What recent Mortgagee Exclusion Clause case law means for Registered Providers
12th August, 2025
Judgment was recently handed down in the case of Westminster City Council v Gems House Residences Chiltern Street Ltd, providing important clarification on how mortgagee exclusion clauses (MECs) within Section 106 Agreements are interpreted.
In 2013, planning permission was granted by Westminster City Council (Westminster) for a mixed-use development which included 60 residential flats, 16 of which were required to be used for affordable housing under a Section 106 agreement. The affordable housing was owned at the time by Kinsman Housing Limited, a Registered Provider of Social Housing (RP).
A decade later, Kinsman Housing was de-registered by the Regulator of Social Housing and subsequently defaulted on its loan agreement. The lender exercised its power of sale and transferred the flats to a third party, Gems House Residencies Chiltern Street Limited (Gems House) without any obligation to keep the flats for use as affordable housing, as it believed it was entitled to do relying upon the MEC in the S106 agreement.
As a result, the defendants, Gems House, sought to let the flats on the open market. This was opposed by Westminster, who sought an injunction to assert that the defendants would be bound by the affordable housing requirements stipulated within the Section 106 agreement, which would have meant that these flats would need to be used exclusively as affordable housing accommodation.
Significance of the Mortgagee Exclusion Clause
A mortgagee exclusion clause in a Section 106 agreement (or any other legal document) provides protection for lenders whereby, should a RP default on their loan agreement, a lender can sell the respective units on the open market, allowing maximum value to be achieved on charging.
This particular case effectively centred on one core legal question: must the mortgagor be a Registered Provider at the time of sale (as Westminster argued), or at the time the mortgage was granted (as Gems House argued)?
Judge Hodge KC ruled in favour of the defendants, with the consideration that the commercial purpose of this clause is for lenders to be able to recover full value in an enforcement situation. The spirit of this clause would therefore be best served by attributing it to the date the mortgage was granted.
While Westminster lost this case, the outcome is a positive one for the affordable housing sector thanks to the protection and confidence it provides for lenders. This allows RPs to continue to charge and dispose of their assets at market value subject to tenancy (MV-STT) levels, while they are better able to raise funding and invest in and maintain their housing stock. Local authorities throughout the country also gain clarity over the impact of these clauses.
The judgment is so important because had Westminster been successful in their claim, lender confidence would have been significantly undermined, with RPs likely being limited to existing use value – social housing (EUV-SH) value of their housing stock. The difference between these values can be substantial.
What Registered Providers need to consider
Given how crucial the interpretation of the MEC has been in this case, and the precedent that has been set, it is more important than ever to undertake robust title and planning reviews for factors that may limit value on charging or disposal, and any existing MECs should be reviewed for their effectiveness.
Even the most minor discrepancies in the wording of these clauses can render them defective, limiting the value of the property to EUV‑SH levels or even making the property un-chargeable. This makes the support of a specialist affordable housing lawyer crucial for ensuring robustly-drafted MECs.
How Ward Hadaway can support Registered Providers
As a full-service, UK top 100 law firm, Ward Hadaway’s multi-disciplinary team has a wealth of expertise in the affordable housing sector and provides specialist support tailored to the wide variety of needs of registered providers.
With many years of experience working with all major funders and their legal teams, registered providers count on our practical advice to confidently work towards their commercial goals.
Our legal support includes a stock review service that ensures properties are ready to charge or be disposed at maximum value, including MEC checks and variations where required.
If you have any questions regarding mortgagee exclusion clauses or property charging more generally, please contact Natalie Owen.
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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