Interpretation of s.106 agreements

The Court of Appeal dismissed Westminster City Council's appeal in Westminster City Council v GEMS House Residences & Others [2026] EWCA Civ 937 applying the general principles of commercial agreements to a planning obligation and the provisions governing the disapplication of affordable housing covenants on the realisation of mortgage security where the mortgagor had been a registered social provider but had been deregistered before sale.

Details of the case

The Court of Appeal (The Chancellor, Holgate LJ and Miles LJ) dismissed an appeal from His Honour Judge Hodge KC [2025] EWHC 1789 (Ch) in which he held that a provision in a s. 106 planning obligation applied to exempt a purchaser from the mortgagee of a deregistered social housing provider from the affordable housing provisions in that obligation. The exemption provided that the obligations did not bind “any mortgagee of a Registered Social Provider or any receiver appointed by such mortgagee or any person deriving title through any such mortgagee or receiver”. The social housing provider had been registered at the time the mortgage was granted and notated but had been deregistered prior to sale to the Respondents, some 6 months after deregistration. The issue was whether the term “Registered Social Provider” meant, in the context of that agreement, the mortgagor had to be registered at the date of the mortgage only or whether it had also to be registered at the time the mortgagee sought to realise its security. The definition of RSP by the obligation did not in fact require registration in all cases, but included an unregistered provider approved by the Council. HHJ Hodge KC held, rejecting WCC’s claim, that properly construed the provision only required the RSP to be registered at the date of creation of the mortgage. Holgate LJ (giving the judgment of the Court) agreed.

The judgment provides a detailed example of the application of general principles for the construction of commercial agreements in the context of a s. 106 agreement. At [34]-[40] Holgate LJ held:

"Principles for the interpretation of a section 106 agreement

34. The modern approach has been to break down former divisions between the principles for interpreting different types of legal documents, whether public or private, and to apply more general rules for ascertaining the meaning of language. Thus, the approach for interpreting a planning permission does not differ materially from that appropriate for other legal documents (Trump International Golf Club Scotland Limited v Scottish Ministers [2015] UKSC 74; [2016] 1 WLR 85 at [33], [53] and [66] and Lambeth London Borough Council v Secretary of State for Housing, Communities and Local Government [2019] UKSC 33; [2019] 1 WLR 4317 at [16]).

35. Section 106 instruments, like planning permissions, are public documents. Planning obligations or agreements are registrable as local land charges and are enforceable by the relevant LPA against the original obligor or covenantor and successors in title. They are typically entered into as a prerequisite for a grant of planning permission, in order to make acceptable the development being approved. Both draft and final versions of s.106 obligations must be placed on the planning register so as to be open to public inspection. There are therefore some similarities between restrictions or requirements in a s.106 obligation and the imposition of conditions on a planning permission. Accordingly, there is no reason in principle why the approach in Trump and Lambeth should not also apply to s.106 agreements or unilateral obligations (Norfolk Homes Limited v North Norfolk District Council [2020] EWHC 2265 (QB); [2021] PTSR 863).

36. The public nature of a planning permission or a planning agreement may operate so as to reduce reliance upon (i) knowledge which is specific to the contracting parties and (ii) extrinsic materials (see Trump at [34]). But neither of those two considerations affects the issues in the present appeal.

37. Applying the approach set out by Lord Hodge JSC in Trump at [34], the court should consider what a reasonable reader would understand the words in question to mean, reading that language in the context of other provisions of the agreement and of the document as a whole. This is an objective exercise in which the court will have regard to the natural and ordinary meaning of the relevant words, the overall purposes of the agreement, any other provisions which cast light on the purpose of those words and common sense.

38. The general principles on the interpretation of agreements and other legal documents are set out in case law which is so familiar and well trodden as not to require rehearsal in this judgment. The judge helpfully summarised a number of the relevant principles in his judgment at [31] and [37]-[43]. The parties referred inter alia to Re Sigma Finance Corporation [2009] UKSC 2; [2010] 1 All ER 571; Arnold v Britton [2015] UKSC 36; [2015] AC 1619; Wood v Capita Insurance Services Limited [2017] UKSC 24; [2017] AC 1173 and Providence Building Services Limited v Hexagon Housing Association Limited [2026] UKSC 1; [2026] 1 WLR 538.

39. In BMA Special Opportunity Hub Fund Limited v African Minerals Finance Limited [2013] EWCA Civ 416 Aikens LJ referred at [24] to the principle that where there are two (or more) possible constructions of an agreement, a court is entitled to prefer the construction which is more consistent with “business common sense”, if this can be ascertained. But he added that commercial common sense should not be elevated to an overriding criterion of construction. The parties should not be subjected to an individual judge’s notion of what might have been the sensible solution to the problem, still less commercial common sense from the perspective of one party to the contract (see also Lord Hodge JSC in Wood v Capita Insurance at [28]).

40. Rival interpretations should be tested against other provisions of the agreement and the commercial consequences of each interpretation. But the court should seek to discern commercial intention and commercial consequences from the terms of the contract itself (Lewison LJ in Napier Park European Credit Opportunities Fund Limited v Harbourmaster Pro-Rata Clo 2 B.V. [2014] EWCA Civ 984 at [31]-[33]).”

Holgate LJ, applying those principles of construction, held:

“60. Clause 10.1.1 contains three linked exclusions from the obligations in sched. 1:

(1) any mortgagee of a “registered social provider”; and

(2) any receiver appointed by “such mortgagee”; and

(3) any person deriving title through any “such mortgagee or receiver”.

61. WCC’s submissions focused on limb (3). They suggested that the expression “deriving title through any such mortgagee” requires the identification of a mortgagee in relation to a subsisting mortgage and thus the mortgagor. Then they submitted that those matters have to be identified as at the date of the transaction between the mortgagee and the person deriving title from him, typically the date when a power of sale is exercised. So, according to WCC, the exclusion does not apply unless the mortgagor is a “registered social provider” on that date. Mr Hutchings says that clause 10.1.1 is “ambulatory”: the exclusion applies at any time when the mortgagor is registered under Part 2 of the HRA 2008, but not otherwise. This means that under limb (1) the mortgagee, and under limb (3) a person deriving title from a mortgagee, only have the protection of the exclusion clause if the registered social provider remains so registered. The judge was entitled to doubt that commercial bodies would be willing to provide secured loans of substantial amounts of money where the value of their security could suddenly drop to affordable housing value simply because a RSP has been de-registered.

62. But WCC’s construction would have wider consequences. They say that the exclusion in limb (3) of clause 10.1.1 only applies if at the time of the sale by the mortgagee the RSP is still registered under the Act. Supposing that it was, what happens when the transferee (or a subsequent successor in title) disposes of its interest at some point in the future? Subject only to clause 10, the obligations in the s.106 agreement bind successors in title (clause 2.2). A successor in title will therefore need to be able to rely on clause 10.1.1. But that clause would still bear the same construction as WCC advances in this appeal. The transferee will not be able to rely upon limb (3) of that clause if by the date he comes to dispose of his interest the RSP has been de-registered under Part 2 of the HRA 2008. Thus, the transferee, having paid general market value for the leases to the mortgagee, will only be able to sell at affordable housing value. Moreover, even if that problem does not arise on a second transfer, the risk of deregistration will hang over subsequent dispositions of the leases. Although WCC’s construction suits its case as it applies to the events which took place here, it proves too much.

63. In my judgment WCC’s construction of clause 10.1.1 does not represent the natural meaning of the words used. Part of the problem is that it fails to read limb (3) in the context of the two preceding limbs. WCC contended that limb (2) is also ambulatory in that a mortgage must have been granted by a mortgagor who remains registered under Part 2 of the HRA 2008, but in this case at the date when a receiver is appointed by the mortgagee, and not also at the subsequent date when the receiver disposes of an interest to a purchaser. Clause 10.1.1 does not contain any language which would justify treating the words “such mortgagee” differently in limbs (2) and (3).

64. But what about limb (1)? On any view that is not ambulatory. A mortgagee of a RSP registered under Part 2 of the HRA 2008 on the date of the mortgage is entitled to rely on that limb from then onwards. Clause 10.1.1 simply requires that the lender be a mortgagee “of” a RSP. It refers to the mortgage relationship with a mortgagee RSP created on the date of the mortgage. There is no language in limb (1), or elsewhere in the s.106 agreement which requires that a registered RSP continues to be registered for that limb to remain applicable. It would then be inconsistent with that straightforward reading of limb (1) for a mortgagee to find that although it could rely on that limb, neither its receiver nor its transferee could rely on limbs (2) or (3) because on the dates indicated by WCC the RSP had ceased to be registered under the HRA 2008.

65. The natural reading of limbs (2) and (3) is the same as limb (1). The words “such mortgagee” provide a straightforward link, indeed the sole link, between limbs (2) and (3) on the one hand and limb (1) on the other. Limbs (2) and (3) simply refer to the mortgagee identified in limb (1). Clause 10.1.1 does not go beyond requiring the relationship of mortgagor and mortgagee, as created by the mortgage (or in the present case the deed of novation), to subsist. There is no temporal test of the kind suggested by WCC. There is no reference in limbs (2) or (3) to the mortgagor, let alone any characteristic of the mortgagor, after the date when the mortgage was created. The language and structure of clause 10.1.1, as set out in [60] above, is crystal clear and does not admit of elaborate analysis. None of the three limbs are ambulatory.

66. Furthermore, a mortgagee would not have to rely upon its power of sale and limb (3). Instead, it could rely on limb (1) and its right to foreclose. In that scenario the mortgagee would not be dependent on the mortgagor remaining registered under the HRA 2008 on the dates of foreclosure and of any subsequent disposition. WCC’s response that foreclosure is not a commonly used remedy is nothing to the point. The remedy is available and may be used. There is no logical reason for limb (3) to operate in such a different way from limb (1).

….

69. I come back to the point that the term “registered social provider” in the s.106 agreement is used to refer not only to a provider registered under Part 2 of the HRA 2008 but also to an unregistered provider approved by WCC’s Director of Housing before being granted long leases of the 16 affordable housing units. The judge accepted WCC’s evidence that the approval by WCC of an unregistered provider is generally an exception to the norm of using a registered provider [101]. Nevertheless, a proper interpretation of clause 10.1.1 and the s.106 agreement as a whole must take into account the possibility of WCC accepting this type of provider.

70. Where that happens the phrase “mortgagee of a RSP” is applied as at the date when the mortgage was created. The issue is simply whether before the grant of long leases to the RSP and the creation of a mortgage to fund that acquisition, WCC approved the unregistered RSP to be the provider of the affordable housing in the development. If the answer to that question is yes, each of the three limbs of clause 10.1.1 is applicable. If subsequently such a mortgagee should find it necessary to appoint a receiver or to exercise the power of sale, then, as Mr Elvin KC pointed out for the respondents, the second and third limbs of clause 10.1.1 are not ambulatory. The application of those provisions does not depend on the RSP continuing to fulfil any particular criterion. The qualification of the provider as a RSP, or the lender as “the mortgagee of a RSP”, only has to be demonstrated at the date when the mortgage was created.

71. Clause 10.1.1 does not contain any language which could justify a different approach, namely WCC’s construction, when the lender is a mortgagee of a social housing provider registered under Part 2 of the HRA 2008.”

David Elvin KC and Tom Morris are barristers at Landmark Chambers. They acted for the Respondent instructed by Mishcon de Reya.