Mortgagee exclusion clauses – why are they important and what do you need to know?

Helga Chau, 13 March 2023

I’ve been practising as a solicitor since 2003, gaining experience across different areas of property law whilst working in both private practice, including Devonshires’ Solicitors, and in various in-house roles. I’ve been working at A2Dominion since 2015, primarily specialising in securitisation. 

I first dealt with the application of mortgagee exclusion clauses in Section 106 (S106) agreements whilst working at Devonshires’ back in 2006. Who would have thought that all these years later, they would still be such a hot topic?

A mortgagee exclusion clause is a lender carve-out to affordable housing provisions, typically in S106 agreements. Should a registered provider be in a default situation, they allow a lender to sell restricted units on the open market if certain steps have been followed, and if the property has not been sold to another registered provider within specific timescales. 

When valuing affordable housing units, valuers are instructed by lenders to review the affordable housing obligations in any related S106 agreement to determine in a borrower default scenario:

  • Whether there’s an ability for any lender sell those units on the open market if a sale to another registered provider does not proceed using all reasonable endeavours within three months of a local authority being notified by the lender. Then, in a default scenario, on any sale by a lender, successors in title would not be bound by the S106 affordable housing obligations.
  • If the above provision benefits all successors in title, and “lender or mortgagee” extends to any receiver, housing administrator, administrator or anyone appointed under any security documentation. The latter particularly important as many registered providers have trust arrangements with their lenders.
  • That the consideration on transferring the properties should not be anything less than the amount outstanding under the facility including interest, costs and expenses.

The lender carve-out clause has to be drafted robustly with all of the above elements clearly outlined. If not, the valuer will only apply a restricted valuation against the stock, known as Existing Use Value for Social Housing (EUV-SH), rather than Market Value Subject to Tenancies (MV-STT). In many parts of England and Wales, EUV-SHs are significantly lower, meaning more security is required to raise bank funding. This increases cost and limits the scope for raising necessary funding.

To assist local authorities and lenders, there are two template clauses that have been circulated within the sector – one by the Property Finance Working Group and one by the Greater London Authority. The example clauses help to ensure that housing associations can achieve best possible funding value when securing loans against assets.

Over the years, there has been a lot of progress in working with local authorities to adopt the template clauses into their S106 agreements. To support you and your development teams in discussions with local authorities, the NHF and the Property Finance Working Group have developed a new resource, designed by my colleague Sam Cooke, Senior Loan Security Officer, which shows which local authorities have implemented the mortgagee exclusion clause templates recently.

This will be kept updated periodically by law firms working with the NHF. We hope you find this a useful tool going forward which you can pull out of your back pocket if experiencing any resistance to the incorporation of the clauses.

Please note that there could be additional clause wording to a S106 agreement that could affect the valuation results and which may also need to be varied. It is beneficial, therefore, to receive legal and valuation advice to ensure that best values are achieved.