Titan Europe 2006-3 plc v Colliers International Limited UK plc (in Liquidation)
Court of Appeal (Civil Division)
3 November 2015
[2015] EWCA Civ 1083
Subject:
Valuers – Acceptable margins of error – Securitisation – Title to sue – Whether title vested in claimant or in noteholders in the securitisation – Whether claimant or noteholders suffered loss – Reflective loss – Analogy with shareholders in a company
Summary:
A loan made in reliance upon a €135 million valuation of vast commercial premises in Germany had been securitised and sold to the claimant. It owned the securitised loan and the underlying security itself. Obiter, that claimant did have title to sue for alleged negligence in the valuation of the underlying asset, and could allege that it (and not the noteholders in the securitisation) had suffered loss as the issuer of the securities due to that allegedly negligent valuation.
However, the valuer’s valuation had in fact been within the acceptable range of values to which a reasonably competent valuer could have come when valuing the property, and was accordingly not negligent.
Abstract
The case concerned a very large commercial property on Fürther Strasse in Nuremberg used mainly for warehousing, (but including offices and a department store). It was occupied by the then biggest mail-order company in Germany, Quelle Alktiengeschell-Schaft (“Quelle”).
Quelle’s landlord was Valbonne Real Estate B.V. (“Valbonne”). Valbonne wanted a loan from Credit Suisse on the security of the property. Credit Suisse instructed Colliers International UK Plc (“Colliers”) to value the property. On 15 December 2005 Mr Robert Mayhew of Colliers valued it at €135 million.
Credit Suisse entered into a facility agreement pursuant to which it advanced €110 million to Valbonne on 29 December 2005. That 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.
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 just €22.5 million.
At trial, Blair J [2015] 2 AER Comm. 479, held Colliers’ valuation to have been negligent, and assessed the true value at €103 million (thus awarding awarded damages of €32 million). As to the true valuation figure he held:
- i) a valuation below €100 million would not have carried any credibility in the market at the time;
- ii) it was open to a reasonably competent valuer to conclude that it was probable that Quelle would stay in the property after its 15 year lease had expired (10 years remained at the time of the valuation), but also that there was a real risk that it might leave. He therefore rejected the valuation methodology used by Titan’s expert witness (a Mr Preston);
iii) Colliers expert was a Mr Manley. His valuation (€125.9 million) was too high partly because his estimated rental value for the property was itself too high, 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 when its lease expired;
- iv) an appropriate yield to adopt in order to apply it to the net rental income from the property was 8.5%; and
- v) this then led to a valuation of €103 million.
In coming to these views the judge had not found comparable transactions involving other properties to be of much assistance, due to the unique nature of the property. However, there had been 6 potentially relevant transactions and valuations of the property itself between 2000 and 2005, prior to Collier’s own valuation. In headline terms, these had been:
(i) A sale price of €102 million in 2000;
(ii) A further sale recorded at €95 million in August 2003;
(iii) A valuation at €114.7 million in September 2003;
(iv) A valuation at €125.5 million in January 2005;
(v) A further valuation at €134.5 million in March 2005;
(vi) A sale of the shares in Valbonne (which owned the property) for €127.1 million in June 2005.
Colliers’ subject valuation of €135 million was provided in December 2005. It was also accepted by the Court of Appeal that 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.”
When these figures were reproduced graphically (as they are in the Court of Appeal’s judgment) they showed that:
(i) the true value as found by the judge was some way below the majority of the sale values and valuations;
(ii) Colliers’ own valuation was within reasonable proximity of the three previous valuations/sales;
(iii) the true value contended for by Colliers’ expert Mr Manley (€125.9 million) was also very close to those three previous valuations/sales; and
(iv) Titan’s expert’s valuations of, at first, €61 million, and then later after revising his view, €76.6 million, were both significantly out of step with the other transactional evidence.
The Court of Appeal’s decision was delivered by Longmore J. Confronted with this transactional evidence, the Court found it “inconceivable that the “correct” value could be as low as €103 million.” The Court of Appeal referred to the yields applicable to each of the previous transactions, noting that they produced a range of between 6.25% and 7.92%. Adopting a yield of 7.4%, and applied to the correct rental value of €9.28 million, the Court of Appeal arrived at a true value of €118.3 million. This meant that Colliers’ €135 million valuation was – by a whisker – within the 15% bracket for error that the judge had found was applicable to the property (and against which % bracket there was no appeal).
Accordingly the appeal was allowed on liability.
A further issue arose from the securitisation of the loans. Colliers argued that it was the Noteholders who would have suffered loss, since it was the value of the Notes that was reduced as a result of the alleged undervaluation of the property, and the Noteholders had no recourse to Titan in respect of that loss. Accordingly, Colliers argued that Titan had suffered no loss, and also had no title to sue.
Although the Court of Appeal noted that “the securitisation industry in general is interested in the title to sue question”, in the light of its findings on primary liability, everything in its judgment on the title to sue issue was obiter.
In summary as to the securitisation:
(i) Titan was incorporated as a special purchase vehicle in order to act as the issuer of securities in the form of floating rate notes.
(ii) Titan purchased a total of 18 loans which made up the asset base for the securitisation pursuant to an Asset Sale Agreement. At the same time, Titan received funds from the subscribers of the floating rate notes (which were fully subscribed), and issued the Notes.
(iii) Most of the proceeds from the investors were transferred to Credit Suisse to pay for the purchase of the loans forming part of the securitised pool, and the remainder was applied towards fees, expenses and reserves.
(iv) Titan and others entered into a Cash Management Agreement. This contained in Schedule 5 the Priority of Payments under the Notes. Priority was referred to at trial as the payments “waterfall”.
(v) Not all the €110m loan by Credit Suisse to Valbonne was transferred to Titan in the securitisation, but only €99,358,333, which was described as “the Senior Tranche”.
Pursuant to the terms of the original loan by Credit Suisse to Valbonne, and pursuant to these securitisation arrangements, it was not in dispute that Titan, as issuer, was the legal and beneficial owner of both the securitised loans and of the securities themselves in relation to the Senior Tranche. The Court of Appeal said it was “not at first sight easy to see why Titan…cannot sue Colliers” in these circumstances.
Colliers submitted that by the express terms of the valuation report, a cause of action was available to: “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”. This included the Noteholders, and Colliers argued that the intention had been to provide them with a cause of action. In those circumstances, it could not have been intended that Titan would have a cause of action as well. It sought to draw support by analogy from The Albazero [1977] AC 774, where the House of Lords had held against the potential double liability of a shipowner where a charterer had parted with title and risk to goods under a c.i.f contract, by holding that the cause of action vested in the purchaser under the bill of lading.
The Court of Appeal did not accept these submissions. It held, obiter:
“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.”
In contrast, the Court of Appeal felt that any claim by the Noteholders was liable to be met with a defence that their loss was merely reflective of Titan’s, and thus irrecoverable under the doctrine of reflective loss as exemplified by Johnson v Gore Brown [2002] 2 A.C. 1. In this respect, the Court of Appeal considered that a Noteholder’s position was analogous to that of shareholders in relation to a company whose shares s/he owns.
Nor was it correct to say that Titan had suffered no loss:
“[Titan] suffered a loss when it acquired the loans and the securities including (on this hypothesis) the over-valued property … 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.”
Comment
The appellate decision on the true valuation is easy to understand in the face of the prior transactional evidence. The valuers’ case was assisted by the manifestly unrealistic valuation provided on behalf of the Claimant; at trial, there was significant criticism of his inexperience in valuing property in properties in Germany.
Of wider interest is the obiter part of the judgment. The Court’s analysis was relatively brief, and its conclusion leaves valuers instructed in the context of securitisations to the risk of liability to both investors and to the issuer of securities, subject to the defensive doctrine of reflective loss raised in the judgment.
Given the obiter status of this limb of the decision, and given the apparent interest among the securitisation industry in general, it seems likely that this will not be the last word. Titan has sought leave to appeal from the Supreme Court; if granted, it is possible that Colliers could seek to reopen the issue by way of a cross appeal. That said, the valuer’s liability to investors in a securitisation will always be driven, in the first place, by the exact terms of its appointment.
Simon Hale
4 New Square