Mortgagee Protection Clauses – case law update

Written by Katie Dyer and Kimberley Hyatt

Mortgagee Protection Clauses (MPCs) are a well-established part of entering into agreements made under Section 106 of the Town and County Planning Act 1990 (Section 106 Agreements). However, MPCs have not been much tested by the courts, given the rarity of a Registered Provider (RP) going insolvent.

However, the recent high court case of Westminster City Council (WCC) v Gems House Residences Chiltern Street Limited (Gems) (22 July 2025) analysed the wording of an MPC to decide whether it was enforceable if affordable housing leases were sold by a mortgagee after a registered provider (RP) had become de-registered. It has been an extremely useful decision in seeing how the courts would interpret such clauses in the future and will be of comfort to the sector- especially funders.

Background

In 2013 planning permission was granted by WCC for a mixed-use development, including sixty residential flats. A Section 106 Agreement was also entered into whereby sixteen of the residential flats were to be affordable housing. Leases of the 16 flats were granted to London District, a RP, who mortgaged them to Securities. In July 2016, the legal title to the leases, as well as the legal charge, were transferred to Kinsman Housing Limited, another RP. Kinsman was de-registered on 7 September 2023. Securities, as mortgagee, exercised its powers of sale in February 2024 and transferred the leases to Gems who are not a RP and intend to let the flats at market rents. WCC brought a claim seeking a declaration that Gems were bound by the planning obligations to use the flats as affordable housing and an injunction to enforce the obligation. 

WCC’s main argument was that the MPC did not apply as at the time of the transfer to Gems, Kinsman was not a RP so Gems could not take the leases free from the affordable housing provisions in the s106. 

Judgment

The court analysed the MPC using established principles of contractual interpretation. His Honour Judge Hodge KC noted that Section 106 Agreements are sophisticated and complex documents, entered into with the benefit of skilled professional advice on both sides and highlighted that the court had to “construe the words the parties have actually used”. 

The court found for Gems on the basis that the purpose of the MPC was to encourage sufficient commercial lending for a RP to acquire long leases of the affordable housing units, which was achieved by permitting the lender upon default to realise its security by selling social housing assets at open market value.  This aim was “better achieved” by Gems interpretation that the MPC applies to a mortgagee of a RP from the time the mortgage is granted, not at the time of disposal, and continues to apply even if the provider in question is subsequently de-registered.

This case highlights the importance of a well drafted MPC. In this case, the clause stated that the obligations were not binding against “any mortgagee of a Registered Provider … or any person deriving title through any such mortgagee…” with the qualifier of “registered provider” meaning that WCC could argue that it was not applicable in this case, when the RP had been de-registered. 

In April 2017, the Property Finance Working Group (PFWG) produced an example MPC for use in Section 106 Agreements and there is a revised template clause for the Greater London Authority. The example clauses state that the affordable housing provisions are not binding on “a mortgagee or chargee…” so this type of challenge is unlikely to have arisen if the standard clause had been used.

The PFWG is a group of RPs, valuers and legal advisors advising funders and borrowers in the housing sector. This group regularly discuss and review the approach to such clauses and any challenges to the standard drafting to make the whole sector aware of the importance of drafting these clauses correctly. The group came together to discuss and create these standard clauses to ensure that where these clauses were used that the funder would be protected but that an RP would still have an opportunity to achieve the higher market value subject to tenancies (MVST) valuation where such clauses were used rather than the often lower valuation of existing use value -social housing (EUV-SH).

This case is a timely reminder of the importance of following the PFWG example MPC clauses. Although it provides comfort that the courts would apply a commercial and common sense view as to how the intention behind such clauses should be interpreted we are very aware that even the smallest error or divergence from these standard clauses can mean that the funder will only allocate the valuation of EUV-SH to that property or development.  Although the case indicates that the courts would take a pragmatic view when interpreting the clauses and its underlying intention – it is still important to ensure the clause is well drafted and gives the funder its required protection at the outset to avoid any uncertainty in its interpretation.

Some of the key elements of an MPC to ensure that RPs can achieve MVST valuation include:

• Must refer to mortgagees, chargees, receivers, administrators (including housing administrators)
• Must cease to apply to anyone acquiring a property via the above entities.
• Where there are conditions to be satisfied before the mortgagee or chargee can be released from the affordable housing obligations in an enforcement scenario  the requirement for the mortgagee, chargee or anyone appointed to enforce the security must only be required to use reasonable endeavours to sell back to the local authority or to another housing association.  
• The time limit in which to use such reasonable endeavours must only be for a maximum of a 3 month timeframe which runs from the date the mortgagee/chargee serves notice to a local authority or other party imposing any use restriction, of its intention to exercise its power of sale - to completion of the transfer of the affordable housing.   This 3 month time frame is particularly important and has been the generally accepted timeframe in the sector for over 15 years to support an MVST valuation – any extension or uncertainty around this time scale has in our experience immediately resulted in a reduction in value to EUV-SH in the majority of cases
• There are requirements within the PFWG standard clauses that must also be followed to ensure that the funder can recover all required monies owing to it which also must be followed to the letter to ensure the MPC is accepted by the funder.

This is just a summary of some of the MPC provisions, and you should refer to the PFWG clauses for the FULL clause and all its required variables and take legal advice on the suitability of the clause.  The clauses can be found here. 

If any aspect of the clause does not follow the recommended clause format, then there is a real risk that the properties will only achieve EUV-SH when an RP seeks to use that property as security for a funding transaction. This can mean a loss of value of up to 50% in numerous geographical locations. 

We have seen first-hand in numerous funding transactions how lenders security trustees and funders will only accept properties at an EUV-SH valuation where there is any element of error or divergence from the PFWG standard clauses. It is therefore particularly important that you get full legal advice from property charging experts (both lawyers and valuers) whenever you acquire properties that have any affordable housing restrictions in Section 106 Agreements to ensure you achieve the maximum valuation for these properties for funding or even portfolio sale of the properties.

Bevan Brittan are one of the legal firms that sit on the PFWG and are in regular discussions with other key property charging lawyers, funders, valuers in the sector and the National Housing Federation to discuss these clauses and the impact on the sector.

Should you have any queries on anything in this article please do not hesitate to contact Katie Dyer  who will be happy to assist with your enquiries.