Lessons learned at White Tower

The high-profile White Tower case may have been dropped, but not before a nail-biting 16-day tutorial on the rigors of attempting to prove negligence in property valuations. 

The UK litigation case brought by White Tower, which alleged negligence against valuer Colliers, was dramatically dropped in its last stages last week with an agreement that each side would pay their own costs.

Colliers has understandably claimed the outcome as a vindication of its original £1.8 billion, October 2006 valuation of a portfolio of nine London office buildings owned by property tycoon Simon Halabi.

Colliers says it agreed not to pursue its costs because there was doubt over whether the claimant could pay, something it had raised in court during the proceedings.

In truth, we don’t know what the judge would have made of the evidence had the action gone to the bitter end.

What the case did do was once again lift the lid on the feverish market in 2006 in the run up to the global financial crash and the fascinating ins and outs of property valuation.

The facts are that Colliers valued what was then called the Protractor portfolio, at £1.8 billion in October 2006. This was also the value contained in an apparent offer letter for the portfolio produced in court and dated September 2006, from US investor Rockpoint, which said it had interest from JP Morgan and separately from Lehman Brothers in financing an acquisition.

That deal didn’t happen and the Colliers valuation was used to secure a loan of £1.45 billion from Société Générale to refinance the assets, of which £1.15 billion of senior debt was securitised in the White Tower 2006-3 CMBS.

The property market crashed 18 months later and in June 2009 the borrower defaulted and the White Tower deal went into special servicing. The assets were subsequently sold and all but the class E noteholders were fully repaid; the £300 million junior noteholder, a Canadian pension fund, was wiped out.

The claimant’s case was that Colliers overvalued five of the nine buildings, variously by between 11.9 percent and 25 percent. They were JP Morgan’s then main London hubs, Alban Gate (valued at a 4.25 percent initial yield) and 60 Victoria Embankment (valued at 4.9 percent), as well as Millennium Bridge House in EC4 (5 percent), New Court in Carey Street in WC2 (4.75 percent) and Sampson House (valued at 4.25 percent) just south of the City in SE1.

The defence admitted in court that there was a degree of overvaluing. The expert witness for the claimant, William Newsom, a director of Savills and that firm’s former UK head of valuation, said that in a bull market like 2006, when there were many transactions and therefore plenty of comparables for valuing, the margin for error for several of the five properties should have been smaller than the 10 percent — and occasionally slightly more — allowed by courts in the past.

Part of the claimant’s case was that Colliers’ valuation process had been inadequate. Among the revelations that came out in court was that the firm had no peer review process in place at the time — although one has since been introduced. Also, that Colliers’ head of valuation Russell Francis had called a senior Savills valuer and discussed aspects of the case, including margin for error, a fact he apologised to the court for.

The defence repeatedly sought to suggest that Newsom did not believe the evidence he was putting forward and was trying to dishonestly mislead the court, something he strongly denied.

The claimant attacked the indexation method used by the defence’s expert witness, John Bareham of DTZ, which it said was contrary to RICS guidelines. Bareham had taken yields of the comparables he selected and adjusted them by reference to market indices to allow for movement in market values, which allowed him to come up with his yields for his valuations of the five properties. Newsom claimed this practice was rarely if ever used.

Ultimately, whatever the methods used to arrive at the disputed valuations, the judge would have had to come to a conclusion about whether the figures that Colliers arrived at were correct or were within an acceptable margin of error, or whether the claimant had proved they were not and had suffered a recompensable loss. The case reinforces how – rightly – difficult it is to prove negligence in property valuations.