Negligence in property valuations – What does that actually mean after Titan V Colliers?

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

In the High Court decision in Titan Europe 2006 - 3 plc v Colliers International UK plc (in liquidation)true value [2014], Mr Justice Blair found Colliers negligent. On his finding as to the "" of the property however the figure produced by the Claimant's expert valuer would also have been negligent, as would the figure relied upon by the Defendant's expert valuer and at least three other contemporary valuations. Can they all have been negligent? Before we can answer that, we need to understand what "negligence" means in the context of property valuations and independent expert determinations.

What is "Negligence"?

Independent experts and valuers owe those appointing them a duty of care. The classic formulation of that duty was set out in Bolam v Friern Hospital Management Committee[1957]. The bar is not set that high; all that is required is to achieve the"ordinary skill of an ordinary competent man exercising that particular art ". So when will a valuer fall below that standard?

There are two competing lines of authority which seem to produce two different answers. One focuses on 'process', the other on 'value'.

Process

"The issue is not whether the expert's valuation was right…it is whether he has acted in accordance with practices which are regarded as acceptable by a respectable body of opinion in his profession".

This was Lord Hoffman's well known statement in Zubaida v Hargreaves[1995]. The emphasis is firmly on the process not the final number.

In the same vein a year later in Lion Nathan Limited v C-C Bottlers Limited[1996], Lord Hoffman held that a warranty that profit forecasts had been calculated on a proper basis and were achievable meant that they had been prepared with reasonable care. Whether the warranty had been breached therefore depended upon whether"reasonable care was taken in preparing it". What mattered was the quality of the process which had been gone through. Even if a difference between the final figure achieved and the forecast was within a foreseeable margin of error, it would still be negligent if it was attributable to"careless double counting".

Value

More recently however the Courts have favoured a focus on the final figure, introducing the concept of the "margin of error" or "bracket." In Singer & Friedlander v John D Wood & Co[1977] emphasising the importance of the figure, the Judge said:

"What can properly be expected from the competent valuer using reasonable skill and care is that his valuation falls within this bracket".

Buxton LJ went further in the Court of Appeal case Merrivale Moore Plc v Strutt Parker[1999] declaring it is a"necessary condition of liability" that the impugned figures fall outside the "bracket". A valuer cannot be negligent as long as his final figure falls within the "bracket" even if he is in fact guilty of a careless mistake. As long as his figure is within the "bracket" there can be no liability no matter how he got there. It is this line of authority that has prevailed.

Titan V Colliers

In Titan v Colliers, the parties agreed that the current state of the law is as follows:

1. Not every error of judgement amounts to negligence. The disputed valuation must be one which no reasonable valuer would have reached and falls outside the permissible margin of error;
2. A valuation within the range will not be negligent even if some aspect of process falls below reasonably competent standards;
3. The Court must assess what it regards a competent valuation and the permissible range;
4. The Court must form a view as to the correct valuation i.e. the final figure a competent valuer would have come to;
5. If the valuation is outside the range, the professional may escape liability if he can prove he exercised reasonable skill and care.

It might look like the odds are stacked in a valuer's favour, but notwithstanding that the Judge still found Colliers negligent. So where did they go wrong?

The facts

In 2005, Colliers International UK Plc valued a group of warehouses in Germany for Credit Suisse at €135 million. On the strength of this valuation, Credit Suisse lent €110 million to Valbonne Plc, the property owner. The loan was acquired by Titan, the SPV created by Credit Suisse to issue commercial mortgage backed securities (CMBS).

A single tenant, Quelle, occupied the property. Quelle became insolvent, causing the borrower to default on the loan. Titan was unable to make payments to note holders under the CMBS and issued proceedings against Colliers, alleging they had negligently overvalued the property.

Titan's expert valuer was Mr Preston and Collier's was Mr Manley.

Approach to Negligence

The Judge decided he had to determine the "True Market Value" and the "bracket" to see whether Colliers were negligent. So he should only have been interested in the figures because as we have seen if Colliers' valuation was within the bracket they couldn't be negligent whatever their methods. However, in order to decide the "True Market Value" the Judge had to decide the figure a competent valuer was most likely to put forward. That took him into looking closely at the valuations and methodologies employed by Colliers and those advocated by the two expert witnesses.

The valuations were as follows:

The biggest differences between the valuers concerned what assumptions should be made regarding the Quelle Lease. The alternatives were:

1. "Term and reversion", assuming no renewal (Preston); or
2. "Yield and covenant", accounting for risk that a less favourable lease would be negotiated at the end of the Quelle Lease with a higher yield for that period (Manley).

The Judge rejected Mr Preston's methodology and accepted Mr Manley's. So Colliers were off to a good start but the Judge then heavily criticised Mr Manley's implementation of his methodology. The Judge said Mr Manley was over optimistic and particularly criticised his failure to realistically assess the risk of a non-renewal by Quelle.

In practice, therefore, the Judge's focus was very much on methodology/process not just the end figures.

The Judge found the "True Market Value" was €103 million using a variation of the yield and covenant approach. Even on the range of 20% margin of error suggested by Colliers, their valuation of €135 million was firmly outside of the bracket.

What can we learn?

Well first the tendency of Judges to split the difference is undiminished; halfway between Collier's valuation and Preston's would have been €105.8 million. The case also demonstrates however that process and value are equally important - it is unrealistic to treat them as unrelated. It was only by analysing the methodologies and forming a view on their implementation that the "True Market Value" could be determined.

One frustration in this case is that the Judge did not expand on where he thought Colliers themselves had gone wrong. He criticised their expert witness in detail but said precious little about their own valuation.

As everyone including the Judge agreed it was a very difficult property to value (indeed according to the Judge all the valuers were badly wrong) and as it is accepted that a valuer can escape liability even if his valuation is outside the bracket, Colliers may feel hard done by in that only their valuation has been held negligent without any real explanation of what they did wrong. The Judgment is subject to an appeal and it will be interesting to see if and how this area of law continues to develop.