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England and Wales Court of Appeal (Civil Division) Decisions
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Cite as:  PNLR 7,  EWCA Civ 1083
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ON APPEAL FROM THE HIGH COURT
QUEEN'S BENCH DIVISION
THE HONOURABLE MR JUSTICE BLAIR
Strand, London, WC2A 2LL
B e f o r e :
THE RIGHT HONOURABLE LORD JUSTICE LLOYD JONES
THE RIGHT HONOURABLE LORD JUSTICE BRIGGS
| TITAN EUROPE 2006-3 PLC
|- and -
|COLLIERS INTERNATIONAL UK PLC (IN LIQUIDATION)
Mr Christopher Symons QC & Mr Peter Verneuil Smith (instructed by Rosling King LLP) for the Respondent
Hearing dates: 6th, 7th & 8th October 2015
Crown Copyright ©
This is a judgment of the court delivered by Longmore LJ:
(A) Negligence? (1) The Law
"(1) As has been said in the case law, the process of valuing real property has strong subjective elements (Capita Alternative Fund Services (Guernsey) Ltd v Drivers Jones  EWCA Civ 1417 at , Gross LJ), and this was clear in the present case. If the valuation is complex, as it was in this case, a number of variables will go into the mix, including market information available about the property, but what emerges is ultimately an opinion as to the market value of the property on the basis on which it was valued.
(2) The competence or otherwise of a valuer cannot be judged as though this is a mechanistic process. For that reason it has also been said in the case law (ibid) that valuation is an art not a science, though surveyors themselves may describe it more aptly as an art and a science. In particular, the valuation (or "appraisal" in North American usage) of property applies standards set out by leading professional organisations such as those in the Red Book issued by the RICS (Royal Institution of Chartered Surveyors), and international standards developed by bodies such as the International Valuation Standards Council (IVSC). It should be noted, however, that there is no one approach to valuation which is universally acceptable, and the Red Book does not comment on which methodology to adopt.
(3) Not every error of judgment amounts to negligence. In order to establish negligence, a claimant must prove that the disputed valuation was one which no reasonable valuer would have reached and was outside the permissible margin of error (Singer & Friedlander Ltd v John D. Wood & Co  PNLR 40 at p. 4, Watkins J).
(4) The permissible margin of error, or the range within which a reasonably competent valuer could have valued the asset, is often referred to as the bracket. If the valuation is within the range, then the valuation will not be found to have been negligent even if some aspect of the valuation process can be criticised as having fallen below reasonably competent standards. In each case, the court must assess what it regards as being the competent valuation and what it regards as being the size of the permissible range. The assessment of range should not be approached mechanistically, and the court's findings will depend on the particular facts of the case. Whatever the range may be, the court must still form a view as to what the correct valuation would have been (i.e. the figure which it considers most likely that a competent valuer would have put forward). Even if the valuation is outside the range, the professional may escape liability if he can prove that he exercised reasonable skill and care (see Goldstein v Levy Gee  PNLR 35, Lewison J, Dennard v Pricewaterhouse Coopers LLP  EWHC 812 (Ch), Vos J, and Capita Alternative Fund Services (Guernsey) Ltd v Drivers Jonas  EWHC 2336 (Comm) where at  the principles in this regard are distilled by Eder J from the authorities).
(5) The question of bracket is ultimately a question of law for the court's determination assisted by the views of expert valuers as to the degree of difficulty of the valuation under consideration. The case law suggests that for a standard residential property, the margin of error may be as low as plus or minus 5 per cent; for a valuation of a one-off property, the margin of error will usually be plus or minus 10 per cent; if there are exceptional features of the property in question, the margin of error could be plus or minus 15 per cent, or even higher in an appropriate case (see K/S Lincoln v CB Richard Ellis Hotels Ltd  PNLR 31 (TCC), Coulson J.)"
(2) The Judgment
i) a valuation below 100 million would not have carried any credibility in the market (para 279(1));
ii) it was open to a reasonably competent valuer to conclude that it was probable Quelle would stay in the property after the lease had expired but that there was a real risk that it might leave. He therefore rejected Mr Preston's term and reversion methodology (para 279(2));
iii) Mr Manley's valuation was too high partly because his estimated rental value for the property was too high (although the judge felt unable to make any specific findings as to the ERV (para 205)) 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 (para 279(3)). In any event the judge (like Mr Manley) relied on the passing rent for the purpose of making his calculations;
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.
(3) Actual dealings in the property
"136. A further issue between the parties is as to the significance to be attached to earlier transactions and valuations concerned with the property itself. This arises in the present case because the valuation of Mr Preston, the claimant's expert, is out of line with the market evidence as to the value of the property for the period between 2000 and 2005.
137. Market evidence of this kind is likely to be important where the valuer is instructed to express an opinion as to the market value of the property in question. As Mr Preston wrote in a piece he published in 2010, "It is a brave valuer who concludes that the open market evidence should be set aside because it does not fit with his or her view of that market. If the market speaks, the valuer should heed the message". On the other hand, it cannot be conclusive, since on investigation the careful valuer may conclude for good reason that the market view is not justified. In any event, there may be, and are in this case, questions as to whether particular features of other valuations or sales of the property mean that they cannot be relied upon as providing proper comparisons."
No doubt the judge had in mind the observations of Phillips J in Banque Bruxelles v Eagle Star  2 All E.R. at 789:-
"Valuing a property that has just been sold
Where the sale of a property has just been agreed, it might be thought that there is little scope for the valuer's art; that the value is demonstrated by the sale price. But this will only be so if the property has been freely and competently marketed on the open market. The possibility will always exist that a seller may for one reason or another not have achieved the full market value of his property, or that a buyer may have been prevailed on to agree to pay more that the market value of the property. For these reasons a bank that is requested to advance money for the purchase of a property on the security of the property to be purchased will normally require a valuation of the property in question.
All the experts were agreed that where a property has just been sold, the sale is potentially the most cogent evidence of the open market value of that property. Provided that the property was properly exposed to the market and competently marketed, the market price will demonstrate the market value. The experts were also agreed that the fact that the property has just been sold does not relieve the valuer of the need to consider comparables. The conclusion that the valuer draws from comparables will be part of the material upon which he bases his valuation. If the comparables suggest a value that differs significantly from the sale price agreed, the valuer has to consider all the evidence in order to decide why the discrepancy exists.
Mr Terence Knight, the senior partner of Weatherall Green & Smith, was called primarily as a witness of fact in relation to the marketing of Cambridge Circus. I found him a particularly impressive witness and ventured to ask him about the approach of a valuer where the property to be valued has recently been sold. He told me that he would regard it as part of his due diligence as a valuer to find out what the purchase price was and to see what the marketing had been. If he was satisfied that the sale had been an open market sale, with no unusual features, he would base his valuation on this rather than on calculations made from comparables. He explained that "if there has been a marketing of a particular property and it has been properly marketed, that is the best evidence of value. It is the value. It is the best price that was obtained in the market at that particular time on that day". He also said that if there was some special feature which explained why the price realised did not represent the open market value, he would refer to that matter expressly in his valuation"
i) Quelle was the original owner of the property but in 2000 sold the property to Thesaurus GmbH and then leased it back from Thesaurus. The sale price was the Deutschmark equivalent of 102,258.000 The 15 year lease began on 1st January 2001 renewable for three further terms at Quelle's option. The judge regarded the transaction as significant;
ii) Thesaurus then sold the property to Valbonne on 27th August 2003 for 91,787,400 (recorded in Valbonne's books as 95,030,793 which the judge considered to be a better indication of value) but (obviously) below the 2000 price;
iii) a valuation in September 2003 by a Netherlands firm Weatherall Vastgoed Adviseurs ("Weatherall") at 114.7 million. The judge accepted it as part of the overall picture while not giving it undue weight because there was no analysis of the strength of the covenant, comparables, rental value or the tenant's intended use of the property at the end of what was now an unexpired term;
iv) a second Weatherall valuation in January 2005 at 125.4 million calculated by capitalising the rent of 9.28 million per annum (the rent which Colliers were required by Credit Suisse to assume) at a gross initial yield 7.4% (or an adjusted yield of 6.98%). The judge gave this the same weight as the previous valuation;
v) a further valuation by another Dutch firm Meeωs in March 2005 at 134.5 million to which the judge ascribed less weight than the Weatherall valuations because it was only disclosed shortly before trial and neither expert commented upon it. He nevertheless said that Colliers was entitled to put it before the court as part of the overall picture; and
vi) on 1st June 2005 the owners of Valbonne's shares sold them to Homco Realty Fund which was owned by Hofberg Invest Inc for 127.1 million. The judge accepted that this was an arms length sale and potentially an indicator of the market value at the relevant time (para 169). The judge made an "important qualification" to this because the seller had warranted that Quelle would execute a new 15 year lease with a rent of 9.28 million rather than the rent of 8,589,703. The judge accepted that this transaction was of relevance but said it was necessary to adjust the value to reflect "the fact that the seller warranted that there would be a 15 year lease entered into by Quelle in place of the 10 years remaining on the existing lease and this did not happen" (para 172). He added that it was significant that the purchaser required an extension of the Quelle term since that underlined the importance to the market value of Quelle's "position" namely that, although Quelle's covenant was "good" it had some concerns (para 214) in the light of the risk that Quelle might not renew (although it probably would, see paras 235 and 179(2) already cited above) and the consequent difficulties if it did not renew.
It is notable (and perhaps surprising) that the June 2005 sale referred to in para 13(vi) above is missing from this table. That sale gives an adjusted yield of 6.9% using the same percentage for purchasers' costs.
(B) Title to Sue
"73. Credit Suisse had always intended that the loan to Valbonne would be securitised, though Mr Mayhew suggested that he did not know this until he was asked to issue a "Third Party Consent Letter" dated 25 May 2006 in connection with the securitisation.
74. The securitisation was a particularly complicated financial transaction. As the name of the claimant (Titan Europe 2006-3) suggests, it was one of number of securitisations arranged by Credit Suisse during this period. A member of the group called Credit Suisse Securities (Europe) Ltd (formerly Credit Suisse First Boston (Europe) Ltd) was the arranger and lead manager.
75. On 24 April 2006, Titan was incorporated as a special purchase vehicle in order to act as the issuer of securities in the form of floating rate notes. Administrative functions were (and are) provided for the company by Wilmington Trust SP Services (Dublin) Ltd, which is a corporate services provider of which Mr Geraghty is managing director. Colliers submits, and I accept, that it was Credit Suisse's nominee SPV, and that the work required to put in place the securitisation was done by Credit Suisse.
76. The steps required by Titan to complete the transaction were in outline as follows. On 2 June 2006, Titan held a board meeting and resolved to participate in the proposed CMBS transaction. On 5th June 2006, it issued a Note Term Sheet. On 6 June 2006 a preliminary offering circular was produced. On 19 June 2006, the directors of Titan approved among other documents a draft offering circular, and a draft Asset Sale Agreement whereby Titan would acquire the loans.
77. The final Offering Circular was issued on 26 June 2006, offering "Commercial Mortgage Backed Floating Rate Notes due 2016" with a total value of 943,750,559. There were 10 classes of floating rate notes secured against a pool of commercial mortgages relating to 18 properties situated in France, Germany, the Netherlands, Belgium and Luxembourg. The loan with which this action is concerned represented 10.5% of the pool. The Notes were to be rated by credit rating agencies from AAA in respect of the classes bearing the lowest interest rates, to BBB or less for the notes bearing the highest interest rates, which also ranked lowest in priority.
78. The securitisation completed on 27 June 2006. Among the steps that happened that day, Titan purchased the 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. The proceeds from the investors were transferred as to 759,475,365 to Credit Suisse International and as to 182,175,855 to Credit Suisse AG to pay for the purchase of the loans forming part of the securitised pool. The remainder of 28,915,000 was applied towards fees, expenses and reserves.
79. Under the contractual scheme, the loans and securities are administered by Hatfield Philips International Ltd as Titan's agent. The loan in respect of the Nόrnberg property is administered by Hatfield Philips Deutschland GmbH. As I understand it, the claimant's instructions in this case to their legal team essentially come from Hatfield Philips.
80. A Cash Management Agreement (the Cash Manager was ABN Amro Bank NV) dated 27 June 2006 to which Titan and others were party contained in Schedule 5 the Priority of Payments. Priority has been referred to at trial as the payments "waterfall".
81. Finally, not all the 110m loan by Credit Suisse to Valbonne was transferred to Titan in the securitisation, but only 99,358,333 which is described as "the Senior Tranche". (An explanation was not available at trial as to why the deal was structured in this way, but in closing Titan suggested that it may have had to do with credit ratings.) An Intercreditor Deed was entered into to regulate priorities between the senior and junior tranches, but nothing turns on it.
94. as part of the Valbonne loan, the security rights in the Nόrnberg property became vested in the Security Agent (which was Credit Suisse). As part of the securitisation arrangements, a Deed of Charge and Assignment dated 27th June 2006 governed by English law was entered into between, amongst others, Titan and the Note Trustee. There was also a German Loan and Security Assignment of the same date which recites that after execution Titan as issuer owned the loan, and the Security Agent owned the security as trustee for, amongst others, Titan as issuer.
95. Titan's case (which was not disputed at trial) is that under English law it remains the legal and beneficial owner of its rights relating to the Senior Tranche. This is because, whilst it has assigned security rights to the Note Trustee, it says that these are not legal assignments as they concern part of a debt (the whole debt being the whole loan to Valbonne) and no notice has been given to Valbonne. They were equitable assignments by way of charge only, with no obligation to give notice of the assignment (see clause 3.2 of the Deed of Charge and Assignment). "
"Liability and Publication
We acknowledge that this certificate will be used by Credit Suisse First Boston (CSFB) in evaluating a request for a loan to be secured by the property. This certificate is addressed to and may be relied upon by:
1. CSFB (in any and/or all of its capacities), its employees, agents, successors and assigns;
2. 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;
3. any rating agency actually or prospectively rating any such securities;
4. any trustee for bond holders holding bonds backed by the loan ("Relevant Securities").
A copy of this certificate may be disclosed to any rating agency (actually or prospectively) rating and relevant Securities and to any trustees for holders of Relevant Securities provided the entire Report is disclosed together with the letter of instruction. Prior to this report or a reference to this report being included or quoted in any offering circular or Prospectus, Colliers CRE's formal written approval/consent, (provided the entire Report is disclosed together with the letter of instruction) or the existence of the report is stated, such consent to be provided to a first request by CSFB and such consent not to be unreasonably withheld to any subsequent request) must first be obtained before disclosure or publication. For the avoidance of doubt such approval is required whether or not Colliers CRE is referred to by name and whether or not the contents of our Report are combined with others.
Colliers CRE agrees to co-operate in answering questions by any of the above parties in connection with a securitisation or transaction involving the Mortgage Loan and/or such securities, providing the quantity of such questions is reasonable and sufficient prior notice is given.
This report has no other purpose and should not be relied upon for any other purpose or by any other person or entity."
The Noteholders, Mr Lawrence submitted, had therefore their own right of action and it could not have been intended that Titan should have a cause of action as well.
"The complications, anomalies and injustices that might arise from the co-existence in different parties of rights of suit to recover, under separate contracts of carriage which impose different obligations upon the parties to them, a loss which a party to one of those contracts alone has sustained, supply compelling reasons why the rule in Dunlop v Lambert 6 Cl. & F. 600 should not be extended to cases where there are two contracts with the carrier covering the same carriage and under one of them there is privity of contract between the person who actually sustains the loss and the carrier by whose breach of that contract it was caused."
"The effect of the sub-participation agreement was to leave Interallianz as the only party making the loan to [the borrower] and the only party having any contractual relationship with [the borrower]; the sub-participators had no direct interest in the mortgage and were not lenders to [the borrowers]."
Apart from the fact that the valuers probably owed no duty of care to the sub-participators, this arrangement was similar to that in the present case. It was different from a case of a syndicated loan where the participants would normally have a contractual relationship with the borrower as was the case in the Banque Bruxelles case.
"Taking into account the important consideration that the sub-participation agreements were made at a time when Interallianz had no knowledge of Allsop's breach or of any damage flowing from it and thus did not arise out of the breach of duty or the loss but were wholly independent of it, I do not consider that the sub-participation agreements should be brought into account to reduce the damages that Allsop would otherwise have to pay. The sole relationship Allsop had was with Interallianz and the sole relationship that [the borrower] had was with Interallianz. They in fact obtained security for their loan to [the borrower] of a value less than they had been told by Allsop; they suffered that loss on draw down. The fact that they entered into independent arrangements with others which has the consequences that loans to them by the sub-participates do not have to be repaid is a matter that is in my judgment collateral and does not have to be brought into account. There is nothing unjust or unreasonable in that conclusion."