Mortgagee exclusion clauses in a planning obligation

No lender will fund a scheme where enforcement of its security could leave it holding land burdened with obligations it cannot perform. A mortgagee exclusion clause answers that: the planning obligations do not bind the mortgagee, any receiver it appoints, or a purchaser from them, except to the extent the clause says they do. It is standard in section 106 agreements and the negotiation is usually about scope rather than principle.

The authority's interest is the mirror image. Section 106 of the Town and Country Planning Act 1990 makes obligations enforceable against the person who entered into them and against successors in title, which is what gives the authority comfort that affordable units will still exist in twenty years. A broad exclusion weakens that, and on affordable housing it can mean the units are lost.

Why lenders insist on the clause

A development loan is secured on the land. If the borrower defaults, the lender wants to realise the security by appointing a receiver or by selling, and it wants the sale to be of land it can value.

Obligations that run with the land are a valuation problem. A requirement to transfer twelve units to a registered provider at a discounted price, to pay a contribution on occupation, or to construct a highway improvement all reduce what a purchaser will pay and may be impossible for a lender to perform at all, since a lender is not a housebuilder. Without the exclusion, credit committees either decline or price the uncertainty into the facility.

So the clause is not a negotiating flourish. It is a condition of the funding, and on most schemes the funding is a condition of the development happening.

What the standard exclusion covers

The usual formulation excludes from the obligations any mortgagee or chargee of the whole or part of the site, any receiver appointed by them, and any person deriving title through them, with the important qualification that such a person becomes bound if and for so long as it takes possession of the land.

Three features deserve a careful read in any draft.

The exclusion is normally personal rather than permanent. It protects the lender while it is enforcing, and a purchaser who buys and then develops becomes bound. A clause that releases the land itself rather than protecting the person is far wider, and authorities should resist it.

The trigger for being bound is usually possession, not ownership. A lender with a charge is not bound. A lender in possession, or a receiver running the site, generally is. That distinction is the whole architecture of the clause.

And the exclusion rarely covers everything. Obligations that are restrictive in nature, such as a covenant not to occupy more than a stated number of units before a trigger is met, often remain enforceable against anyone, because they restrict use rather than requiring performance.

Effect on the authority's ability to enforce

For financial contributions the practical effect is modest. The authority's remedy is usually against the person who was bound when the trigger occurred, and a scheme that stalls before the trigger was never going to pay in any event.

For affordable housing the effect is substantial, because the obligation is the thing the authority bargained for and a release means the units become market housing. That is why most authorities accept a mortgagee exclusion for the general obligations and insist on a controlled process for the affordable housing element.

The controlled process is the sensible compromise, and it looks the same in most agreements: before the lender can dispose free of the affordable housing restrictions, it must give the authority written notice, allow a period in which the units can be marketed to another registered provider, and only then sell on the open market, often with a provision that part of the proceeds goes to the authority. The negotiation is about the length of the periods and who bears the marketing cost.

Registered provider funding requirements

Where affordable units are transferred to a registered provider, the provider's own lender needs protection too, and that produces a second mortgagee clause with a different shape.

Registered providers borrow against their stock, and their funders require the ability to realise that security if the provider fails. The usual mechanism gives the provider's lender a right, on enforcement, to dispose of the units free of the affordable housing restrictions after a defined process: notice to the authority, a period during which the units must be offered to other registered providers at a price reflecting their value as affordable housing, and a fallback allowing open market disposal if no provider takes them.

Three practical points. The periods required by different providers and their funders are not identical, so agree the clause with the named provider rather than drafting generically. Grant funding adds its own conditions, and a scheme relying on grant should check the funder's requirements before the deed is engrossed. And the authority will usually want a recycling provision directing any surplus to affordable housing elsewhere in the area.

Where the affordable offer itself is contingent on viability, these clauses interact with any review mechanism, and the interaction is easy to get wrong, as our note on affordable housing review mechanisms describes.

Negotiating the wording

Four points carry most of the value, and all four are easier to settle before the deed goes to the authority's solicitor than after.

1. Define possession precisely, and say whether a receiver appointed under the charge is treated as in possession for the purpose of the clause.
2. Separate the general exclusion from the affordable housing provisions, in different clauses, so that a later variation of one does not disturb the other.
3. State which obligations survive the exclusion, by clause number rather than by description, because a description invites argument about whether a given covenant is restrictive or positive.
4. Deal with partial disposals. A lender enforcing over one phase of a multi-phase site creates questions about apportionment of contributions and affordable units that generic wording does not answer.

Where an authority resists

Resistance usually comes from a legal team that has seen affordable housing lost under a loosely drafted clause, and the way through is to narrow the clause rather than to argue the principle.

Offer the authority three things. A short notice period before any disposal free of the restrictions, so that it finds out in time to act. A marketing obligation to other registered providers with the price basis stated. And a recycling provision for any surplus. Authorities that have refused a bare exclusion will often agree one with those protections attached, and the lender usually accepts them because they do not prevent realisation of the security.

Where an authority refuses outright, the options are to escalate to the head of planning with the funding timetable attached, or to accept a narrower clause and go back to the lender. The second is often faster. A deal that completes with an imperfect clause beats a perfect clause on a scheme that never funds.

Timing against the funding agreement

The sequence that works runs backwards from financial close. Obtain the lender's required wording early, before the heads of terms for the obligation are agreed, because retro-fitting it into an agreed draft restarts the authority's legal review. Share it with the registered provider at the same time, since their funder's requirements may conflict with the development lender's.

Then build the review time into the programme honestly. A mortgagee clause negotiated between three sets of solicitors and a local authority legal team takes weeks, and it sits on the critical path to the decision notice. Schemes that discover this late end up either delaying the committee or signing an agreement the lender then refuses to accept, which means a deed of variation before a single brick is laid.

This is general guidance, not legal advice; check the position with your local planning authority or a qualified professional before relying on it. PlanScope drafts the planning statements and the Affordable Housing Statement narrative that accompany an application, alongside the Viability Assessment structure, rather than the deed itself. PlanScope provides AI-assisted draft reports for planning applications. Reports should be reviewed before submission. We do not guarantee planning approval.