Professional negligence – Valuation – Real property – Commercial mortgage-backed security – Defendant valuing commercial property as security for loan – Tenant becoming insolvent and property sold at under value – Claimant suing defendant for professional negligence Whether defendant negligently overvaluing property – Whether claimant entitled to judgment – Claim allowed
The defendant company (now in liquidation) was part of a global real estate services organisation whose expertise included the valuation of commercial properties. The claimant, an Irish company, brought proceedings against the defendant for professional negligence in which the claimant alleged that it had relied on an overvaluation given by the defendant of a commercial property in Germany. The claimant sought judgment for €58,400,000, being the difference between the defendant’s valuation of the property at €135m and what the claimant said was the true market value of €76.6m.
Although the property had been security for a loan, the loan had not been made by the claimant. The loan had been made by a third party arranger and lead-manager and transferred to the claimant as part of a securitisation. The claimant was a special purpose vehicle incorporated as the issuer of the commercial mortgage backed securities. The principal cause of the litigation was the insolvency of the tenant of the property which was in the process of being sold for €22.5m, which was far below the valuation.
The defendant contended that the claimant, as issuer of the securities, was the wrong claimant on the basis that it had not suffered any loss. It was the holders of the securities who had sustained the loss, and who relied directly or indirectly on the valuation, and who could have sued the allegedly negligent valuer, but had not done so. The court was also asked to decide whether the defendant had negligently overvalued the property and, if so, whether the claimant had suffered a loss entitling it to pursue a claim against the defendant.
Held: The claim was allowed.
(1) In the case of a complex structured financial transaction of this kind, the circumstances in which legal claims had to be brought depended on the contractual terms typically contained in a number of different agreements. Although the present case was a claim in negligence against the valuers who had appraised the security, it was in essence a realisation claim. A securitisation was neither a conventional loan, nor a conventional issue of securities in which investors looked to the issuer (corporate or sovereign) to repay the debt. In complex structured financial transactions, the developing case law showed that the courts were reluctant to accept “no loss” arguments. The distribution of loss could be difficult to pin down, and depended on when investments were acquired, market movements, and the performance of the rest of the transaction. The important points were that: (i) where the contractual structure allocated the bringing of a type of claim to a particular party, that party brought the claim, complying with any conditions for doing so, and (ii) the proceeds were dealt with according to the contractual requirements. Provided that happened, all parties would get what they bargained for. Applying those principles, the defendant had been wrong to submit that the claimant was the wrong claimant because it had suffered no loss. Accordingly, the claimant was entitled to bring the claim: Forster v Outred & Co (a firm) [1982] 1 WLR 86, VTB Capital plc v Nutritek International Corp [2012] 2 BCLC 437, Anthracite Rated Investments (Jersey) Ltd v Lehman Brothers Finance SA in liquidation [2011] 2 Lloyd’s Rep 538 and Interallianz Finance AG v Independent Insurance Co Ltd [1997] EGCS 91 considered.
(2) Where a commercial property was let at the time of valuation, particularly where the lease had a substantial time to run, the strength of the tenant’s covenant would be an important factor in the valuation. In the present case, at the time of valuation there were approximately ten years unexpired on the lease of the property, so that an acquirer of the property would acquire a sure income stream for 10 years (subject to contractual adjustments) on the assumption that the tenant was good to pay it for that period. In its protocol for valuation and appraisal of land and buildings for commercial secured lending, the Red Book issued by the Royal Institution of Chartered Surveyors (RICS), suggested that among matters that would normally be included in a report was comment on the market’s view of the quality, suitability and strength of the tenant’s covenant. In that regard, the valuer’s role was different from that of a bank lending on the security of the property. It was for the bank to conduct a credit analysis of the tenant, as happened in the present case. A valuer might need to take account of financial statements and other available financial information when commenting on the market’s view of the strength of the tenant’s covenant, but could not be expected to, and did not necessarily have the expertise to, conduct the kind of analysis that would be expected of a lending institution: Singer & Friedlander Ltd v John D Wood & Co [1977] 2 EGLR 84, Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1994] 2 EGLR 108, South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191, K/S Lincoln v CB Richard Ellis Hotels Ltd [2010] EWHC 1156 (TCC); [2010] PLSCS 156 and Capita Alternative Fund Services (Guernsey) Ltd v Drivers Jonas [2011] EWHC 2336 (Comm); [2011] PLSCS 225, [2012] EWCA Civ 1417; [2013] 1 EGLR 119 considered.
On the facts of the present case, the defendant’s valuation of the property had been negligent. It had failed to give sufficient weight to the fact that the property was likely to attract poor demand because it was very large, old, and built to the needs of the tenant’s particular business. A reasonably competent valuer would have concluded that there was a real risk that the tenant might leave and the defendant had not given sufficient weight to the attendant problems which the building would then pose. The true value of the property as at the valuation date had been €103m. Therefore, the defendant had overvalued the property by €32m and was required to pay that sum to the defendant, which had relied on that valuation, together with interest and costs.
Christopher Symons QC and Peter de Verneuil Smith (instructed by Rosling King LLP) appeared for the claimant; Patrick Lawrence QC and Sian Mirchandani (instructed by Reynolds Porter Chamberlain LLP) appeared for the defendant.
Eileen O’Grady, barrister
