08 April, 2020
Section 106 of the Town & Country Planning Act 1990 ("the Act") explicitly states that a planning obligation entered in accordance with the Act is enforceable against (a) the person entering into the obligation and (b) any person deriving title which may also include a mortgagee / funder.
A mortgagee exclusion clause (MEC) may be needed if the Local Authority has for example via a s106 Agreement retained control over the use of the property and thereby created a restriction which may impact on the property's value or saleability.
In situations where s106 agreements apply, the primary aim of the MEC is to protect the funder (and anyone acting on behalf or for the funder) by ensuring that maximum value can be achieved from the property, and to enable the funder to carry out their duty in the event the borrower defaults on its loan.
In the Social Housing sector, it is likely that the mortgagee (funder) will be bound by affordable housing restrictions via a s106 agreement. In such instances, if the MEC does not provide adequate protection for the funder, the value of the property would be limited to Existing Use Value for Social Housing ("EUV-SH"). Dependant on the type and location of the property, we are advised by Valuers that the EUV-SH may only be equivalent to the 60-50% of the Market Value Subject to Tenancies ("MV-STT"). The MV-STT would enable the mortgagee (funder) to sell on the open market to a Registered Provider (RP) or a non-regulated purchaser.
To help RP's achieve the best possible funding value when securing loans against its assets, representatives from the sector formed the Property Finance Working Group ("the Group"). The Group with the support of the National Housing Federation (NHF) agreed a consistent approach and formulated a standard MEC for use in s106 agreements. This has now been successfully adopted across many local authority areas and most RPs and more importantly accepted by key stakeholders (including mortgagees / funders).
More recently, for those RPs developing and acquiring sites in London, the Group has negotiated a revised Greater London Authority (GLA) template MEC and the GLA has issued a practice note specifying limited circumstances it will use the clause:
The NHF and the Group recommends that the standard MEC as a minimum to be adopted in any s106 agreements. The use of the GLA's revised template clause is limited to GLA development sites.
If you would like assistance with or more information on mortgagee exclusion clauses, please contact our Property Team on 01772 220022. Alternatively send any question through to Forbes Solicitors via our online Contact Form.