Securities’ providers could recoup huge property market losses for investors following landmark High Court ruling

20 Nov 2014

The recent High Court judgment Titan Europe 2006-3 Plc v Colliers International UK Plc [2014] EWHC 3106 (Comm) regarding commercial mortgage-backed securities (CMBS) reflects judicial dislike of legal lacunas that let professionals perform sub-standard services without the risk of paying out damages in negligence. It is a ruling of significance to the finance industry that could give some individuals who lost out when the recession revealed that their investments were worth less than they had been told a way of recovering their money. 

Those who invest in CMBS products are generally too far removed from the valuers of the properties against which the mortgages founding the financial instruments are secured to argue that they relied on those valuations when purchasing the securities. Moreover, due to the complexity of the products, it is difficult to quantify the losses caused by the negligent valuation rather than other extraneous and irrecoverable factors. Investors also tend to have no recourse against the company from whom they bought the CMBS notes if their investment fails because a property underlying it was negligently overvalued, assuming the company in question took reasonable steps in obtaining valuation reports. In such a scenario, a CMBS investor would therefore struggle to recover money lost through a surveyor’s negligence. However, Mr Justice Blair, in Titan, has established a new and potentially valuable route for these disappointed investors.

Factual background

At the height of the real estate boom in December 2005, Colliers International UK (“Colliers”) provided Credit Suisse with a valuation report regarding a property in Germany housing mail-order giant Quelle that stated that the property was worth €135 million. In light of the report, Credit Suisse lent the owner of the property, Valbonne Real Estate BV (“Valbonne”), €110 million, secured against the property. Titan Europe 2006-3 (“Titan”) was a special purpose vehicle (SPV) that offered floating rate notes to investors secured against a pool of mortgages on commercial properties. Titan used monies investors gave to it in order to purchase mortgages from Credit Suisse that it thought would be profitable based on the underlying property valuations, including the loan secured against the building where Quelle was a tenant. After taking an initial fee, Titan filtered down any profit (and loss) made on the mortgages to investors.

When the credit crunch hit, Quelle’s mail-order business collapsed. It became insolvent and its administrator terminated its lease of the property in September 2009. Valbonne found it impossible to find a new tenant as the building was old and had been purpose-built for Quelle: the lease was in far less demand than the inflated valuation of the property had suggested it would be. With no rent coming in, Valbonne also became insolvent and defaulted on the loan. The CMBS notes plummeted in value. In September 2013, a sale of the property was agreed for just €22.5 million.


Colliers contended that Titan had no standing to bring the action, as it had suffered no loss; only the note holders had suffered loss, as only they were exposed to the mortgage risk, given that they had no recourse to Titan for their losses. Moreover, it was the investors who had funded Titan’s purchase of the loan.

However, Blair J disagreed with this analysis. He accepted that the investors had clearly suffered an economic loss, but he also acknowledged that they would struggle to bring a claim against Colliers, because they had not directly relied on the valuation report. Instead, he concluded that Titan had also suffered a loss, which it incurred at the moment it purchased the Valbonne loan by buying something worth less than the price it paid for it. The exact amount of loss would not crystallise until the insufficiency of the security became known. Titan had relied on Colliers’ valuation report in making its purchase and Colliers had known that its report would be made available to potential investors in the CMBS. The judge deemed the investors’ original bankrolling of the mortgage purchase and the fact they had no recourse to Titan for their losses to be irrelevant in determining whether Titan had suffered a recoverable loss.

Expert evidence assisted Blair J in finding that the correct value of the property in December 2005 was €103 million, with a margin of error of 15% either side of that figure, allowing a range from €87.55 million to €118.45 million. Colliers had therefore provided a negligent valuation. The judge applied the so-called “SAAMCO” cap that limits recoverable damages to the difference between the negligent valuation and the true valuation at that time, concluding that Titan’s recoverable loss was therefore €135 million minus €103 million, giving €32 million.


This was a deeply pragmatic judgment. Blair J’s conclusion ensured that justice was achieved in this instance because Titan was contractually bound to distribute any damages it received to the note holders. As the judge stated: “all parties would get what they bargained for”. However, many CMBS products are similarly contractually structured, and therefore the ruling is likely to be of wider significance.

Although Colliers will seek permission to appeal on 28 November 2014, this case as it stands provides investors in CMBS products with a simplified route by which they can recover losses arising from the property market crash. Many valuations on which note holders may wish to found such actions were made more than six years ago, raising the spectre of a limitation defence. However, such claims in negligence could still be brought under section 14A of the Limitation Act 1980, which provides that a claimant has three years in which to bring a claim in negligence from the date when he acquired the requisite knowledge. The claimant may not become aware of the valuer’s potential negligence until the borrower defaults on the loan or the property is first revalued.

The residential real estate lending world has been alive to the fact that lenders and debt purchasers may be sat on claims that can be pursued against negligent professionals for some years now. Commercial real estate financiers and in particular CMBS providers have, however, been slow to recognise and pursue such claims. This could be because losses have not yet crystallised or because parties are unwilling to jeopardise ongoing commercial relationships. After Titan any reticence is far less likely to be due to a lack of awareness about when and how such claims can be pursued.


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