between the parties)
This is a landmark decision for those involved in the CMBS sector. Aside from the obvious size of the damages award, this case is significant as it is the first time that the English Courts have had to consider whether an Issuer of commercial mortgage-backed securities was able to pursue a claim against a valuer who had acted negligently in advising the original lender at the time of loan origination. The decision is therefore significant in providing some much needed clarity on this issue.
Given the volume of commercial real estate-secured loans which were securitised in the pre-Lehman years, it is somewhat surprising that it has taken until now for a case of this nature to be considered by the Courts; there is common misconception that claims of this nature would now be time-barred. However, this decision may now prompt Issuers, Servicers and other CMBS professionals to give further consideration to whether they may be sat on claims which, beforeTitan v Colliers, there may have been too many uncertainties for them to pursue.