The recent High Court judgment handed down in Westminster City Council v Gems House Residences Chiltern Street Limited provides important clarity on the operation of mortgagee protection clauses (‘MPCs’) in Section 106 agreements. The decision confirms that MPCs can effectively shield lenders from affordable housing planning obligations, protecting the value of their security and therefore enabling them to lend against affected units at ‘market value subject to tenancy’ (‘MV-STT’). This is a positive outcome for lenders and registered providers (“RPs”) and provides local authorities with certainty regarding the effect of MPCs.  

This insight will consider the role of MPCs, the court’s reasoning in this case, and the wider implications for the social housing sector. 

Mortgagee protection provisions 

Mortgagee protection clauses enable lenders, in the event of a default, to dispose of properties on the open market free from s106 requirements to use the units only for affordable housing.  MPCs are critical to encourage lending at MV-STT levels against s106 schemes, as opposed to ‘existing use value – social housing’ (‘EUV-SH’) levels.  This valuation difference can be significant. Therefore, the existence of MPCs in a portfolio can permit an RP to raise several million pounds in additional funding, secured against those properties, for investment in existing properties and/or new development of social housing.   

The standard format MPCs, as formulated by the National Housing Federation and the Greater London Authority, have been settled for several years now, striking a balance between maximising borrowing capacity and ensuring social housing units are not lost to the sector. The Westminster case tested the strength of the protection offered by MPCs. 

The case 

The defendants, Gems House Residencies Chiltern Street Limited, acquired 16 affordable housing leases from a mortgagee that had previously enforced its security over the units. Westminster City Council (‘WCC’) sought a declaration that the defendants, having acquired the units from the mortgagee, were still bound by the affordable housing planning obligations contained within a Section 106 agreement, which required the flats to be used solely as affordable housing. WCC argued that the mortgagee protection clause should not apply because the registered provider (Kinsman Housing Ltd) whose assets the mortgagee’s security was held over, had been de-registered before the properties were sold. 

The mortgagee protection clause stated that the obligations would not be binding upon ‘any mortgagee of a Registered Social Provider or any receiver appointed by such mortgagee or any person deriving title through any such mortgagee or receiver.’ 

WCC’s position was that the mortgagee protection clause should only apply if the mortgagor was still a registered provider at the time the mortgagee sold the property. The defendants argued that the relevant date was when the mortgage was granted, at which point the provider was registered. 

The court dismissed WCC’s claim and held that the mortgagee protection clause in the s106 agreement applied, meaning the defendants were not bound by the affordable housing restrictions. Judge Hodge KC considered that the commercial purpose of the clause – to protect the lenders’ ability to recover full value – was best served by fixing the relevant date at the time the mortgage was granted. 

Wider Context 

It is worth noting that in WCC’s original claim, they raised allegations concerning the conduct of the defendants’ predecessors in title and various (allegedly) connected companies. These parts of the claim were later withdrawn, leaving the court to focus on the interpretation of the MPC. This is significant as it suggests that the case may have been driven by WCC’s concerns around the structure of the transaction rather than the MPC itself – the wording of which was fairly standard. 

This case helps to provide clarity on the strength and operation of mortgagee protection clauses in s106 agreements. The court’s decision confirms that standard MPC wording continues to offer reliable protection for funders and registered providers, supporting MV-STT valuations and preserving access to finance. 

The outcome here is a positive one for the social housing sector. It confirms that mortgagee protection clauses continue to offer robust protection for funders, allowing registered providers to maintain their existing funding arrangements and continue to achieve MV-STT levels when charging their assets (and when revaluing stock already in charge). Had the court found against the defendants, it could have significantly undermined lender confidence and likely limited providers to EUV-SH valuations, restricting their ability to invest in and maintain their housing stock. 

Although this decision went against WCC, it provides clarity to local authorities over the impact of mortgagee protection clauses. It also suggests that, if there are wider concerns over particular RPs and their funding structures, there may be ways to address these in the planning process that cover off those concerns while still enabling the sector to maintain confidence in the standard mortgagee protection clause wording. 

We will continue to monitor any developments in this area, particularly any future challenges to MPCs or shifts in local authority approaches to affordable housing enforcement. 

How Capsticks can help 

Capsticks can support you with drafting and reviewing MPCs, advising on their enforceability, and providing broader support across the social housing finance sector. 

If you have any queries about what's discussed in this insight and its impact on your organisation, please speak to Susie Rogers or Suzanne Smith to find out more about how Capsticks can help.