A landmark case in the commercial property sector looks certain to have an impact on the valuation, lending and commercial mortgage-backed securities (CMBS) markets for years to come.
Colliers International (UK) plc is currently appealing a Commercial Court judgment that ruled they had negligently overvalued a property in Germany by €32m (£23m) and ordered them to pay that amount to Titan Europe 2006-3 plc, the issuer of commercial mortgage-backed securities secured against a number of properties, including the Nuremberg property in question.
The case is the first of its type brought successfully by a CMBS issuer and has highlighted a range of lessons to be learned. Balance sheet and CMBS lenders may have known about claims but seem to have had little appetite to pursue them before the Titan case proved they can achieve significant returns.
Claims against professional advisers on loans agreed in 2006/7 are still being discovered and now there is talk of more being pursued - and timing is extremely important. Time has not run out for such claims, as the Titan case has shown.
The case has again confirmed that valuation is not a science and valuers are afforded a margin of error - up to 15%, as was shown in Titan. However, provided the judge decides that no reasonably competent valuer could have valued the subject property at the level of the original valuation, it will be deemed negligent. The lender will be entitled to the difference between the original valuation and the true valuation at the date of origination as a cap on their recoverable damages.
There are also lessons to be learned for new CMBS lending. Valuers may look to put caps on their liability or exclusions in their retainers. We see attempts to restrict liability to a multiple of fees. These restrictions may sometimes be effective, but on the whole are not. They need to be negotiated in detail and agreed before they have any chance of biting in the event of a claim.
When the market is hot and deal flow is high, it is inevitable that professionals make mistakes. The surprising thing is that the transaction documentation on complex CMBS structures like this did not cater for what happens when such a mistake is made.
The Titan judgment was a sobering moment for commercial property professionals and advisers. The sector will remain on full alert as the implications unfold.
Georgina Squire is head of dispute resolution at Rosling King LLP
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