Mortgagee exclusion clauses are a well-established feature of section 106 planning agreements. It is, however, highly unusual for these provisions to be the subject of judicial scrutiny as they were in the recent High Court case of Westminster City Council v Gem House Residences & Anor [2025] EWHC 1789. The case is eye-catching for this reason alone. But does it have any wider implications?
Background
The case concerned 16 residential flats in the City of Westminster, that were the subject of affordable housing obligations in a section 106 agreement (the S106) entered into with Westminster City Council (the Council) in 2013.
In 2015 the developer granted 125 year leases of the flats to a registered provider of social housing, who the following year transferred the flats to Kinsman, another registered provider. In 2023, the Regulator of Social Housing took the decision to de-register Kinsman from the register of social housing providers. This qualified as an event of default under a third party legal charge and the chargee exercised its power of sale, assigning the 16 leases to Gem House Residences (Gem) for £12.6m.
Gem intended to let the flats out at market rents on the understanding that the S106 affordable housing requirements had now fallen away. This prompted the Council to issue proceedings seeking a declaration and injunction that Gem was bound by the affordable housing obligations in the S106 with an interim injunction being granted in October 2024.
The Judgment
The question at the heart of the case was whether Gem was entitled to claim the benefit of a mortgagee exclusion clause in the section 106, as a person deriving title from the mortgagee of a registered social provider. The key provision was clause 10.1 of section 106, which provided that the planning obligations in section 106 were not enforceable against various persons, including at 10.1.1 “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 Council submitted that for a person to fall into 10.1.1 they must derive title from a person who is a mortgagee of a registered social provider at the time of the disposal. The Council argued that this was the natural meaning of the wording and that this aligns with the wider planning and regulatory context, including the overall aim of the affordable housing obligations to secure the affordable housing in perpetuity.
Gem submitted that they fell within the scope of 10.1.1 on the natural and ordinary meaning of the words, being a person deriving title through a mortgagee of a registered social provider. The relationship of mortgagor and mortgagee was created at the grant of the mortgage and it was not relevant that Kinsman was subsequently deregistered; the Council’s interpretation involved reading into 10.1.1 wording which was simply not there.
In its judgment in late July, the High Court favoured Gem’s interpretation over the Council’s and discharged the interim injunction accordingly. Whilst the Court expressed regret at the consequent loss of affordable housing, it explained that Gem’s construction was consistent with the rationale and purpose of the mortgagee exclusion clause – namely to encourage sufficient commercial lending for a registered provider by permitting the lender to sell the affordable housing at open market value in order to realise its security in the event of default. In this context, the Court considered that the Council’s interpretation was “counter-intuitive, because it puts any mortgagee at the mercy of the actions of third parties over which it has absolutely no control: the conduct of the registered social provider, and the response of the regulator.”
The Implications
The direct and immediate consequence of Westminster City Council v Gem House Residences was, of course, the loss of the 16 flats as affordable housing units, as the Court itself acknowledged. However, mortgagee exclusion wording of this nature is common in section 106 agreements all over the country. It therefore seems likely that a number of local planning authorities, not just the Council, will now be considering the risk highlighted by the case and, in turn, reviewing the mortgagee exclusion wording in their standard form section 106 agreements.
In this regard, as much as the judgment shines light on a potential problem from a local planning authority perspective, it also highlights the solution – namely explicit drafting to cover off the possibility of a registered social provider being deregistered. However, one might question whether such drafting would be palatable to lenders if it impacted their ability to enforce their security free of the section 106 obligations.
Given that the purpose of these types of mortgagee exclusion clauses is to help facilitate the funding of affordable housing units, there is a delicate balancing act to be maintained here, which councils will need to carefully consider.
The potential legacy of Westminster City Council v Gem House Residences in section 106 drafting terms will no doubt play out in future section 106 negotiations. In the meantime, the case serves as both a reminder that section 106 agreements are subject to the usual rules of contractual interpretation and a stark illustration of the real-life consequences that legal drafting can have.
If you require any advice or assistance on section 106 matters, please do not hesitate to contact our specialist Planning Infrastructure & Public Law team.
