In a judgement of major significance for the commercial mortgage backed securities (CMBS) market, the High Court has ordered a negligent valuer to pay €32 million damages to a CMBS issuer. This is the first time a CMBS-related valuation negligence claim has been before the English courts.
In 2005, Credit Suisse made a loan in reliance on Colliers International (UK) plc’s (Colliers) €135 million valuation of a commercial property in Germany. The senior tranche was then largely securitised and transferred to Titan Europe 2006 plc (Titan) as part of a €1 billion securitisation.
The tenant of the property subsequently became insolvent and vacated, and the property’s value plummeted.
Titan claimed that Colliers had been negligent when it prepared the valuation and as a result the property had been overvalued and Titan had suffered a loss when it acquired the senior tranche.
1. The true value of the property at the time of the valuation was €103 million
After a careful review of the expert evidence on both sides the judge determined that the appropriate valuation was €103 million and then allowed a 15% margin for error (Colliers had contended that an appropriate margin should have been 20%). He found that Colliers’s valuation was outside this margin for error, in large part because it had 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 the current tenant’s particular business, and held that Colliers had therefore been negligent. He awarded Titan €32 million, being the difference between Titan’s €135 million valuation and the judge’s finding that €103 million was an appropriate valuation.
2. The issuer suffered loss
Colliers argued that as a non-recourse issuer of notes, Titan had suffered no loss and was the wrong claimant. Economically, it was not disputed that it was the noteholders who had suffered loss as a result of the drastic reduction in value of the underlying property. However, the judge held that the non-recourse nature of the notes was irrelevant: Titan suffered a loss the moment it purchased the senior tranche because it paid more than the senior tranche was worth. It was held that it was essential to Titan’s ability to bring a claim that it could show that it was contractually obliged to distribute any sums received following judgement to the noteholders under the waterfall in the Cash Management Agreement. The judge was at pains to emphasise that the decision was based on the facts of this particular case.
Operators in the CMBS market have been waiting for a judgement on this issue for a long time. It has always been a point of some interest that there have been no actions against valuers in the courts (successful or otherwise) in the aftermath of the intense lending activity and subsequent loan/real estate crash from 2008 onwards.
It is understood that Colliers intend to seek leave to appeal to the Court of Appeal. Given how much is at stake for valuers and insurers, this is perhaps not surprising. The grounds of appeal are likely to focus on the decision in relation to whether the issuer was the correct claimant and had in fact suffered loss.
In any event, given the potentially significant ramifications of this judgement, the industry (and the legal community) would benefit from the analysis of the Court of Appeal.