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Negligent valuation overturned, but security issuer entitled to sue, says court

The Court of Appeal has suggested that a commercial mortgage-backed security (CMBS) issuer would be entitled to sue a surveyor for a potentially negligent valuation, despite overturning the finding of negligence  itself.06 Nov 2015

Colliers International had claimed that Titan Europe 2006-3 plc was not entitled to sue on the grounds that it had negligently overvalued the property, because the valuation had been carried out on behalf of the original lender, Credit Suisse. The Court of Appeal did not need to rule on the point given its findings in relation to negligence, however it commented that although Titan had "parted with the risk" in relation to the property in dispute when it issued the securities, it had "retained the property in the loans and the securities and therefore ... [had] title to sue".

The appeal court did, however, overturn Mr Justice Blair's 2014 High Court finding of negligence in favour of Titan. The three judges found that that Colliers' valuation of a German warehouse was within the "permissible margin of error" set by the High Court, and that Mr Justice Blair's conclusion on the true value of the property was itself incorrect.

"If we were reversing the judge on a question of fact we would, of course, be extremely hesitant about doing so," said Lord Justice Longmore. "But none of his basic findings of fact have been challenged by Colliers; it is only his inferential conclusions as to the 'correct' value based on his earlier findings that are subject to challenge."

Commercial disputes expert Suzie Boyd of Pinsent Masons, the law firm behind Out-Law.com, said that the Court of Appeal's comments could have a big impact on the securities market.

"The CMBS sector has been slow to progress professional negligence actions in the past due to a lack of clarification on whether their claims could be pursued and who the correct claimant should be," she said. "The Court of Appeal has now provided an indication on these points, which should give confidence to those pursuing similar claims."

"It will be interesting to see whether valuers now try and redress the balance by limiting the extent to which their advice can be relied upon by parties other than those instructing them," she said.

The dispute arose in relation to a warehousing complex in Nuremberg, Germany, which was once occupied by the country's largest mail order company. Colliers had valued the property at €135 million in December 2005, on the basis of which Credit Suisse granted a loan of €110m against the property. The bulk of this was subsequently securitised and transferred to Titan.

In late 2009, the occupants became insolvent and vacated the property, which lost nearly 90% of its stated value. Titan then sued Colliers for negligence. In the High Court, Mr Justice Blair concluded that the true value of the property in December 2005 had been €103m, well outside of the 15% margin of error he said was appropriate in the case. Titan was therefore entitled to damages for the negligent overvaluation of €32m.

The Court of Appeal was provided with evidence of six potentially relevant transactions and valuations of the property between 2000 and 2005. In June 2005, six months before Colliers' valuation, property had been sold at €127.1m. Although Colliers' valuation had to take into account the possibility that the tenant would not renew its lease, it was "inconceivable" that the correct value could have been as low as the €103m established by the High Court judge, the appeal court said.

A "more realistic" valuation of €118.3m was accepted by the court. This meant that Colliers' €135m valuation was within the 15% margin for error, it said.

"We are conscious that the figures fall somewhat narrowly rather than generously into the bracket selected by the judge but they speak for themselves and a narrow success is still a success," Lord Justice Longmore said. "It must also be remembered that the market was a rising market; that is a factor which has not been included in our calculations at all, but would favour Colliers if it was."

Property disputes expert Michael Smith of Pinsent Masons said that the judgment "reinforces again the significant weight which should properly be attached to a recent actual sale of a property in assessing value".

"It is not the 'be all and end all' of the valuation exercise, but it is cogent evidence of market value – which it appears received insufficient consideration in the High Court in this case," he said.