Mortgagee exclusion clauses and why lenders insist

A mortgagee exclusion clause suspends the affordable housing obligations in a section 106 agreement if the registered provider's lender takes enforcement action, so the lender can sell the units free of the restrictions and recover its debt. Without one, no registered provider will buy the affordable units, because it cannot charge them to raise the money to build or acquire them.

That is the whole commercial logic, and it explains why the clause is not really negotiable in principle. What is negotiable is the protection the council gets in exchange: how long the lender must try to sell to another provider first, what happens to any surplus, and whether the obligations can come back to life later.

What the clause does

On enforcement, the clause disapplies the affordable housing covenants against the lender and anyone deriving title from it. In practice it sets out a sequence rather than a simple switch.

The lender gives notice to the local planning authority that it intends to enforce. A period then runs during which the lender must market the units to other registered providers, and the council usually has a right to nominate a provider or to step in itself. If a provider acquires the units within that period, the obligations continue and nothing changes. If none does, the lender may dispose of the units on the open market free of the affordable housing restrictions.

The proceeds are then applied in a defined order: the outstanding debt, interest, and the lender's enforcement costs. Whatever remains, if anything, is paid to the authority to spend on affordable housing elsewhere.

That last limb matters more than it looks. It is the council's compensation for the loss, and it is the part most often left vague in a first draft.

Why registered providers require it

A registered provider funds development and acquisition by borrowing against its stock. Lenders advance on the security value of the property, and security value depends on being able to realise the asset if the borrower fails.

Affordable housing covenants destroy that value. A unit that can only ever be let at a social rent, to a nominated household, in perpetuity, is worth a fraction of its open market value, and a lender asked to advance against it will either decline or lend a fraction of what the provider needs.

The clause restores the security. It does not mean the lender expects to enforce, and registered provider failures are rare. It means the lender can price the risk, and the sector's funding model depends on that.

So when a provider tells you it cannot exchange without an acceptable clause, that is usually accurate rather than a negotiating position. Its own funders and its regulatory obligations around asset security sit behind it.

The council's exposure and how it is limited

The council's exposure is the permanent loss of affordable housing that its policy required, on a site where the market housing has already been built and sold.

Four mechanisms limit it, and a well-drafted clause uses all four:

1. A marketing period long enough for another provider to be found, commonly three months, with a defined process rather than a general obligation to try.
2. A right for the authority to nominate an alternative provider or to acquire the units itself during that period, at a price reflecting the outstanding debt.
3. A cap on what the lender can recover, so the clause cannot be used to extract more than the debt, interest and reasonable costs.
4. Payment of any surplus to the authority for affordable housing provision, with a mechanism for calculating it.

Some authorities also ask for the obligations to revive if the units are later acquired by a registered provider, which is reasonable in principle and complicates the title. Expect resistance from the lender, and expect the point to be traded against the length of the marketing period.

What councils sometimes ask for and will not get: a clause that applies only after the authority's consent, or one that leaves the lender bound by nomination rights. Either makes the security worthless and the provider will walk.

Standard forms and where they differ

There is no statutory form. Most authorities work from a precedent, and most registered providers and their funders work from sector standard wording that has been through many transactions.

The differences that generate real negotiation:

The length of the marketing period, which runs from around one month to six. Shorter favours the lender, longer favours the council, and three months is the common landing point.

Whether the clause covers shared ownership as well as rented units, and how it treats existing shared owners' leases. Leaseholders who have already staircased need protecting and the drafting for that is different.

Whether the clause extends to a receiver appointed by the lender, and to a subsequent buyer from the receiver. It needs to, or the protection is incomplete.

How the surplus is calculated, and whether the lender's costs are capped or simply "reasonable". A cap is better for the council and harder to agree.

Whether the obligations revive on a later transfer to a provider.

Start from whichever precedent the provider's funder will accept and mark up from there, rather than starting from the council's template and discovering in week six that the funder will not move.

Negotiating the clause without delaying completion

The clause is a common cause of delay on affordable housing delivery, and the delay is almost always caused by leaving it too late.

Four steps that prevent it.

Raise it at heads of terms, not at engrossment. Ask the council for its standard clause when the heads of terms are first circulated, and send it to the provider immediately.

Get the provider to confirm which funder's requirements apply and obtain that funder's position in writing. Providers often have several facilities with different requirements, and the one that matters is the one funding this acquisition.

Involve the provider's solicitor in the section 106 drafting even though the provider is not a party at that stage. A clause agreed between developer and council, then rejected by the provider's funder, means a deed of variation before the units can be sold.

Keep the clause out of the viability argument. It is a legal mechanism, not a cost, and mixing it into a Viability Assessment discussion confuses two separate negotiations.

Effect on the affordable housing offer

An unacceptable clause has a predictable consequence. The registered provider does not exchange, the developer cannot dispose of the affordable units, and the scheme either stalls at that phase or the developer retains and lets the units itself.

The second outcome is worse for the council than it looks. Units retained by a developer and let at a policy-compliant rent, without a registered provider's management, nomination arrangements and long-term stewardship, deliver less than the policy intended. That is a point worth making to a council that is resisting the clause on principle.

Grant funding adds another layer. Where the provider is using grant, the funding agreement will have its own requirements about security and disposal, and those requirements are not negotiable by the council or the developer.

The interaction with tenure mix is worth flagging early in the Affordable Housing Statement. A scheme whose affordable offer depends on a provider acquiring the units has a delivery risk that a scheme with developer-retained units does not, and being open about that at application stage is better than discovering it at the point of sale.

Getting it into the first draft

The practical answer is to treat the clause as part of the heads of terms rather than as legal detail.

Ask the council for its clause up front. Send it to the intended provider and its funder before the section 106 is engrossed. Agree the marketing period, the surplus mechanism and the costs cap in principle, and record them in the heads of terms so the drafting has somewhere to land.

Then check three things in the engrossed deed. That the clause covers receivers and subsequent buyers. That the surplus calculation is a formula rather than a statement of intent. And that the marketing period starts on a defined event rather than on notice being "given".

Where the agreement is later varied, check that the clause survives the variation and still refers to the right obligations, because a deed of variation that renumbers the affordable housing schedule can leave the clause pointing at nothing. The same care applies to indexation provisions, as covered in deferred contributions and indexation, and to any review mechanism, as in viability review mechanisms.

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This is general guidance rather than legal advice. Section 106 drafting is a matter for solicitors, so take specific legal advice before relying on any of it. PlanScope provides AI-assisted draft reports for planning applications. Reports should be reviewed before submission. We do not guarantee planning approval.