Court of Appeal provides welcome clarity on mortgagee exclusion clauses 

Last year, the High Court ruled against Westminster City Council on the interpretation of a historic mortgagee exclusion clause ("MEC") in a section 106 agreement. The Council appealed, and the Court of Appeal has now upheld that decision, confirming that the protection conferred by the MEC was fixed when the qualifying mortgage was granted. As a result, the subsequent deregistration of the Registered Provider did not prevent either the lender or a purchaser deriving title through it from relying on the exclusion. 

A brief recap of the facts

Westminster City Council granted planning permission in 2013 for a mixed-use development on Chiltern Street, London, accompanied by a section 106 agreement requiring 16 flats to be provided and retained as affordable housing. The agreement envisaged that the affordable units would be transferred to a Registered Provider ("RP") and included an MEC providing that the affordable housing obligations would not be enforceable against "any mortgagee of a Registered Social Provider... or any person deriving title through any such mortgagee". ("Registered Social Provider" being the terminology used in the agreement and now more commonly referred to as an RP.) 

The affordable housing units were subsequently acquired by an RP, Kinsman Housing Limited, and charged in favour of a lender as security for financing. In September 2023, the Regulator of Social Housing deregistered Kinsman. That deregistration constituted a default event under the lender's loan agreement. The lender then exercised its power of sale and, in February 2024, sold the long leases of the 16 flats to Gems House Residences Chiltern Street Ltd ("Gems House"). 

Westminster City Council argued that, because Kinsman had been deregistered before the lender's sale, Gems House could not rely on the MEC and remained bound by the affordable housing obligations. Gems House argued that the exclusion applied because it derived title through a mortgagee of Kinsman, and Kinsman was an RP when the mortgage was originally granted. 

The central issue was whether the phrase "mortgagee of a Registered Social Provider" was to be assessed at the date the mortgage was granted or, instead, at the date the mortgagee exercised its power of sale. If the latter, the deregistration of Kinsman would mean that the purchaser could not benefit from the MEC. 

The decision  

The Court of Appeal upheld the High Court's decision. The Court held that there was nothing in the language of the clause requiring the RP to remain registered for the exclusion to remain effective. The Court considered that the clause was directed to the status of the mortgagor when the mortgage was created. Once a qualifying mortgage had been granted, the protection extended to the mortgagee and any person deriving title through that mortgagee, irrespective of any subsequent deregistration of the RP. 

The Court also attached significant weight to the commercial purpose of the MEC. It accepted that lenders would be reluctant to provide finance if the value of their security could be materially reduced by a later deregistration of the RP, an event largely outside their control. If the exclusion ceased to apply following deregistration, lenders would risk recovering only affordable housing value on enforcement, which could undermine the availability of commercial funding for affordable housing acquisitions. 

Comment

The decision will be welcomed by RPs and lenders. Whilst the specific wording considered by the Court is more commonly found in historic or non-standard MECs, the judgment reinforces the courts' willingness to give effect to the commercial purpose of mortgagee exclusion clauses. 

It is also worth noting that the 2013 section 106 agreement pre-dated the introduction of the National Housing Federation's standard mortgagee protection clause, which has since become the industry standard form of mortgagee protection wording. Unlike the wording considered by the Court, the NHF clause is tied to the affordable housing units or land rather than the status of the RP. It also extends protection to a wider range of persons and lending arrangements. As a result, the specific interpretative issues which arose in this case are unlikely to arise where the NHF wording has been adopted and the prescribed mortgagee protection process has been properly followed.

Local authorities should not view this decision as a reason to revisit standard NHF-style mortgagee protection wording. RPs already face significant financial pressures and remain selective about acquiring section 106 units. Any reduction in lender protection may make funding more difficult to obtain and could ultimately affect the delivery of affordable housing. Local planning authorities will therefore continue to need to balance the objective of securing affordable housing obligations against the practical reality that lenders require robust mortgagee protections if RPs are to access acquisition and development finance. 

The Court of Appeal's judgment can be read in full here - Westminster City Council v Gems House Residences Chiltern Street Ltd & Anor [2026] EWCA Civ 937 (21 July 2026)