Court of Appeal Dismisses Westminster’s Appeal in Section 106 Affordable Housing Case

Mortgagee exclusion clauses in section 106 agreements: Recent Court of Appeal decision and its implications for developers and Local Planning Authorities (“LPAs”). Our experts Rebecca Stewart and Rachel Lee explain what you need to know.

The Court of Appeal has dismissed Westminster City Council’s appeal in Westminster City Council v GEMS House Residences Chiltern Street Ltd and another [2026] EWCA Civ 937.

The case concerned 16 flats which had been secured as affordable housing under a section 106 agreement linked to planning permission for a mixed-use development. The section 106 agreement required the affordable units to be leased to a registered social provider (“RP”) to rent those units at affordable rents, but included a mortgagee exclusion clause so that those obligations would not bind a mortgagee of an RP, a receiver, or anyone deriving title through them.

Since acquiring the flats, the RP had been removed from the register of social housing providers by the Regulator of Social Housing. This was a default event in the relevant RP’s loan, and the mortgagee subsequently exercised its powers of disposal under the charge and assigned long leases of the flats to Gems House Chiltern Street Limited (“the Purchaser”).

The issue was whether the mortgagor (the RP) had to be a registered social provider when the mortgage was granted, or when the mortgagee later enforced its security and transferred its interest to the Purchaser. The answer to that question was determinative of whether the Purchaser was bound by the section 106 covenants to provide the flats at affordable rents or could realise the value of the flats as general market housing.

Westminster City Council as LPA argued that the RP’s deregistration meant the exclusion no longer applied, so the affordable housing obligations continued to bind the Purchaser and therefore the flats were still required to be disposed of at affordable rates.

Holgate LJ, giving the judgment of the Court of Appeal, rejected that argument, concluding that the clause was concerned with the status of the RP when the mortgage was entered into. This was because requiring registration at the later mortgage enforcement stage would undermine the commercial purpose of the clause, which was to protect the lender and facilitate funding for affordable housing. The court therefore upheld HHJ Hodge KC’s decision that the Purchaser derived title through the mortgagee and was not bound by the affordable housing covenants.

The Court’s Approach to Interpreting Section 106 Agreements

The judgment confirms that section 106 agreements are to be interpreted objectively, in context, which in this case involved having regard to commercial realities of lending arrangements.

Implications for Developers and Affordable Housing Funding

It is commonplace for a section 106 agreement to contain an exclusion of liability clause for RP mortgagees, enabling them to realise sums due under a loan through disposal of affordable homes on the open market. As Holgate LJ put it, this is bound up with the commercial realities of securing lending for affordable homes, which includes, we would add, ensuring that such loans are affordable for RPs. Developers will be reassured by the findings in this case, which uphold the strong safeguards afforded to RP lenders, and maintain developer access to affordable housing schemes.

What Does This Mean for Local Planning Authorities?

It should provide some reassurance to LPAs to know that the circumstances of the Gems House case were very unusual.  But having said that, we also think it would be very difficult to safeguard against a similar outcome in future cases by, for example, stronger section 106 restrictions on a mortgagee’s powers of sale, given the likely implications in terms of securing funding for affordable housing at the outset. The potential impact of that would also be counterproductive for LPAs focused on maximising delivery of affordable housing. As is often highlighted within the industry, the commercial realities of a private-developer led affordable housing supply sits sometimes uncomfortably with delivering on local housing needs.

Protection Through Modern Mortgagee Exclusion Clauses

LPAs can however take a degree of comfort from what is now commonplace section 106 drafting for RP mortgagee exclusion clauses (which, notably, did not feature in the Gems House section 106 agreement, which dated back to 2013). Standard drafting, backed by the GLA for schemes in London (and often adopted by regional LPAs across the country), requires RP mortgagees to follow a prescribed process of offering an exclusive option to the relevant LPA (or its nominated social housing provider) to purchase affordable homes before they are disposed of as general market housing.

Preserving Affordable Housing Through Section 106 Processes

It is only where this process has been complied with that a mortgagee will be released from the in-perpetuity obligations of a section 106 agreement to provide homes as affordable, then allowing  a sale on the open market. Whilst this process has its limitations, it serves as an added protection for LPAs to preserve consented affordable homes within its administrative area.

In recent times we are seeing industry experts and policy makers seek to achieve greater alignment between the commercial realities that sit behind affordable housing delivery and securing long term provision of new affordable homes.  This case illustrates one set of circumstances where continued guidance from industry leaders could prove valuable in terms of advising LPAs (and industry professionals) on how far section 106 drafting can and should go where commercial considerations/constraints conflict with long-term delivery. This may prove increasingly relevant in circumstances where the nature of RPs is evolving and diversifying (e.g. the continuing growth of private for-profit RPs).

How Sharpe Pritchard Can Help

Sharpe Pritchard’s planning team have extensive experience in advising LPAs and developers on section 106 agreements, including provisions for mortgagees. Please contact a member of our planning team if you require advice or assistance in relation to such matters.

Rebecca Stewart is a Senior Associate and Rachel Lee is a Managing Associate at Sharpe Pritchard LLP.

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