Mortgagee protection clauses
Mortgagee protection clauses (MPCs) can be a thorny issue when charging properties. Sharon Kirkham and Chris Drabble discuss the problems Registered Providers can face.
When registered providers and registered social landlords (RPs) are looking to charge properties clearly one of the most important things to consider is how to achieve the highest value for their stock. It may seem incongruous, but just a short paragraph in the document in the form of a MPC can make the difference in securing tens of millions of pounds more value. As a result MPCs – which allow RPs to borrow at a higher rate – are of fundamental importance. With the recent boom in bond issues due to low interest rates having the correct MPCs in place has sharply come into focus again for RPs.
By their very nature, properties that are used for social housing are commonly subject to clauses that specify they can only be used for social housing purposes. But when an RP wants to charge a property and there is a document – such as a transfer, lease, planning permission or s.106 agreement which contains restrictions to use as affordable housing – it means the RP will not be able to borrow against the full value of the property. This is where MPCs come in.
To get the maximum value when drawing down against a property the lender must be able to sell the tenanted dwelling on the open market free from any restrictions if the RP defaulted on its loan. If the lender is only able to sell the properties for use as social housing, then they will only allow the RP to borrow at Existing Use Value for Social Housing (EUV-SH), which is the value given to properties that must be retained in the social sector.
However, if the lender is able to sell at Market Value Subject to Tenancies (MV-STT) then lenders are willing to lend at this higher rate. In real terms this figure is significantly more than EUV-SH – and can be double. An MPC allowing the lender to sell the properties outside the social housing sector is therefore fundamental in achieving the maximum value when charging properties.
Something to note here is that this may be considered to be a theoretical exercise, no social housing is ever likely to be sold out of the sector, even if an RP was to get into trouble. If one RP was to get into financial difficulty, then another would more than likely step in to bail them out. This means no lender is ever likely to sell social housing properties outside of the sector, but they still have to cover themselves by having MPCs inserted just in case.
Things to consider
The main thing is to make sure the MPC and its terms are acceptable to the lender. There are generally two types of MPC. The first is an absolute MPC that does not impose any controls on the lender selling the properties on an unfettered basis. The second is a conditional MPC where the lender must first try to sell the properties to another RP or local authority, keeping them within the sector. This should be in a period of no more than three months and at a price that allows them to fully redeem the mortgage, including associated interest and costs. If the lender is unable to sell, then the lender can sell free of the social housing restrictions which will then fall away. RPs are more likely to get local authorities to approve MPCs with a conditional clause.
When RPs purchase new stock they should always check the relevant legal documents, such as s.106 agreements, to see if there is a MPC in place. If there isn’t, or its terms would not be acceptable to a lender, then this may mean they can’t borrow as much against the properties as they would hope to.
One development we are seeing is RPs that have charged stock 15 to 20 years ago and are looking to refinance having problems with their MPCs. The rules have tightened in the past few years so it is always worth checking that any historic MPC is still acceptable to lenders.
What can you do if you need to include an MPC?
Fortunately, there is a way to get a MPC included if one is not present or the current one needs changing, through a Deed of Variation. Unfortunately, getting this approved by the local authority is not a foregone conclusion. Most local authorities allow them, but they don’t have to, and it can take a lot of negotiation. If they refuse, there isn’t a lot you can do.
The main reason a local authority wouldn’t agree to a Deed of Variation is the belief that there is a significant risk that the social housing would be lost if an RP was to get into financial trouble. As already stated, this isn’t the case. It should be straightforward to agree a Deed of Variation as it is, in our view, a low-risk exercise, but sometimes it is unnecessarily difficult.
The key message to local authorities is that RPs and their lenders are not trying to pull a fast one by asking for a Deed of Variation. They are just trying to get the maximum value for their properties so they can reinvest that in more homes for social housing. The best way of trying to persuade local authorities is to show them the difference in the amount of housing that could be delivered to their community with and without them allowing the MPC.
Ever since we helped found the Property Finance Working Group in 2014 we have been trying to get the industry as a whole to accept an agreed wording for an MPC, but we still aren’t there. Until we do, MPCs will remain a tricky issue for RPs who want to ensure they can borrow the maximum value against their housing stock. Just make sure you check any MPCs as failure to do so could mean you are able to borrow substantially less.
Sharon Kirkham and Chris Drabble are partners at law firm Devonshires.