The English High Court has held for the first time that a securitisation issuer was able to bring a claim against a valuer who had been negligent when it provided a valuation for a property that was used as collateral for a loan which was subsequently securitised. The judgment in Titan Europe v Colliers1 will be of interest to investors, issuers and other participants in the CMBS industry that may be contemplating or are currently bringing negligence claims against valuers.
Proper claimant and "no loss" arguments
Colliers had argued that Titan was not the correct claimant because, as a non-recourse issuer of the CMBS Notes, it had not suffered any loss itself. They submitted that the loss had in fact been suffered by the Noteholders and that they were therefore the right party to bring the action (but had not done so).
The court concluded that Titan was the proper claimant, based on the contractual terms of the transaction documents. Under the Deed of Charge and Assignment and the Cash Management Agreement, Titan was contractually obliged to distribute the proceeds of any successful claim in accordance with the applicable payments waterfall, whereas the Noteholders did not have any such obligation. The proceeds would be applied according to the contractual structure to which the Noteholders had subscribed when they made their investments and, as such, they would be getting what they bargained for. The contractual terms of the transaction documents that the judge relied on are present in most securitisations in the market.
In relation to the "no loss" argument, the judge concluded that it was irrelevant that Titan was an economically neutral conduit for Noteholder receipts and payments. Instead, he held that Titan had suffered a loss from the moment it purchased the loan, for the simple reason that it acquired an asset (the debt instrument) worth less than the price paid for it.
Basis for negligence
The case highlights that, in order to establish negligence, it must be proved that the disputed valuation was one which no reasonable valuer would have reached and was outside the permissible margin of error. He held that, by reference to previous case law, the appropriate margin of error was 15 per cent. and that Colliers' valuation fell outside this tolerance level.
It was held that Colliers had been negligent, as a reasonably competent valuer would have concluded that there was a real risk that the tenant of the property in question might leave and the valuation failed to give sufficient weight to the fact that the property was likely to attract poor demand from alternative tenants because it was large, old and built to the needs of the tenant's particular business.
Having found that Colliers were negligent, the issues of causation and reliance had to be considered. The court found that the originating bank would not have made a loan secured on the property if it had been provided with an accurate valuation and that Titan would not have acquired its interest on the basis that the originating bank would not have been in compliance with the 90 per cent. loan to value warranty it gave. The judge noted that the valuation was transferred as security in relation to the securitisation and held that Titan had also relied on it (specifically the valuation figure) when purchasing its interest.
It is of interest that the court determined that Titan was the correct claimant, not because the originating bank had suffered loss when it originated the loan and that Titan could sue as assignee of any cause of action originally vested in it, but because Titan could sue in its own name as it had itself suffered loss when it purchased its interest in the loan for a higher amount than it was worth.
It is also interesting to note that, in this case, the parties' experts seem to have agreed that the recovery made through the claim would have the nature of a principal payment. This is itself a live issue in other cases. Whilst we can certainly see that a valuation claim recovery is in effect of a capital nature (as it effectively compensates for the value of the underlying security asset which was missing), it may not always follow that the sum should be treated as principal for the purposes of the relevant waterfalls in the transaction. It may be that the recovery should be treated in the same way as property disposal proceeds and the treatment of those may itself depend on matters such as the terms of the loan and inter-creditor agreement and whether the loan is in default. Issuer claims which are not to do with valuations may not even be of a capital nature at all, depending on what is being compensated for.
As well as ruling on who was the correct claimant in the case and on whether Colliers' valuation had been negligent, the judgment also discussed the complicated relationship between valuers and instructing lenders.
Titan claimed that the originating bank placed pressure on Colliers to reach a valuation which matched as closely as possible to a (higher) desktop valuation provided by another valuer and that this led to errors in the valuation. Colliers was pitching for work from the originating bank, probably in competition with other valuers, and therefore had a vested interest in achieving the bank's desired valuation. The judge added that, in his view, it was wrong for a leading institution to act in a way which compromised the independence of a valuer, particularly where the loan in question was made with the intention of transferring it to other parties and where the independence of the valuation was of paramount importance. As to legal principle, the lender may be enthusiastic but the valuer has to remain independent.
The loan was originated at a time when banks were highly motivated to produce loans that could be securitised because it was extremely profitable business for them. It is easy to imagine the temptation a banker would have been under to encourage a valuer to provide them with the highest valuation possible to help them maximise the amount that they could lend in relation to a particular property. As we see a return to economic growth, the importance of independent valuations for property finance transactions should not be forgotten by either valuers or instructing lenders.
1 Titan Europe 2006-3 plc v Colliers International UK plc (in liquidation)  EWHC 3106 (Comm)
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