In an earlier blog post, we reported on the High Court’s decision in Westminster City Council v Gems House Residences Chiltern Street Ltd. The judgment, which was welcomed by housing associations, funders, and investors, confirmed that mortgagee exclusion clauses (MECs) within Section 106 agreements become effective from the moment a property is charged. While the case focused on a specific agreement, its implications are far-reaching, highlighting the critical importance of well-drafted MECs across a wide range of property-related documents.

When is a MEC necessary?

There are two primary scenarios where a MEC is essential:

1. Financial risk to the lender

Any restriction or liability that could reduce a lender’s recovery when enforcing a charge and selling the property must be considered. Common examples include:

• Use restrictions requiring the property to remain affordable or designated for social housing.
• Financial obligations such as those found in Section 106 agreements or overage provisions.

2. Limitations on sale

These are conditions that restrict who the lender can sell the property to, such as:

• Requirements for ownership or management by a housing association.
• Conditions tied to occupant eligibility, including local connection criteria or nominations from local authority housing registers.

Given that Section 106 agreements often contain both types of risk, it is vital that the MEC either applies to the entire agreement or explicitly addresses all relevant provisions.

Types of MECs

Understanding the different forms of MECs is crucial, particularly when aiming for a higher valuation basis under MV-STT (Market Value Subject To Tenancies):

• Unqualified MECs

These clauses offer clear protection for mortgagees, chargees, receivers, and successors in title, allowing them to sell free of restrictions. There are no steps that need to be taken to benefit from the MEC.

• Hoops-Style MECs

The NHF and GLA template MECs are hoops-style. These require certain conditions to be met (or 'hoops' to be jumped through) before the lender or receiver can sell the property free of restrictions/provisions being protected.

What makes a MEC adequate?

Not all MECs are created equal. In hoops-style MECs, ‘free drafting’ often leads to inadequacies. To ensure effectiveness, especially when deviating from NHF/GLA pre-agreed forms, the clause must include:

• Coverage for all relevant insolvency actors: mortgagees, chargees, receivers, and successors.
• Reference to the correct type of security document (where there is a reference).
• A requirement for the lender to give written notice to the council, triggering a three-month moratorium period during which the council or another housing association may purchase the property.
• Completion of the sale within that moratorium period.
• A sale price sufficient to cover the lender’s capital debt, interest, costs, and expenses.

If these conditions are met and the property is not sold to the council or a housing association within the moratorium period, the lender or receiver may sell the property free of restrictions. These provisions then permanently cease to bind future owners.

Final thoughts

The High Court judgment ruled that MECs become active once a property is charged; however, it is unwise to wait until that point to assess risk. Whether acquiring land or property, it is essential to identify potential issues early and ensure that an adequate MEC is in place to ensure certainty on value.

If you would like to discuss any points raised in this article further, then please contact me.