High Court Clarifies Mortgagee Exclusion Clause in Section 106 Agreements

A recent High Court judgment has provided important clarification on the interpretation of Mortgagee Exclusion Clauses (MECs) in Section 106 Agreements, with significant implications for registered providers, lenders, and local authorities.

In Westminster City Council v Gems House Residence Chiltern Street Limited, Gems House Chiltern Head Lease Limited [2025] EWHC 1789, Westminster City Council (WCC) sought a declaration that the defendants are bound by and an injunction to enforce planning obligations contained within the s106 Agreement requiring 16 flats to be occupied as affordable housing units. The High Court dismissed the claim and discharged the interim injunction previously granted against the defendants.

Background

In April 2013, WCC granted planning permission for a mixed-use development comprising 60 residential flats in Marylebone. The permission was subject to planning conditions and a s106 Agreement, which required 16 of the units to be delivered as affordable housing. The agreement included a Mortgage Exclusion Clause (MEC), designed to protect lenders by allowing them to sell the affordable housing dwellings if a borrower defaults on their loan.

The affordable housing units were originally purchased by social housing provider London District Housing Association and later transferred to Kinsman Housing Limited (Kinsman), a registered provider and social landlord at the time. However, in September 2023, Kinsman was de-registered by the Regulator of Social Housing due to breaches of governance and financial viability standards.

Following Kinsman’s default, the mortgage lender, PGP Securities, exercised its power of sale in February 2024, relying on the MEC contained in the Section 106 Agreement.  The leases were transferred to Gems House Residence Chiltern Street (Gems House), which intended to let the units on the open market. WCC challenged this, arguing that the MEC did not apply to Gems House, given that Kinsman was no longer a social housing provider at the time of the transfer.

However, Gems House contended that the MEC became operative at the time the mortgage was granted, when Kinsman was still a registered provider, and continued to apply despite the subsequent de-registration and that  therefore MEC was still operative at the time of transfer of the long leases  releasing  successors in title from the affordable housing obligations once the lender had exercised its power of sale.

Legal Issue

The main issue for the court was whether Gems House could benefit from the MEC as a successor in title through a mortgage of registered social provider and whether the defendants were bound by the terms of the s106 Agreement, which required 16 residential flats to be used as affordable housing units within the development. The issue turned on whether the status of the mortgagor as registered social provider is determined at the date the mortgage was created, or at the time of the sale.

High Court judgement

The High Court judge Hodge KC agreed with Gems House claim that the relationship of mortgagor and mortgagee comes into existence upon the grant of the mortgage and the terms of the mortgage will set out when the mortgagee may appoint any receiver, and the relationship between the receiver and the mortgagor.

Judge Hodge KC states “…..the phrase ‘any mortgagee of a Registered Social Provider’ contemplates a mortgagee of an entity which was a registered social provider at the point at which that entity granted the mortgage. A, third party who acquires title by way of a disposition from a mortgagee whose mortgage was granted by a registered social provider can said to qualify as ‘any person deriving title through any such mortgagee’. Their title derives from a mortgage granted by a registered social provider because it was necessarily that grant which conferred any rights on the mortgagee in the first place.”

The judge emphasised that the clause must be interpreted in line with its commercial purpose; facilitating funding for affordable housing development. He concluded that the MEC continued to apply even after deregistration, and that successors in title, such as Gems House, were not bound by the affordable housing obligations.

As a result, the WCC claim was dismissed and the 16 units were deemed free from affordable housing restrictions in the S106 Agreement and could be sold or let on the open market.

WCC has announced its intention to seek permission to appeal the decision.

Key Considerations

This case demonstrates the practical impact of MECs in s106 Agreements, which are designed to protect lenders from restrictive obligations such as affordable housing requirements in s106 Agreements, and that the MEC play a critical role in securing finance for the long leases of the affordable housing units. It underscores the need for carefully drafted and robust MECs that protect not just the registered providers and social landlords but also their lenders and successors in title.

Where an MEC lacks clarity or is not in the ‘golden standard’ form promoted by the National Housing Federation, funding may be restricted to existing use value for social housing, rather than the more favourable market value subject to tenancies, potentially reducing the financial viability of affordable housing schemes.

Need advice?

Lester Aldridge’s Planning & Environment team advises national and regional developers on all legal aspects of planning. Contact the team at online.enquiries@LA-law.com.