White Tower case further tests CMBS issuers’ rights

Colliers International stands accused of negligently overvaluing a London office portfolio back in 2006, writes Daniel Cunningham

As Real Estate Capital went to press, an ongoing case in London’s High Court was putting the spotlight on to the responsibilities of property valuers in real estate finance deals.

The SPV issuer of a 2006 CMBS deal alleges that Colliers International UK negligently overvalued five central London office buildings which were collateral for the securitisation, which was eventually placed into special servicing in 2009.

The issuer, White Tower 2006-3 (White Tower), issued the £1.15 billion securitisation of the senior portion of a £1.45 billion whole loan which Societe Generale (SocGen) provided to borrowers relating to tycoon Simon Halabi.

White Tower claims that Colliers overvalued five of the nine buildings in the so-called Protractor portfolio by between 11.9 and 25 percent, leading to it eventually suffering a net loss of £34.85 million.

This latest court action closely resembles a 2014 High Court case brought against Colliers by another CMBS issuer, Titan Europe 2006-3 (Titan). Back then, Colliers stood accused of negligence for its €135 million valuation of a German property which was financed by Credit Suisse and subsequently securitised.

In that case, a High Court judge ruled that Colliers was indeed negligent, having overvalued the property by €32 million. Colliers appealed the decision, and was vindicated in November 2015, when the Court of Appeal ruled that the true valuation of the building was €118.3 million, putting Colliers’ valuation within the acceptable 15 percent margin of error.

Another key issue raised in the Titan case was whether the CMBS issuer had the right to sue, given that the valuation was actually requested by the lending bank. In that case, the High Court ruled that Titan did have that right, an aspect of the case which was not overturned by the Court of Appeal.

The White Tower court battle is again testing this principle. White Tower claims that Colliers owed it a duty of care on the basis that the consultancy signed a ‘reliance letter’ at SocGen’s behest, alongside notification that the loan was to be securitised.

The claimant argues that the status of ‘lender’ was conferred on the White Tower vehicle by the wording of a credit agreement under which the SPV would be considered a ‘successor in title’ to the lending bank and thus become the senior lender once the loan was transferred to it for the purposes of securitisation.

“The point is that everybody knew this was going to be a securitised transaction,” Anneliese Day QC for the claimant said.

Colliers argues that it did not owe a duty of care to White Tower. There was no assignment of any cause of action by SocGen to White Tower, argued Patrick Lawrence QC for the defence, meaning that if there were a valid case to be brought, SocGen itself would have to bring it.

As for the decade-old valuation of the five properties, the claimant alleges that Colliers used indicative values for the properties to inform its eventual valuation, without a thorough process being undertaken.

Under cross-examination from Day, Carl Barrand, the former Colliers valuer responsible for the valuation, vehemently defended the process. The net initial yields for the properties were determined through his own experience as a valuer, through consultation with in-house City of London investment experts and through individual examination of each properties’ characteristics, Barrand argued.

Questioned as to whether the borrower attempted to influence the valuations to make them higher, Barrand explained that such behaviour was common practise: “All borrowers get on the phone to talk up the value of their properties. It was ignored. Mr Halabi was no different to other market participants who believed the value of their properties was higher than we would attribute.”

Lawrence for the defence argued that SocGen was proactively seeking to provide finance to Halabi, a relationship customer at the time. The portfolio properties were correctly valued, he said.

“Quite a heavy burden rests on the claimant to prove a lower valuation would have led to an outcome where they part with less than £1.15 billion,” Lawrence said. The case continues.