Mortgagee exclusion clauses in affordable housing

A mortgagee exclusion clause is the provision in a section 106 affordable housing schedule that allows the affordable housing restrictions to fall away if a registered provider's lender has to enforce its security. Without it, most registered providers cannot borrow against the units, which means they cannot buy them, which means the affordable housing the planning permission requires never gets delivered. That is the whole reason the clause exists, and it is why a local planning authority that refuses to include one is usually refusing to make its own policy work.

The negotiation is never about whether to have the clause. It is about how many units it covers, what the lender has to do before it bites, and where any surplus money goes.

Why a lender insists on it

A registered provider funds acquisition and development with debt secured on its stock. The security is only worth something if the lender can realise it.

Affordable housing restrictions in a section 106 agreement bind the land. They cap rents, restrict who may occupy, give the authority nomination rights and prevent disposal on the open market. A unit subject to all of that has a value well below its unrestricted market value, and in a forced sale the gap is the lender's loss. Lenders therefore require that, on enforcement, the restrictions are released so the units can be sold at market value and the debt recovered.

Two different clauses get called the same thing, and conflating them in a report is a giveaway. The mortgagee exclusion clause in the section 106 agreement protects the registered provider's own lender. The mortgagee protection clause in a shared ownership lease protects the individual shared owner's mortgage lender by limiting what the landlord can recover on a possession sale. They do different jobs at different levels of the structure.

What the exclusion actually permits

The effect is narrow and conditional. On a valid enforcement by a qualifying lender, and only after a defined sequence of steps, the affordable housing covenants cease to apply to the units concerned, which can then be sold without restriction.

A typical sequence looks like this, though the periods vary between authorities:

1. The lender, or a receiver it has appointed, serves written notice on the authority and on the registered provider that it intends to dispose of the units.
2. For a defined period, commonly three months, the lender must use reasonable efforts to find another registered provider willing to take a transfer of the units at a price not less than the outstanding debt, interest and enforcement costs.
3. If no registered provider comes forward, the lender must offer the units to the authority, and sometimes to Homes England, for a further shorter period on the same basis.
4. Only if both steps fail may the units be sold free of the restrictions.
5. Net proceeds are applied to the debt, interest and costs in a stated order, with any surplus dealt with as the agreement provides.

The step that gets negotiated hardest is the second one. An authority will push for a longer marketing period and a tighter definition of what those efforts must involve. A lender will resist anything that delays recovery, because the interest clock is running and the cost comes off the same pot.

The authority's concerns, and the usual answers

An authority is being asked to accept that units secured through its own policy might one day be sold on the open market. That is a real objection and it is worth meeting properly rather than dismissing.

The grant point is often overlooked by developers and is usually the first thing a provider's development team raises. Where Homes England funding has been used, the conditions attached to that funding, including the arrangements for recovering or recycling grant, sit alongside the section 106 position. The agreement should not cut across them.

The surplus mechanism is the most useful concession a developer can offer. It costs nothing in the base case, because a surplus only arises if the units sell for more than the debt plus costs, and it gives the authority a reason to accept the clause without a longer argument about principle.

How many units the clause should cover

The default position in many model agreements is that the exclusion applies to all of the affordable units. Authorities increasingly ask for it to be limited.

The argument for the narrower version is straightforward. If only part of the affordable element is charged to the lender, releasing all of it on enforcement gives the lender a windfall and the authority an avoidable loss. The argument for the broader version is that providers refinance and recharge over decades, and a clause tied to the units charged on day one may not cover the units charged in year twenty.

A workable compromise ties the release to the units subject to the charge being enforced, with a mechanism for the provider to notify the authority when the charged units change. That keeps the clause live without making it open-ended.

An illustrative example

This example is illustrative. A 48-unit scheme delivers 14 affordable homes, 10 at affordable rent and 4 shared ownership, transferring to a registered provider on completion of the shell. The provider's lender requires a mortgagee exclusion covering all 14. The authority agrees, subject to a three-month search for a replacement provider, a one-month offer to the authority at the debt figure, release limited to the units actually charged, and any surplus after debt and costs paid to the authority. The clause is never triggered. The provider's credit committee approves the acquisition, which is what the clause was for.

Where it sits in the application

The clause is a legal drafting point, but it has planning consequences, and the developer should flag it early rather than at engrossment.

Raise it at heads of terms, because a late objection from the authority's legal team can hold up completion of the agreement and therefore the decision notice. Provide the provider's standard wording, which is usually the quickest route, and identify which lender type the definition covers. Confirm who the registered provider will be, because an authority will not sensibly agree a lender protection clause for an unidentified purchaser.

The affordable housing offer itself belongs in an Affordable Housing Statement setting out the mix, tenure, transfer arrangements and the heads of terms. Where the offer is below policy, the case runs through a Viability Assessment instead, and the authority's reviewer will test it, as we cover in independent review of a viability appraisal. Getting the appraisal into the format the authority expects saves a round of correspondence, and our note on viability appraisal submission format sets out what that looks like.

Agree the clause at heads of terms, not at engrossment. Enter your postcode on PlanScope to see which reports your scheme is likely to need.

This is general guidance, not legal advice. Section 106 drafting should be settled by a solicitor acting for you, and the authority's own model agreement will govern. PlanScope provides AI-assisted draft reports for planning applications. Reports should be reviewed before submission. We do not guarantee planning approval.