To consider a proposed approach to the treatment of requests for Mortgagee in Possession clauses within Section 106 agreements entered into under Section 106 of the Town and Country Planning Act “Section 106 Agreements”.
Note – The Legal, Governance and Democracy Lead Specialist (Monitoring Officer) drew attention to paragraph 7 of the report relating to legal implications and advised that it would be noted within the minutes that Members present who were also Members on the Planning Committee would reserve their position, with, as outlined at paragraph 7.7, a number of applications having already obtained approval and which had subsequently requested inclusion of a mortgagee in possession clause due to be taken back through Planning Committee or delegation sought for officers to deal with outstanding matters, when each case would be considered on planning merits.
The Housing and Innovation Portfolio Holder presented a report which referred to development proposals where affordable housing delivery was being secured by Section 106 Agreements in those parts of South Lakeland District Council outside the Lake District and Yorkshire Dales National Parks (i.e. the area for which South Lakeland District Council was the local planning authority). In the National Parks, Section 106 Agreements were negotiated with the relevant national park authority, although still advised by South Lakeland District Council as Housing Authority.
Mortgagee in possession clauses were currently being sought on a number of sites affecting the delivery of affordable homes.
The report explained in detail what a mortgagee in possession clause was. A mortgagee in possession was a lender (person or body) which had entered into a mortgage in respect of a dwelling constructed on the proposed development site or part of the proposed development site and had taken action, in the form of taking possession of the said dwelling, following a default by the borrower in respect of the repayment due under that mortgage.
In the context of Affordable Housing, as defined at Annex 2 of the National Planning Policy Framework June 2019, mortgagee in possession clauses were increasingly being sought in Section 106 Agreements by Housing Associations (Registered Providers) – both in new Section 106 Agreements and via modifications to existing Section 106 Agreements. Most Mortgagee in Possession clauses sought to nullify requirements in Section 106 Agreements related to restrictions on sale price, rental, occupancy, income eligibility and local needs requirements in the event of ownership of the property transferring to a mortgagee from the housing association (Registered Provider, or owner of shared ownership or discounted sale property) through the inclusion of mortgagee in possession clauses.
The argument being put forward by applicants and housing associations (Registered Providers) as regards seeking mortgage in possession clauses was that lenders and (in the case of schemes supported by grant aid) Homes England were either making support for schemes conditional on mortgagee in possession clauses or development finance was being made available on less favourable terms. It was, therefore, argued that the absence of mortgagee in possession clauses was preventing the delivery of affordable housing.
The mortgagee in possession clause issue related to the (very rare) circumstance in which a Housing Association (Registered Provider) failed and its assets had to be disposed of. Assets might include affordable homes for rent and shares in shared ownership properties. Under Section 96 of the Planning and Housing Act 2015, when a Housing Association went into administration, in addition to the normal administration objectives, the administrator also had a duty to keep social housing within the regulated sector. Generally when a Housing Association failed, it was taken over by another Housing Association. Housing Association failure resulting in the disposal of assets was rare.
The mortgagee in possession issue was not unique to South Lakeland. The Greater London Authority had produced a standard Mortgagee in Possession clause for use by all Greater London Authorities. The issue had been considered in the Cumbrian Model Section 106 Agreement produced in 2012, although a cross-Cumbria standard approach had not been agreed. The National Housing Federation produced a standard clause that was being used widely.
Standard mortgagee in possession clauses such as the National Housing Federation model and the Greater London model mitigated the risk with the inclusion of a cascading clause to the effect that before a mortgagee in possession clause was triggered, there was a period (normally 3 months) during which the property had to be offered for sale to another housing association or a local authority.
The report examined the Council’s policy. Affordable housing delivery in South Lakeland (outside National Parks) was regulated by Policy 6.3 of the Council’s Local Plan - Core Strategy (adopted in 2010). In addition to seeking an on-site affordable housing contribution of 35% for sites over a certain size, it required that affordable housing provided was made available solely to people in housing need at an affordable cost for the life of the property. Policy 6.3 applied predominantly to market housing schemes and these were predominantly on sites allocated in the Local Plan.
A small number of schemes were also delivered as exceptions sites. These were sites which would not normally be granted consent but were approved on an exceptional basis because they were all or predominantly affordable. Policy DM14 of the Local Plan Development Management Policy regulated schemes of this type and required that affordable housing provided in this way be affordable in perpetuity.
However small the risk of affordable properties being lost in this way, mortgagee in possession clauses were contrary to the letter of both policies in that, in the event of the mortgagee in possession clause being triggered, the properties would cease to be available to people in need at an affordable cost and would not be affordable in perpetuity.
The report examined how a flexible approach might be applied. Planning policy could only be changed through the preparation of a new Development Plan Document. This was a long process requiring informal and formal consultation and independent examination by a planning inspector. All planning policies were currently being examined through the Local Plan review. If the proposals proposed in the Government’s Planning White Paper were implemented on the timescale envisaged, the whole planning landscape, including matters currently dealt with through Section 106 Agreements, matters dealt with through local plan policy and matters dealt with in national policy and mechanisms for delivering affordable housing, may look very different.
Councils could produce supplementary planning documents which provided guidance on the interpretation and implementation of policy. However these could not change policy.
Under Section 38 of the Planning and Compulsory Purchase Act 2004 planning applications were considered against the Council’s Development Plan and other material considerations of each individual planning application on a case by case basis. Each application had to be determined on its own merits. The inclusion of a mortgagee in possession clause in a Section 106 Agreement meant that affordable housing affected by it was contrary to the letter of Policy 6.3. Therefore, upon a strict reading of the policy it would indicate that the proposal to include mortgagee in possession clauses should be refused unless other material considerations justified an exceptional approach.
However, in many cases the policy requirement for affordable housing for the lifetime of the property needed to be balanced against impacts on the wider policy objective of affordable housing delivery, the very low risk of the clause being triggered and the mitigating measures in place to ensure that other solutions are explored before it happens.
Cases for exceptional approvals needed to be supported by evidence and were likely to have greater weight if the risk of harm (the loss of affordable housing) was mitigated by the inclusion of cascading or other appropriate risk mitigation.
Paragraph 3.17 of the report suggested that, whilst judgments on individual planning applications could not be fettered, the following approach was felt to be of relevance in considering planning applications seeking mortgagee in possession clauses:-
· The clear policy requirement that new dwellings should be made available in perpetuity.
The scale and quality of the affordable housing offer
· Issues might include the scale of any non-delivery including how many affordable homes would be delivered with or without the mortgagee in possession clause. Also of relevance would be how such provision relates to evidenced local housing needs identified in the Strategic Housing Market Assessment and other reputable evidence sources. Consideration may need to be given to the proportion of affordable housing for rent, whether provision is optimal in terms of size and design and whether any would be fully disabled accessible.
The degree to which the proposal is supported by evidence
· Another issue may be the potential threat to the wider objective of affordable housing delivery and the degree to which this is supported with evidence. Direct evidence in the form of a letter from the lender or from Homes England carries the greatest weight. It needs to be shown that the clause will prejudice the delivery of affordable housing on the scheme in question. Wider impacts on the finances of the Housing Association asset base and the capacity to deliver elsewhere are not relevant.
The extent to which the risk of the clause being triggered can be mitigated
· Consideration will also be needed of the degree to which the risk of loss of affordable units can be mitigated. Strong means of achieving this include:-
o By the inclusion of a cascading clause requiring that the mortgagee in possession clause be triggered only after a period during which the property must be offered for sale to a Housing Association or South Lakeland District Council (and any successor authority). The longer such a period is, the greater effect it will have in mitigating the risk and minimising policy conflict; or
o By the limitation of mortgagee in possession clauses to mortgagees of housing associations. This would obviate the greater risk to the affordable housing stock of defaults on mortgages by purchasers of shared ownership or discounted sale.
The Customer and Commercial Services and People Portfolio Holder expressed support for the proposal, thanking officers for their work to ensure that these homes which had been built for the benefit of local occupancy remained so for future generations of local people. Councillor John Holmes pointed out that this situation was rare, the risk being negligible, and pointed out that the Regulator monitored Housing Associations carefully. On behalf of South Lakes Housing and other housing associations, he welcomed the paper and proposal which was felt to be a reasonable solution to the present problem.
The Leader and Promoting South Lakeland Portfolio Holder thanked the Deputy Leader and Housing and Innovation Portfolio Holder and officers for their work involved in addressing various competing concerns.
The Leader asked the meeting if the motion was agreed. There was no dissent.
RESOLVED – That
(1) the report be noted; and
(2) the principles of the approach set out at paragraph 3.17 of the report and outlined above be approved.
Reasons for Decision
The mortgagee in possession issue relates directly to the delivery of affordable homes to rent and the Council’s target of 1,000 new homes to rent between 2014 and 2025.
Alternative Options Considered and Rejected
Planning Policy can only be changed through the preparation of a new Development Plan Document. This is a long process requiring informal and formal consultation and independent examination by a planning inspector. All planning policies are being examined through the current Local Plan review. If the proposals proposed in the Government’s Planning White Paper are implemented on the timescale envisaged, the whole planning landscape including matters currently dealt with through Section 106 agreements, matters dealt with through local plan policy and matters dealt with in national policy and mechanisms for delivering affordable housing may look very different. Whilst planning policy can be changed in the longer term, this is of no assistance with current proposals.
Councils can produce Supplementary Planning Documents which provide guidance on the interpretation and implementation of policy. However these cannot change the substance of local plan policy.