Mortgagee Protection in Section 106 Agreements
Posted on in Planning, Environment & Licensing, Affordable Housing
Westminster City Council has recently lost a case in the High Court, concerning the enforcement of a section 106 agreement requiring 16 flats in West London to be retained as affordable housing, subject to specified exemptions.
In Westminster City Council v Gems House Residences Chiltern Street Limited & Anor [2025] EWHC 1789, the Council sought an injunction to compel the continued use of the flats as affordable housing, after they were sold on the open market. The High Court ruled in favour of the defendants, accepting that a mortgagee exclusion clause in the section 106 agreement applied.
Background
In 2013, Westminster granted planning permission for a 60-flat, mixed-use scheme subject to a section 106 agreement requiring the provision of 16 affordable units. In 2016, all 16 flats were transferred to Kinsman Housing Ltd, a registered provider of social housing at the time. In August 2023, Kinsman was de-registered by the Regulator of Social Housing following a breach of the Governance & Financial Viability Standard. The 16 flats were later sold to Gems House Residences Chiltern Street Ltd, for around £12.6 million.
Westminster sought a legal declaration that the affordable housing obligations remained binding, and in April 2024, obtained an interim injunction to prevent use of the homes as market housing.
The Legal Issue
The case turned on the interpretation of the mortgagee exclusion clause in the section 106 agreement — specifically, whether a liability exemption expressed to benefit “any mortgagee or chargee of a Registered Social Provider or any receiver appointed by such mortgagee or any person deriving title through any such mortgagee” still applied, if the registered provider was later de-registered.
The Council argued that, to fall within the scope of the exemption, a person must derive title from someone who is a mortgagee of a registered social provider at the time of disposal. This interpretation aligns with the broader planning aim of securing the provision of affordable homes in perpetuity.
The High Court sided with the defendant and ruled that:
"The mortgagee exclusion clause applies from the time the mortgage is granted by a registered social provider and continues to apply even if that provider is subsequently de-registered."
The Judge added that this interpretation better aligned with the purpose of the clause to encourage commercial lending by allowing lenders to sell the affordable housing at open market value in order to realise their security in the event of default.
Tozers’ View
Imprecisions and ambiguities in drafting can lead to unintended consequences. The case highlights not just the need for great care when drafting mortgagee exclusion clauses in section 106 agreements, but also the ongoing challenge of balancing the need to attract investment with the imperative to protect affordable housing provision. It remains to be seen whether explicit drafting to address the scenario of a registered provider becoming de-registered will be acceptable to lenders, or whether it risks limiting access to funding.