Mortgagee exclusion clauses – recent caselaw: Westminster City Council v Gems House Residences Chiltern Street Ltd [2025]

This recent case will be of interest to anyone dealing with securitisation of housing by Registered Providers of Social Housing (RPs) or Registered Social Landlords (RPs). 

Housing stock is valued for loan purposes on two bases: market value - subject to tenancies (MV-ST) or existing use value - social housing (EUV-SH).  To maximise the amount of funding available, it is important to obtain a valuation on the usually higher MV-ST basis rather than EUV-SH.

Value is limited to EUV-SH where there is a restriction on the title or, as in this case, an obligation is imposed in a section 106 agreement which requires the affected property to be used for affordable housing. In the event of a funder needing to enforce its security and sell the property, such a restriction will limit the re-sale value. 

In an attempt to balance the competing interests of local authorities to preserve properties as affordable housing; of RPs and RSLs to raise funds on the security of those properties to enable them to maintain their existing homes and develop or acquire new ones; and of funders who need to be able to enforce their security in the event of default, it is common for documents imposing restrictions/obligations to include (or be varied to include) a “mortgagee exclusion clause” (MEC).

An MEC allows a funder, that is seeking to enforce its security, to sell the property free from the restrictions/obligations, generally following a period when they are first required to attempt to sell the property as affordable housing. Importantly, if an adequate MEC is in place, funders will attribute the higher MV-ST valuation. 

Facts of the Case

In the case of Westminster City Council v Gems House Residences Chiltern Street Ltd, planning permission was granted in 2013 by Westminster City Council (the Council) for a development including 60 residential flats. The section 106 agreement entered into simultaneously with the grant of the planning permission included an obligation for 16 of the flats to be used as affordable housing.  The agreement also included an MEC that stated that the obligations would not be binding on or enforceable against “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”.

The 16 flats were acquired by an RP - London District Housing Association Ltd (London District) - and a mortgage was entered into by them to fund the acquisition. In 2016, London District transferred their interest in the 16 flats to Kinsman Housing Limited (Kinsman) who was at that time also an RP. The mortgage was novated to Kinsman.

In 2023, Kinsman was de-registered by the Regulator of Social Housing due to concerns around its viability and this qualified as an event of default under the mortgage.

The lender subsequently exercised its power of sale and sold the flats to Gems House Residences Chiltern Street Limited (Gems House), subject to the occupational assured shorthold tenancies. Gems House sought to let the flats on the open market, in reliance on the MEC.

The Council sought a declaration that Gems House was bound by the planning obligations and that the flats could not be occupied other than as affordable housing.

The case revolved around one key issue – whether Gems House could claim the benefit of the MEC as a person deriving title through a mortgagee of a Registered Provider.

Gems House contended that they were entitled to the benefit of the MEC. The Council opposed this on the grounds that Kinsman had been de-registered at the time of the sale and Gems House therefore derived title through a mortgagee of an unregistered provider.

Decision

The High Court ruled in favour of Gems House, although “not without some regret at the consequent loss of much-needed affordable housing”. The primary aim of the MEC was “to encourage sufficient commercial lending for a registered provider”. The relevant point in time for considering the status of the mortgagor is the date of the creation of the mortgage.  To conclude otherwise “would substantially undermine the purpose of the exclusion. The risk to their security that this would entail might well deter mortgagees from lending at all.”

Conclusion

Although the direct consequence of this judgment is that 16 affordable housing units have been lost, the case is ultimately positive news for the social housing sector. It underlines the fact that funders can continue to rely upon MECs and accept security valued on an MV-ST basis, in turn allowing RPs and RSLs to maximise their borrowing potential and invest in existing and new homes. 

As part of our wider services, Clarke Willmott’s social housing finance and planning teams would be happy to review MECs in both existing and draft documentation to ensure it meets funders’ requirements.