A firm of surveyors is facing up to a Euros 32 million compensation bill after over-valuing an office building during the pre-recession period when securitising commercial mortgages was all the rage and considered a sure-fire route to profits.
An investment bank had advanced a Euros 110 million loan in 2005 on the basis of the surveyors’ assessment that the building, which was to act as security, was worth Euros 135 million. The loan was one of several – with a total value just short of Euros 1 billion – which were packaged up and passed to a company which specialised in issuing mortgage-backed securities.
In upholding the company’s claim against the surveyors, the High Court noted that the market for such securities had dried up following the 2007/08 financial crisis. However, at the time, banks were making handsome profits from such deals and the surveyors had been under pressure to reach a valuation which matched their client’s expectations as closely as possible.
Finding the valuation negligent, the Court noted that the building was very large, old and built to the specific requirements of its long-term tenant. There was a real risk that that tenant might leave and insufficient account had been taken of potential difficulties in re-letting the property and the costs of refurbishment. In the event, the building had fallen vacant in 2009 and was currently on the market with a price tag of only about Euros 22.5 million.
The Court found that the company had relied upon the negligent valuation and that the surveyors owed it a duty of care. Had it not been for the over-valuation, no loan would have been advanced on the property. The surveyors’ negligence had therefore been an effective cause of the company’s loss. The company was entitled to damages on the basis that the correct valuation of the property would have been Euros 103 million.