PERE: Georgina, what exactly is being contested here?
Georgina Squire: Back in September 2014, the High Court in London held that Colliers International was liable in relation to a negligent valuation of a commercial property that was collateral for a securitized loan. In 2007, Colliers valued one of the properties, a German multi-use property, in the CMBS structure at €135 million. The property was recently sold for around €10 million. As the whole securitization was in special servicing, the special servicer Hatfield Philips asked us to investigate how the valuation could have dropped so much.
We investigated the original valuation by getting a retrospective valuation from an independent expert valuer with only the knowledge the original valuer could have had – so ignoring hindsight. They put their own value on the property. The independent valuer arrived at less than €100 million, so a very sizeable difference. We therefore decided that there was a claim against the valuer for negligence.
The case went to trial to answer several points. Three key issues were: was Titan, as issuer of the CMBS, the correct claimant? Had it suffered any loss as a result of Colliers’ alleged negligent overvaluation of the property? Thirdly, was the valuation of the property by Colliers a negligent overvaluation?
The court found that Titan was entitled to bring a claim against Colliers. This is ground breaking as it is the first case in which an issuer has been said to have legal standing to bring a claim against a valuer. The court also found Colliers’ valuation of €135 million to be negligent and based on the valuation evidence presented, the judge decided the correct valuation was €103 million. Colliers are appealing this judgment.
PERE: Why is the outcome of the appeal important to anyone beyond Colliers and Titan?
GS: A first instance decision, like this, could be distinguished on its facts or said not to apply in another situation for different reasons. But once the Court of Appeal gives judgment, their decision is binding on any cases that follow. This is why it is a throw of the dice by Colliers to appeal it, because if they appeal and lose, they are in a worse position than they are now, where they are able to distinguish the facts of that case in another set of circumstances. It also sets a precedent for lenders, issuers and note holders who will likely be the beneficiaries of numerous high value professional negligence cases. We have a number of other investigations going on at the moment, there has been a huge amount of interest on behalf of the CMBS market since the original decision and we expect more if Colliers’ appeal is unsuccessful.
PERE: Other than a spate of negligence claims, what other impacts does the Titan case have on the real estate industry?
GS: It may well have an impact on valuers’ insurances; they, like other professionals, have found their professional indemnity insurance to be more expensive in recent years due to the number of claims being made. Valuers may also wish to review the scope of their retainers and any exclusions and restrictions in them. They may well also spend more time negotiating their retainers than they used to and be more precise in what they are doing, to whom they owe duties and the scope of those duties.
On the CMBS side, some of the definitions, such as ‘recoveries’ in CMBS documentation, and any new structures that are being put together now are being looked at more closely. There are issues for the special servicer as to whether it is authorized to bring claims of this type, whether it needs a special authority, whether its rights are already embodied within the documentation. Also, who should be able to bring the claims: the issuer, security trustee or someone else? I think a lot of those issues are now being actively considered in the context of the new structures which are being put together today.