Macfarlanes partner Lois Horne and solicitor Alexa Segal examine the lessons to be learned from the recent Quelle Nurnberg reversal

The Court of Appeal has overturned a decision at first instance that a valuer, Colliers, was liable for a negligent valuation of a commercial property that was collateral for a securitised loan while Quelle - the then biggest mail order company in Germany - was the tenant. In doing so, the Court of Appeal has made comments that an SPV issuer of CMBS would be entitled to rely on a valuation provided to the original lender.

The claim, one of several substantial valuers' claims currently moving through the Commercial Court, arose out of a loan advanced after a property valuation. The valuation, of €135m, was done in 2005, during a bull market where banks where competing to lend as much money as possible, assuming that the value of commercial property would continue to rise.

The major tranche of the loan (the senior tranche) was purchased by Titan Europe 2006-3, which packaged it up in a complex securitisation process worth approximately €1bn. Titan used the loan, together with loans secured against 17 other properties in Europe, as the asset base for the securitisation.

As part of the securitisation process, the noteholders became the ultimate beneficiaries of the loan, receiving varying amounts of interest. Titan though, as issuer, retained the beneficial and legal ownership of the rights relating to the senior tranche.

Colliers argued that Titan did not hold the title to sue it and, even if it did have such a cause of action, it had not suffered any loss. This is because the securitisation agreements contained a waterfall provision whereby Titan was only obliged to distribute the actual sums it received by way of realisation to the noteholders.

As such, it was insolvency remote. The loss, if Collier's valuations were negligent, was borne by the noteholders, who would realise less from their subscriptions. The noteholders also had their own right of action, as Colliers had assumed responsibility to them.

The Court of Appeal disagreed. Titan held the legal and beneficial titles to, and therefore owned, the securitised loans.

These are a form of property. It is a commonplace truism of property law that the owner of property has rights of suit for damages in respect of any actionable negligence.

Regarding any future action by the noteholders, the Court of Appeal said that it would be reluctant to say that they could not bring a claim, but - since the noteholders stood in the same place to Titan as shareholders stand in relation to a company - such a claim might be met with an assertion that their loss was reflective of Titan's loss and thus be defeated. In any event, the Court of Appeal anticipated that the noteholders would receive the benefit of any damages through the waterfall provisions.

Finally, Titan would itself have suffered a loss (assuming the property was overvalued) when it acquired the loans and the securities on the basis of that overvaluation. The price paid for the loans would have been too high. In its concluding remarks, the Court of Appeal said: "Titan's relationship with the noteholders is analogous to that of a company with its shareholders; no one suggests that, because the shareholders may be the ultimate losers in a case of this kind, the company has not suffered a loss."

The Court of Appeal's comments were made obiter and, as such, would not be binding on any future court. That said, this will not be the last case arising out of the change in the commercial property market together with a complex loan structure.

We can expect further arguments in court on this point. It is, therefore, unsurprising that Longmore LJ noted that the issue of whether Titan had title to sue was more important to the securitisation industry than the outcome of any one valuation appeal.

Corralling together a group of disparate noteholders to bring a class action would have been much more difficult than using Titan as the claimant. There will, no doubt, have been some banks keenly awaiting the outcome of this decision to see whether their claims remain valid and they will be pleased to see that, despite the use of complex financial instruments and corporate structures, legal rights to recourse remains intact.

That said, there are lessons to be learned. With securitisation products now coming back into fashion, banks should pay keen attention to ensuring that, if it all goes wrong, they retain a right to sue for damages and that right is expressly written into the securitisation agreements.

The full Court of Appeal Judgement can be found here.