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CRE Finance World, Summer 2014

Overvalued Real Estate Could Translate Into Higher Recoveries Georgina Squire nsolvencies have resulted in the loss of billions of pounds in payment of interest and principal to investors in European CMBS products over the last few years. This has left noteholders with substantial losses, some of which have not yet crystallised as the loans are yet to mature. Those involved in these transactions have more recently started exploring avenues to reduce their losses, including bringing claims against negligent professionals, particularly real estate valuers (appraisers). And notwithstanding the jurisdiction in which the collateral itself was located, the Courts of choice for pursuing these claims appear to be the Courts of England and Wales. A professional adviser engaged to provide advice to a lender in the course of originating a loan owes a contractual duty and a duty of care implied by common law. If they get that advice wrong, they face a claim from that lender, whether in contract or in the tort of negligence. It is inevitable that, given the volume of work valuers/ appraisers were required to handle during the boom years, mistakes would be made. It is equally inevitable that, as noteholders, issuers and servicers come to terms with the losses suffered on CMBS products, they will be seeking recourse as a result of those mistakes. Yet despite the volume of CMBS issued during the boom years of 2005 and 2006, only a relatively small number of CMBS loans are currently the subject of claims against valuers/ appraisers for negligently overvaluing commercial real estate. One of the reasons why they are not being pursued in greater numbers is that often potential claimants assume, wrongly, that the claim is time barred. As the CMBS product became popular across Europe in 2001, the majority of deals completed over six years ago (the standard time period for bringing a claim in the Courts of England and Wales). A claim can, however, be started well after that six year cut off. It is fact sensitive, but the timeframe for commencing claims is often much longer and so CMBS noteholders, servicers and issuers should look deeper into whether they can be run claims, regardless of the date of the original loan. Another deterrent may be concerns over who has standing to bring the claim. Is it the issuer, is it the servicer on behalf of the issuer, or is it the noteholders? This issue is not straightforward and there are a number of factors which will need to be determined in order for a successful claim to be brought. In particular, the party bringing the claim needs to be able to establish that it was owed a duty of care by the negligent valuer/appraiser. In a “balance sheet lending” situation, establishing such a duty is simple, but in the CMBS context this can be tricky — to whom was the valuation report addressed? CRE Finance World Summer 2014 42 Was reliance by parties other than the instructing lender foreseeable? Can actual reliance on the valuation report be established? Similarly defendants on claims of this nature, when faced with possible payouts of what are generally huge sums, are quick to raise any possible defences that they can think of. And one common argument is that the issuer is merely a conduit through which investors have invested in property and that the issuer has not itself suffered any loss. At the present time, the English Courts have not yet been required to determine a valuer/appraiser negligence claim which has been brought within a CMBS structure. A direct legal precedent has therefore yet to be established which confirms that an Issuer of CMBS is entitled to pursue a claim against a negligent valuer in order to make recoveries which will ultimately benefit the noteholders. Despite this lack of a direct precedent, the Courts have been quick to look through complex financial structures in order to hold wrongdoers responsible for their actions; the expectation is therefore that the Courts will be prepared to find a remedy for an issuer pursuing a valuer/appraiser negligence claim. Certainly, in all three of the biggest valuer negligence cases currently being pursued in Europe which relate to CMBS loans, the claimant is the issuer. The first of those cases, Titan Europe 2006-3 Plc v Colliers International (In liquidation) relates to an alleged €58m overvaluation of the former Quelle headquarters in Nuremburg, Germany. The trial of this claim is due to heard by the Commercial Court in London in July this year, when many of the issues referred to in this article will be considered by the Courts for the first time. The second case, Windermere X CMBS Limited v Warwick Street (KS) LLP relates to a claim against the former King Sturge LLP arising out if its valuation of a large logistics property let to the now insolvent Woolworths in Bonen, Germany. In June last year, the third of these three cases was issued in the High Court in London; Gemini (Eclipse 2006-3) Plc v CBRE Limited and Warwick Street (KS) LLP concerns a circa £100m overvaluation of a portfolio of properties originally valued for Barclays. Whether all or any of these claims makes it all the way to trial without a commercial settlement being reached between the parties remains to be seen. However, it is clear that as the CMBS market in Europe continues its slow recovery, the next few months and years will continue to see historic CMBS issuances put under the microscope as noteholders, issuers and servicers battle to recover the losses suffered during the last CMBS cycle. I Head of Dispute Resolution Rosling King LLP, UK “… the Courts have been quick to look through complex financial structures in order to hold wrongdoers responsible for their actions.”


CRE Finance World, Summer 2014
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