Titan Europe 2006-3 Plc v Colliers International UK Plc

This is an appeal in a valuer’s negligence case. On 15^th December 2005 Mr Robert Mayhew of Colliers International UK Plc (the defendants below and respondents here) valued at €135 million a large commercial property on Fürther Strasse in Nuremberg used mainly for warehousing, (but including offices and a department store) and occupied by the then biggest mail-order company in Germany, Quelle Alktiengeschell-Schaft (“Quelle”). This was at a time of generally rising property values in Germany and elsewhere, well before the fall of Lehmann Brothers and the subsequent financial crisis. Quelle’s occupation was as leaseholder pursuant to a 15 year lease beginning on 1^st January 2001. At the time of Colliers’ valuation there was thus a further 10 years to run and Colliers assessed the covenant as “very good”; the judge decided that the probability in 2005 was that Quelle would renew but that there was a “real risk” that they would not, a risk which Colliers had not factored into their valuation. The judge also held that, in the event of non-renewal, it might not be easy to find a new tenant or otherwise dispose of the property.

As from 27^th August 2003 Quelle’s landlord was Valbonne Real Estate B.V. (“Valbonne”) who wanted a loan from Credit Suisse on the security of the property. It was Credit Suisse who instructed Colliers to value the property leased to Quelle and thereafter entered into a facility agreement pursuant to which it advanced €110 million to Valbonne on 29^th December 2005. Credit Suisse instructed Colliers to assume that the passing rent was €9.28 million although it was in fact only €8,589,703. No complaint is made that Colliers followed that instruction.

This loan was, some 5 months later, sold to Titan Europe 2006-3 Plc (“Titan”) pursuant to a process of securitisation whereby a number of loans were packaged together and a number of “Noteholders” became the ultimate beneficiaries of the loan and the securities supporting those loans. The process of securitisation is usually understood to be the repackaging of illiquid financial assets or receivables into more liquid tradeable securities. The detail will have to be examined but in very broad terms the position was that Titan had an obligation to administer the loans and securities which were referred to as commercial mortgage backed securities (or CMBS). It acquired and held the benefit of charges over the various properties subject to the securitisation and remained the legal and beneficial owner of the rights it had relating to what was called “the Senior Tranche” of the loan. Once it received sums by way of realisation, Titan was obliged to distribute such sums to the Noteholders pursuant to a “waterfall” provision in the securitisation agreements.

In September 2009 both Valbonne and Quelle became insolvent. Quelle’s last payment of rent was made in December 2009. In due course Valbonne’s administrator disposed of the property for €22.5 million by which time this litigation had begun.

Blair J in a judgment now reported at [2015] 2 AER Comm. 479 has held that the true value of the property was €103 million, that Colliers were negligent in making their valuation of €135 million and that Titan were entitled to sue for damages, which have been assessed at €32 million. Colliers have appealed both the finding of negligence and the decision that Titan was entitled to damages in respect of that negligence. They say that it was the Noteholders who suffered the loss since it was the value of the Notes that was reduced as a result of their undervaluation and the Noteholders had no recourse to Titan in respect of that loss. Although the securitisation industry in general is interested in the title to sue question and this question was argued first before us, it is more logical to consider initially the question of negligence since, if there is no claim, title to sue does not generally matter.

Negligence? (1) The Law

At paragraph 127 of his judgment, Blair J recorded that the legal principles in relation to a valuer’s negligence were not in dispute:-

The trial was complex since the judge was invited to deal with many issues and sub-issues few of which he ultimately held to be decisive. The expert evidence presented particular difficulty since each of the parties chose to be particularly critical of the competence of the other side’s expert. Mr Duncan Preston, acting for Titan, was said by Colliers to be unfamiliar with the valuation of properties in Germany and so no weight should be accorded to his evidence; Mr Jonathan Manley, acting for Colliers, was said by Titan to be unacceptably conflicted because he had made a valuation of another German property which was itself not dissimilar to Quelle’s building and this valuation was itself subject to a pending claim for negligence so that he had a reputational interest to defend. The judge dealt with each of those criticisms in a measured way which, despite the repetition of the criticisms by both Mr Patrick Lawrence QC for Colliers and Mr Christopher Symons QC for Titan in this court, we find impossible to criticise. He permitted both experts to give evidence some of which the judge found valuable, taking into account the extent to which he held that the criticisms made were legitimate.

The judge’s difficulties with the experts’ evidence did not, however, end there because their expert valuations were a very long way apart. Mr Preston’s first valuation recorded in Titan’s solicitors’ letter of claim of 6^th October 2010 was as low as €61 million; by the time of his report he had come up to €76.6 million. That produced a net initial yield of 11.38% which Titan accepted was high but was justified by the fact that Quelle’s lease only had 10 years to run and the property would then only be worth its land value. For this purpose Mr Preston had adopted what he called a “term and reversion” methodology. In contrast, Mr Manley adopted a “yield and covenant” methodology which apportioned rental income across the various components of the property; this led to a valuation of €125.9 million with a net initial yield of 6.77%.

As far as the permissible margin of error (or the “bracket” as it is frequently called) was concerned, Mr Preston accepted that the property was sufficiently unusual to justify a figure of 15% either side of what a judge would decide to be the “correct” valuation. Colliers pointed out that the bracket applicable to Mr Preston’s own two figures was itself more than 20% and argued that that was the appropriate margin of error for any valuation for what was accepted by both sides as being a building which was undoubtedly difficult to value.

In the event the judge decided this point in favour of Titan (and Mr Preston) and adopted a bracket of 15%. That is not challenged on appeal. When he came to assess the true market value of the property as at December 2005, the judge made the following important findings:-

a valuation below €100 million would not have carried any credibility in the market (para 279(1));

it was open to a reasonably competent valuer to conclude that it was probable Quelle would stay in the property after the lease had expired but that there was a real risk that it might leave. He therefore rejected Mr Preston’s term and reversion methodology (para 279(2));

Mr Manley’s valuation was too high partly because his estimated rental value for the property was too high (although the judge felt unable to make any specific findings as to the ERV (para 205)) but mainly because his yield calculations were “too low by a substantial margin” and he had understated the real difficulties of disposing of the building if Quelle did indeed leave (para 279(3)). In any event the judge (like Mr Manley) relied on the passing rent for the purpose of making his calculations;

an appropriate yield to adopt in order to apply it to the net rental income from the property was 8.5%; and

this then led to a valuation of €103 million.

The judge was aware of the importance of this aspect of the case. He said:-

There was evidence of “comparables” but in the end the judge did not find it particularly helpful. The transactions and valuations of the property itself thus became important.

There were 6 potentially relevant transactions and valuations of the property between 2000 and 2005:-

Quelle was the original owner of the property but in 2000 sold the property to Thesaurus GmbH and then leased it back from Thesaurus. The sale price was the Deutschmark equivalent of €102,258.000 The 15 year lease began on 1^st January 2001 renewable for three further terms at Quelle’s option. The judge regarded the transaction as significant;

Thesaurus then sold the property to Valbonne on 27^th August 2003 for €91,787,400 (recorded in Valbonne’s books as €95,030,793 which the judge considered to be a better indication of value) but (obviously) below the 2000 price;

a valuation in September 2003 by a Netherlands firm Weatherall Vastgoed Adviseurs (“Weatherall”) at €114.7 million. The judge accepted it as part of the overall picture while not giving it undue weight because there was no analysis of the strength of the covenant, comparables, rental value or the tenant’s intended use of the property at the end of what was now an unexpired term;

a second Weatherall valuation in January 2005 at €125.4 million calculated by capitalising the rent of €9.28 million per annum (the rent which Colliers were required by Credit Suisse to assume) at a gross initial yield 7.4% (or an adjusted yield of 6.98%). The judge gave this the same weight as the previous valuation;

a further valuation by another Dutch firm Meeùs in March 2005 at €134.5 million to which the judge ascribed less weight than the Weatherall valuations because it was only disclosed shortly before trial and neither expert commented upon it. He nevertheless said that Colliers was entitled to put it before the court as part of the overall picture; and

on 1^st June 2005 the owners of Valbonne’s shares sold them to Homco Realty Fund which was owned by Hofberg Invest Inc for €127.1 million. The judge accepted that this was an arms length sale and potentially an indicator of the market value at the relevant time (para 169). The judge made an “important qualification” to this because the seller had warranted that Quelle would execute a new 15 year lease with a rent of €9.28 million rather than the rent of €8,589,703. The judge accepted that this transaction was of relevance but said it was necessary to adjust the value to reflect “the fact that the seller warranted that there would be a 15 year lease entered into by Quelle in place of the 10 years remaining on the existing lease and this did not happen” (para 172). He added that it was significant that the purchaser required an extension of the Quelle term since that underlined the importance to the market value of Quelle’s “position” namely that, although Quelle’s covenant was “good” it had some concerns (para 214) in the light of the risk that Quelle might not renew (although it probably would, see paras 235 and 179(2) already cited above) and the consequent difficulties if it did not renew.

In the light of the judge’s acceptance that all these figures, albeit with some qualification, were legitimately part of the overall picture in relation to Colliers’ valuation, Mr Lawrence produced in this court a graph showing the various transactions and valuations in respect of the Quelle property which we reproduce below. He added Colliers’ own valuation beside them.

Mr Lawrence then pointed to the parties’ agreement that prices were generally rising at the time in a bullish market as reflected in paras 20, 136-7 and 178 of the judgment and submitted that Colliers’ valuation was in line with all the available evidence of the approximately contemporaneous transactions and valuations of the property itself, which were much the most cogent evidence of a true valuation. He pointed out, further, that there was an inherent inconsistency in the judge saying that on one hand a valuation below €100 million would carry no credibility in the market and on the other fixing on a figure of €103 million as the true valuation when also deciding that a bracket or margin of error of a non-negligent valuation was 15%. If a valuation of €100 million was the minimum the market would consider credible a true value had to be at least €117.39 million so that the valuation actually given by Colliers of €135 million was within 15% of the true value.

We can see no answer to these criticisms of the judgment. It is, of course, true that all six transactions shown in the graph were subject to some legitimate qualifications but, if six months before the valuation there had been an actual sale at €127.1 million (albeit on somewhat different terms) and the market was still rising it is, to our minds, inconceivable that the “correct” value could be as low as €103 million.

Moreover, during the trial Colliers produced the yield table recorded at para 268 of the judgment, which was not factually in dispute. These yields are not net initial yields but are adjusted to take into account purchaser’s costs at 6% as Colliers did in their own valuation which the judge accepted (para 268) was a reasonable figure.

Of course these figures require some adjustment to allow for the fact that by 2005 only a 10 year term remained rather than the 15 year lease contemplated at the time of the sale to Homburg; the mean of the experts’ views was that that could be catered for by an adjustment of 0.5%, which the judge also accepted. That then gives a further adjusted yield of 7.4% which on a rent of €9.28 million, (which Colliers were instructed to assume) results in a “correct” value of € 118,306,986. That, as it seems to us, is a more likely value than €103 million. This figure places Collier’s valuation of €135 million within the 15% bracket.

Mr Symons’ response to these arguments was that the judge was entitled, on all the evidence, to adopt a yield of 8.5% which then leads to the figure of €103 million but, for our part, we cannot see that the judge was so justified. It is a much higher yield than those given in the table referred to and reaches a figure which is perilously close to the figure of €100 million, the absolute minimum that would have carried any credibility in the market. It is, moreover, significant that in the calculations that led him to the figure of €103 million, the judge has not even mentioned the June 2005 sale although he had earlier (para 172) accepted that it was relevant. He seems therefore to have proceeded without regard to what Phillips J called “the most cogent evidence”.

In a note submitted after oral argument had concluded, Mr Symons contended for other (higher) yields on the basis first that the true value at the time of the June 2005 sale was not €127.1 million but €118.1 million because the difference of €9 million was the deposit which was held back pending signature of a new lease. But the judge was in our view correct to accept (para 169) that the sale was based on a value of the property of €127 million since that value was not conditional on a new lease being signed and the judge accepted that the right probability for Colliers to take into account was that Quelle would renew although that was not certain. He correctly identified the retention of €9 million as the combined effect of the need to await the warranted new lease with both a longer term and a higher rent, and that since Colliers were instructed to assume the higher rent, no adjustment had to be made for that. This left, as the judge said, only the need to adjust for the warranted longer term of 15 years (para 172), which he elsewhere decided could be reflected in a 0.5% increase in the yield (para 259(1)).

Mr Symons also submitted that the purchase costs were not 6% but 2.5% because stamp duty in Germany was, as in the United Kingdom, not chargeable on a sale of shares but only on a sale of the property. But it was agreed between the parties at trial that 6% was the appropriate figure which the judge explained was, in any event, a reasonable figure. Moreover it was an opinion as to the sale price value of the property itself which Colliers were instructed to provide, and it would therefore be appropriate for stamp duty to be brought into account as part of purchasers’ costs, so as to compare like with like when using a yield.

In the end it does not matter whether the “correct” value is a figure 15% of which is within the minimum credible figure of €100 million or what we believe to be a more realistic valuation of €118.3 million. Colliers’ valuation is within 15% of both of them and, on the agreed view of the law, Colliers cannot therefore be liable.

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. 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.

If we were reversing the judge on a question of fact we would, of course, be extremely hesitant about doing so. 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. After anxious consideration we have been unable to see any satisfactory answer to Mr Lawrence’s submissions as to the true value of the property.

Mr Lawrence also sought to appeal the judge’s findings on causation and reliance but in the light of our conclusion that the “correct” value was in the region of €118.3 million and that Colliers’ valuation of €135 million cannot therefore be said to be outside the 15% bracket, those arguments need not be addressed in any detail. For our own part, however, we cannot see that the findings of the judge, who saw and heard the relevant witnesses can, in this respect, be criticised. It follows therefore, that the appeal will have to be allowed and that anything we say about title to sue will be obiter. Since the matter was, however, fully argued and since it is probably of more importance to the securitisation industry than the outcome of any one valuation appeal, we think it right to express our views.

Colliers submit that the judge was wrong to hold that Titan had any cause of action against them or, alternatively, that even if Titan did have a cause of action it had suffered no loss, because the risk of their valuation being negligent had passed to the Noteholders who were therefore the only persons to have suffered loss. For this purpose it is unfortunately necessary to refer to the securitisation in some detail. The judge’s account was not seriously challenged and can be quoted:-

In these circumstances it is not at first sight easy to see why Titan as the legal and beneficial owner of both the securitised loans and the securities cannot sue Colliers to recover any loss resulting from Colliers’ negligence in relation to the valuation. It may well be that after recovery of that loss, the loss will be treated as a receivable that must be applied in accordance with the provisions of Schedule 5 of the Cash Management Agreement but that is a matter with which Colliers should have no legitimate concern.

In this connection it is important to note that the valuation itself expressly provided:-

CSFB (in any and/or all of its capacities), its employees, agents, successors and assigns;

any actual or prospective purchaser, transferee, assignee, or servicer of the loan, any actual or prospective investor (including agent or advisor) in any securities evidencing a beneficial interest in or backed by the loan;

any rating agency actually or prospectively rating any such securities;

any trustee for bond holders holding bonds backed by the loan (“Relevant Securities”).

He relied on the decision of the House of Lords in The Albazero[1977] AC 774 in which it was held that a charterer and seller of goods under a c.i.f. contract who had parted with both property and risk in the goods to the purchaser of the goods was held to be entitled to nominal (rather than substantial) damages in an action against the shipowner for breach of charterparty because the shipowner would otherwise be exposed to the risk of double liability both to the charterer under the charterparty and the purchaser under the terms of the bill of lading. Lord Diplock said at page 848E:-

We are unable to accept Mr Lawrence’s submissions. It is a commonplace truism of property law that the owner of property has rights of suit for substantial damages in respect of any actionable negligence, see e.g. The Sanix Ace [1987] 1 Lloyds Rep. 465. In our judgment the same applies to rights of suit in relation to loans and the securities underlying them. The choses in action owned by Titan in this respect are just as much property as any other sort of property and Titan’s title to those choses in action entitles it to sue for substantial damages if it has a cause of action at all. It clearly would have had such a cause of action against Colliers (if Colliers had been negligent) since Colliers expressly assumed responsibility to Titan as the “purchaser or transferee” of the loan pursuant to the “Liability and Publication” section of their valuation report.

Much time was taken up both at the trial and in this court by counsel’s submissions on the question whether the Noteholders had a cause of action so that Colliers might be exposed in theory to a possible action by a Noteholder as well as to the action by Titan. (We say in theory because no Noteholder has sought to sue and it is difficult to see how any action brought now would not be time-barred). There would be other difficulties in any such action since the Notes were secured against a pool of mortgages on 18 separate properties and it would not be obvious what interest any particular Noteholder would have in the Quelle property. The judge recorded what he called Mr Lawrence’s diplomatic observation that he did “… not submit that the exercise would be free of forensic complication”.

But in our view that enquiry is irrelevant because Titan owned both the loans and the securities. The case is therefore different from the Albazero in which the claimant charterer had parted not merely with the risk in the goods but also with the property. In this case Titan may well have parted with the risk but it had retained the property in the loans and the securities and therefore, in our view, has title to sue Colliers for their negligence if any.

Since Colliers expressly assumed responsibility to “any actual or prospective investor” in the Liability and Publication section of their report, we would be reluctant to say that a Noteholder could never bring an action but, since the Noteholders stand in much the same relation to Titan as a shareholder stands in relation to a company whose shares he owns, any such action by a Noteholder might well be met with the assertion that his loss was reflective of Titan’s loss and thus be defeated by the doctrine of reflective loss as exemplified by Johnson v Gore Brown[2002] 2 A.C. 1. Gardner v Parker[2005] BCC 46, to which Mr Lawrence very properly drew our attention, makes it clear that the reflective loss principle is by no means confined in its effect to shareholders.

Mr Lawrence then submitted that even if Titan had a theoretical right to sue, it had suffered no loss because it laid off the risk of Colliers’ negligence to the Noteholders who had no recourse to Titan.

The same argument was put to Thomas J as he then was in Interallianz Finanz A.G. v Independent Insurance Co Ltd dated 30^th May 1997. That was not a case of securitisation but of sub-participation (with only limited recourse) in the loan on the part of other “lenders” after draw down had occurred. The judge held that the original (and continuing) lender was entitled to recover damages from a negligent surveyor. He described the arrangement by saying:-

Interallianz submitted that they had suffered the relevant loss and that the sub-participation agreements were res inter alios acta. The judge agreed relying on British Westinghouse v Underground Railway[1912] AC 673 which held that subsequent transactions, if they were to be taken into account, had to arise “out of the consequences of the breach and in the ordinary course of business”. He said (page 73):-

We would respectfully approve this decision, although on the facts of the present case we would, as we have said, put primary emphasis on the fact that Titan were the owners of the loan and of the securities. That of itself gave Titan not only its right to sue but also the right to recover substantial damages.

It is, moreover, not correct to say that Titan suffered no loss. It suffered a loss when it acquired the loans and the securities including (on this hypothesis) the over-valued property in Fürther Strasse. The price it paid for the loans was too high. Titan's relationship with the Noteholders is analogous to that of a company with its shareholders; no one suggests that, because the shareholders may be the ultimate losers in a case of this kind, the company has not suffered a loss.

If therefore Colliers had been negligent and provided a valuation outside the 15% bracket we would have held, like the judge, that Titan could recover the difference between their valuation and the “correct” value whatever that was. As it is, however, this appeal must be allowed and judgment entered for Colliers on Titan’s claim.