Issuer of securities entitled to raise negligence claim for overvaluation of commercial property, says UK court

Property law expert Gerry Mulholland of Pinsent Masons, the law firm behind Out-Law.com, said that the court's "sensible and pragmatic conclusion" against Colliers International had "potentially wide ramifications for CMBS transactions". This was the first time that a UK court had been asked to consider a claim against a negligent property valuer where the loan advanced by the original lender had later been securitised.

"In concluding that the issuer of the securities was entitled to bring a claim, the judge has provided a solution that avoids considerable practical difficulties," Mulholland said.

"The issuer of securities has to deal with the proceeds of the claim in accordance with the contractual requirements of the scheme. However, this means that all the parties get what they bargained for," he said.

Colliers valued the property involved in the dispute at €135 million in December 2005. Given the valuation, Credit Suisse granted a loan of €100m against the property, the bulk of which was subsequently securitised and transferred to Titan Europe 2006-3 plc. After the building lost nearly 90% of its stated value when the occupants, a German mail order company, became insolvent and vacated the property, Titan sued Colliers for negligence.

In his judgment, Mr Justice Blair concluded that the true value of the property in December 2005 had been €103m. Colliers had therefore negligently overvalued the property by €32m. The judge then had to consider whether Titan had actually suffered the loss and was entitled to bring the claim against Colliers. Colliers argued that only Credit Suisse, which had requested the valuation; and the holders of the securities, rather than Titan as issuer, were entitled to sue.

However, Mr Justice Blair said that in this case, the security contract was structured in such a way as to give Titan the right to sue. Colliers' argument was "commercially unattractive", while Titan was right to argue that "practical difficulties in valuing claims [made] it more likely than not in the present case that [security holders] would not be able to bring a claim".

Moving on to look at the loss issue, the judge said that he agreed as a "general point" that it was the security holders that suffered the loss in value of the mortgage. However, that did not mean that Titan had not also suffered a loss in respect of which it could bring a claim, provided that it could show that it was contractually obliged to distribute any damages in respect of that loss to the security holders, he said.

"In fact, it is common ground between the parties that [Titan] was contractually obliged to do so," he said.

"I do not think that it is right to conclude from the transaction as a whole that Titan suffered no loss. I agree with Titan that, on the premise that it can show reliance on a valuation which negligently valued the security as more than it was worth, and make good its case in causation, it suffered a loss the moment it purchased the senior tranche of [the Credit Suisse loan] because it acquired a chose in action worth less than the price it paid for it … The fact that Titan received funds from the investors which was used to fund the purchase of the loan assets is irrelevant," he said.

"In complex structured financial transactions of this kind … the distribution of loss can be difficult to pin down, and depends on when investments were acquired, market movements and the performance of the rest of the transaction. The important points are that (1) where the contractual structure allocates the bringing of a type of claim to a particular party, that party brings the claim, complying with any conditions for doing so, and (2) that the proceeds are dealt with according to the contractual requirements. Provided this happens, all parties will get what they bargained for," he said.