What was the issue?
Mortgagee Exclusion Clauses “(MEC”) were in the spotlight following the case of Westminster City Council v Gems House Residences Chiltern Street Ltd [2025}. The case centred on the interpretation of a MEC in a Section 106 agreement attached to planning permission granted by Westminster City Council in 2013. The agreement originally required 16 flats to be occupied as affordable housing, but the current owner disagreed, claiming the MEC meant they were not bound.
What is an MEC?
The now industry wide Mortgagee Exclusion Clause has been agreed by expert valuers and lawyers within the sector to provide much-needed consistency regarding what obligations will bind a mortgagee of a Registered Provider (“RP”) in a default scenario. Following a RP default, the clause allows a period of 3 months before the mortgagee can step in and sell the Property at market value disregarding any affordable housing use (and leaving successors free from those obligations too). The use of this clause ensures that when drafting S106 agreements, mortgagees can be certain when they lend monies that on enforcement, they will take free of any affordable housing obligations. This enables the RP borrower to obtain a Market Value Subject to Tenancies (MV-STT) valuation when charging the Property and borrow larger amounts secured against the Property.
What did the case decide?
The flats were originally owned by Kinsman Housing, a registered provider when the mortgage was granted. Kinsman was a small RP, consistently in breach of the Social Housing Regulator’s requirements, with weak governance, and ultimately found to be non-compliant with the Regulator’s enforcement notices in 2023. It was then de-registered.
After Kinsman was de-registered, the lender enforced their security over the Properties and sold them to Gems House Residences Chiltern Street Ltd, who planned to let them on the open market.
This was of concern to the tenants in occupation. Westminster argued that the MEC no longer applied once Kinsman lost its registered status and sought to enforce the affordable housing restrictions through the courts.
The High Court dismissed the claim. Judge Hodge KC ruled that the MEC took effect from the moment a mortgage was granted by a registered provider and remained valid even after that provider was deregistered. The defendants, having acquired title through the mortgagee, were therefore not bound by the affordable housing obligations.
The judge also refused the Council’s application for permission to appeal, although this may still be reviewed directly to the Court of Appeal. He ordered the Council to pay £250,000 plus VAT towards the defendants’ costs and declined to extend the injunction that had prevented market lettings since October 2024, noting the significant financial losses already incurred.
What are the implications?
The National Housing Federation have re-circulated this agreed “golden clause”, (which appears on their website) which, if followed, will give the RP comfort that they can borrow at higher levels from any funder in the sector, allowing them, amongst others, to build much needed new housing.
This case illustrates that the High Court are looking at the intention and purpose of the MEC clause rather than the semantics or any later events, and have upheld the principle that commercial funding arrangements should always be taken into consideration, and that any push back would mean uncertainty amongst funders in the sector which could affect monies available for development.
For Planners and Developers, this ruling highlights why planning obligations need to be drafted with care. Ambiguous drafting could severely impact value and affect the RPs business plan, and if valuations don’t stack up the RP might have to provide further security to fill the gap or borrow less. Continued investment in the sector is reliant on certainty and transparency; unpredictable outcomes could quite simply deter investors. On the other hand, Local Authorities need to preserve affordable housing stock whilst RPs remain solvent, but as default in the sector is rare, coupled with the robust special administration rules for RPs under the Housing and Planning Act 2016 , another RP will usually be found to step in if an RP is in default, so those affordable housing units would not ordinarily be lost.
The Takeaway?
For lenders and developers, the ruling provides welcome clarity, confirming that mortgagee protection clauses survive the deregistration of a RP, reducing risk and offering greater certainty when financing affordable housing schemes.
For councils, the decision highlights the need for precision in drafting Section 106 agreements. Authorities may need to review existing provisions and ensure future agreements use clear and standardised wording, such as the “golden standard” clauses promoted by the National Housing Federation.