The Commercial Court in London’s judgment against Colliers International (UK) plc in respect of its negligent valuation of a commercial property is a landmark decision that will have major implications for the commercial mortgage backed securities (CMBS) market, explains partner James Walton.

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. Aside from the 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.

The case was progressed by Hatfield Philips International, the special servicer of the loan. 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.

In his judgment, Mr Justice Blair concluded that the 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 was ordered 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.

Mr Justice Blair concluded that:

• the value of the property as at December 2005 was €103m; i.e. a €32m, or 31%, overvaluation;

• in considering the question of the appropriate “bracket” which the valuer in this case was permitted, Mr Justice Blair commented that, despite the “very real difficulty” in valuing the property, he preferred Titan’s submission that the appropriate margin of error was 15%; and

• 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.

In relation to the second point, Mr Justice Blair disagreed with Colliers and concluded that it was indeed Titan who had suffered a loss and that it was the correct claimant.

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 a common misconception that claims of this nature would now be timebarred. 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, before Titan v Colliers, there may have been too many uncertainties for them to pursue.

Following the judgment, Blair Lewis, Chief Executive Officer of Hatfield Philips commented “We are very pleased with the ruling, not just because of the positive impact it will have for the noteholders of Titan 2006-3 directly, but also for the precedent it sets for other claims of this nature”. He added “we couldn’t be happier with the work done by Rosling King and barristers at 3 Verulam Buildings in achieving this successful outcome.”
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