Professional negligence – Valuation – Commercial mortgage-backed securities – Appellant valuing commercial property for purposes of loan security – Loan transferred to respondent pursuant to securitisation arrangements – Property later sold at undervalue – Whether appellant negligently over-valuing property – Whether respondent having standing to sue or suffering loss – Appeal allowed
The appellant company was part of a global real estate services organisation whose expertise included the valuation of commercial properties. The respondent was an Irish company which issued commercial mortgage-backed securities. It brought proceedings against the appellant for professional negligence in relation to an alleged over-valuation of a large commercial property in Nuremberg, Germany, which the appellant had valued in 2005 as security for a loan to the landlord of that property. The respondent had not itself instructed the appellant or made the loan; that was done by a third-party lender which then transferred the loan and security to the respondent as part of a securitisation. Under the securitisation arrangements, a number of loans were packaged together as investments for subscribers (noteholders) who invested in floating rate notes issued by the respondent, although the respondent remained the legal and beneficial owner of the relevant loans and securities.
The appellant’s valuation certificate stated that it was addressed to, and could be relied on, not only by the lender but also by “any actual or prospective purchaser, transferee, assignee, or servicer of the loan, any actual or prospective investor… in any securities evidencing a beneficial interest in or backed by the loan”. The appellant valued the property at €135m, on the basis of the lender’s instructions to assume a passing rent of €9.28m. The landlord had acquired the property six months previously for €127.1m. At the time of the valuation, the property was tenanted under a lease with 10 years of a 15-year term left to run. Both the landlord and the tenant became insolvent in 2009 and the property was sold for only €22.5m.
The respondent’s claim was allowed in the court below and damages of €32m were awarded, representing the amount of the appellant’s over-valuation as the judge found it to be. In deciding that issue, the judge regarded as important the market evidence of various earlier sales of the property from 2000 onwards. He found that a valuation below €100m would not have carried any credibility in the market in 2005 and that, overall, the correct valuation was €103m. Since the appellant’s valuation fell outside the 15% permissible margin of error adopted by both parties, the judge held that the valuation was negligent.
The judge rejected an argument by the appellant that the respondent had not relied on the valuation and had suffered no loss in circumstances where the risk of over-valuation had passed to the noteholders who invested in the security: see [2014] EWHC 3106 (Comm); [2014] PLSCS 262. The appellant appealed.
Held: The appeal was allowed.
(1) Where there had been an actual sale of the property for €127.1m, albeit on somewhat different terms, six months before the appellant’s valuation and in circumstances where the market was still rising, the “correct” value could not be as low as the figure of €103m found by the judge. Looking at the yield percentages for the property in light of the earlier sales figures, adjusted to 6.9% to take account of purchaser’s costs and further adjusted by another 0.5% to allow for the fact that only 10 years of the 15-year term remained on the lease by 2005, produced a yield of 7.4% on the rent of €9.28m which the appellant had been instructed to assume. That exercise resulted in a “correct” value of €118,306,986 for the property. That placed the appellant’s valuation of €135m within the accepted 15% margin of error. It also fell within 15% of the minimum credible figure of €100m for the property. Although the figures fell somewhat narrowly, rather than generously, into the “bracket” of 15% selected by the judge, a narrow success was still a success. The appeal was allowed accordingly. While the appeal court would be hesitant about reversing the judge on a question of fact, none of his basic findings of fact had been challenged, but only his inferential conclusions as to the “correct” value based on those findings.
(2) Per curiam: Had the appellant been negligent and provided a valuation outside the 15% bracket, the respondent would have been entitled to recover the difference between the valuation and the “correct” value. The appellant had expressly assumed responsibility to the respondent as the “purchaser or transferee” of the loan. The respondent’s status as the legal and beneficial owner of the loan and of the securities gave it not only the right to sue in respect of any negligence but also the right to recover substantial damages. It was settled law that the owner of property had rights of suit for substantial damages in respect of any actionable negligence: Obestain Inc v National Mineral Developments Corporation Ltd, “The Sanix Ace” [1987] 1 Lloyd’s Rep 465 applied. The same applied to rights of suit in relation to loans and the securities underlying them. The choses in action owned by the respondent were just as much property as any other sort of property. The respondent’s title to those choses in action entitled it to sue for substantial damages if it had a cause of action at all. Any possibility that the noteholders might also be able to sue was irrelevant to the respondent’s rights since the respondent owned both the loans and the securities. The respondent might have parted with the risk but it had retained the property in the loans and the securities and therefore had title to sue the appellant for its negligence, if any: Albacruz v Albazero, “The Albazero” [1977] AC 774 distinguished.
The fact that the respondent had laid off the risk to the noteholders, who had no recourse against it in that regard, did not mean that the respondent would have had suffered no loss as a result of any negligence by the appellant: Interallianz Finanz AG v Independent Insurance Co Ltd 1997] PLSCS 164 applied. In any event, it would have suffered a loss when it acquired the loans and the securities including an over-valued property, since the price which it paid for the loans would have been too high. The respondent’s relationship with the noteholders was analogous to that of a company with its shareholders; the fact that the shareholders might be the ultimate losers in a case of that kind did not mean that the company had not suffered a loss.
Patrick Lawrence QC and Sian Mirchandani (instructed by Reynolds Porter Chamberlain LLP) appeared for the appellant; Christopher Symons QC and Peter de Verneuil Smith (instructed by Rosling King LLP appeared for the respondent.
Sally Dobson, barrister
