City council loses appeal over mortgagee exclusion clauses and section 106 agreements

HHJ Hodge ruled in the High Court in July 2025 that Gems House Residences Chiltern Street was entitled to benefit from a mortgagee exclusion clause in the s.106 agreement as a person deriving title through a mortgagee of a ‘registered social provider’.

The s106 agreement provided for 16 of a development’s properties to be affordable homes and these were transferred to social landlord Kinsman Housing.

But Kinsman was later de-registered by the Regulator of Social Housing over governance and viability issues and the homes were bought by Gems House for some £12.6m.

Westminster argued the s106 agreement meant they still had to be affordable.

But Gems House successfully argued in the High Court that the primary aim had been to encourage sufficient commercial lending for a registered provider to acquire the long leases of the affordable housing units, and that it achieved this by permitting the lender upon a default to realise its security by selling the social housing assets at open market value.

In the Court of Appeal Lord Justice Holgate found the s106 agreement meant the developer's obligations were not binding on or enforceable against “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”.

Westminster’s main grounds of appeal were that HHJ Hodge had been wrong to construe the words "any person deriving title through any mortgagee of a registered social provider" as meaning "a third party which acquires title by way of a disposition from a mortgagee whose mortgage was granted by a registered social provider".

The council said the true construction of the former key phrase, was a person listed in the register of providers of social housing at the date of the disposition from the mortgagee to the third party claiming the exemption.

This must have regard to the natural and ordinary meaning of the language and the relevant context.

Holgate LJ said: “The issue is whether [Gems House] is entitled to rely upon the mortgagee exclusion clause 10.1.1 as a ‘person deriving title through’ a ‘mortgagee of a [RSP]’. If it is not, then it is bound by the affordable housing obligation and will be unable to realise the value of the 16 flats as general market housing.”

The court had to determine the date at which the mortgagee in question qualified as a mortgagee of the registered provider.

Was it when the registered provider granted the mortgage to the mortgagee or the later date when the mortgagee transferred the mortgagor's interest to Gems House?

Holgate LJ said: “In my judgment [Westminster’s] construction of [the relevant] clause does not represent the natural meaning of the words used.”

The clause’s three limbs were: any mortgagee of a registered social provider; any receiver appointed by ‘such mortgagee’ and any person deriving title through any ‘such mortgagee or receiver’.

“Part of the problem is that it fails to read limb (3) in the context of the two preceding limbs,” Holgate LJ said.

“[Westminster] 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 Housing and Regeneration Act 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. [The clause] does not contain any language which would justify treating the words ‘such mortgagee’ differently in limbs (2) and (3).”

The judge said of limb 1 “on any view that is not ambulatory”. He added the natural reading of limbs (2) and (3) meant the clause did not go beyond requiring the relationship of mortgagor and mortgagee, as created by the mortgage to subsist.

He explained: “There is no temporal test of the kind suggested by [Westminster]. 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…is crystal clear and does not admit of elaborate analysis. None of the three limbs are ambulatory. “

Holgate LJ added that a lender would find it difficult to identify any logic in a clause which reduces the value of its security simply because the borrower has become deregistered.

“For a substantial period of time the lender would have been able to realise full market value in the event of having to sell the mortgaged property, but it then finds that it cannot do so because of a change in circumstance over which it had no control,” he said.

“[HHJ Hodge] was correct to doubt whether commercial funding could be obtained for such a proposition.”

Lord Justice Miles and Sir Colin Birss, Chancellor of the High Court, both agreed.

Mark Smulian