Mortgagee Exclusion Clause reviews can be an easy win to extract more security value
What is Mortgagee Exclusion Clause (MEC) for?
A MEC is relevant in any document which creates a binding restriction on use, occupation or saleability of that land. These restrictions will often restrict the use of dwellings to social housing. Documents that commonly contain such provisions could be a S106 planning agreement, a lease, a transfer or perhaps a nominations agreement.
A MEC within such a document, if correctly drafted, will mean that a funder, mortgagee and any future owner will be released from these restrictions and thus can sell the property to a wider market and at a higher Market Value Subject to Tenancy (MVST) value. The difference between this and the lower Existing Use Value (EUV) value where a MEC is found to be ineffective can be striking. On portfolio acquisitions, buyers and investors will also want to ensure that MEC provisions are adequate to enable them to seek higher valuations if and when they raise finance post acquisition. The devil is most definitely in the detail, and in the drafting, and getting it right, preferably as early as possible, is always worth the time.
In the not too distant past, any changes to such agreements were dealt with on a case by case basis. Trying to negotiate changes was commonly very time consuming and expensive. In recent years this process, and the outcomes, have been significantly assisted by agreement of standardised MECs amongst the funders and their solicitors, the borrower's advisors in the sector and local authorities. We can now say with some certainty that if this wording is used (in the current market), the higher MVST valuation will be available. It is important that this wording is strictly adhered to as, any change, even if small, can introduce uncertainty, and the smallest uncertainty can make funders and valuers unwilling to attribute MVST value.
MEC drafting is very technical and precise. It needs expert review which we are well versed in providing. Even a minor change can be very significant, and we urge our clients to have these provisions checked at the earliest opportunity to ensure we can facilitate a smooth transaction and achieve the best possible value for the property. Do ask development teams to pass on any documents prior to purchase or during development and we will happily review. Often at this stage issues can be pre-empted and resolved before they cause a delay or a more protracted problem. Increasingly we are being asked to review portfolios either prior to acquisition or which is already secured to a funder to consider if MECs are adequate in order to extract further value for clients. This can be a relatively easy way to raise additional finance without having to undertake a full charging programme.
What should a MEC include?
It is critical that where a restriction is going to bind existing and future owners and their funders, that a MEC correctly benefits the widest list of relevant parties. This will ensure that any type of funder can more readily sell the asset in an enforcement scenario. There will be more parties willing to buy if the property is not restricted. Funders can utilise more flexible enforcement methods if the list of beneficiaries to the MEC is widely drafted.
In today's market, funders might include, for example, banks, security trustees or bond holders and their legal standing varies. It may be the case that not all parties are included for the current deal but, if amending a clause, it is certainly worth creating a market standard MEC covering all required parties to ensure flexibility into the future.
If there are existing agreements in place restricting value, obtaining a deed of variation can be an easy fix to access more funding from existing arrangements. Seeking deeds of variation can take time so reviewing and addressing inadequate MEC provisions should be commenced early and in advance of any transaction.
Current standard wording
There are a number of beneficiaries that must be listed in a MEC in relation to affordable housing land for it to be effective. Beneficiaries must include a mortgagee and chargee and their successors in title as well as a variety of different appropriate receivers, including administrative receivers and certain other administrators or other appropriate persons appointed under security documentation to enforce security.
It is worth noting that it is extremely unhelpful to include or refer to a 'mortgagee is possession' because frequently a mortgagee will not be in possession, so this definition is too limiting.
In addition to specifically listed beneficiaries it is important to include a catch all provision to try and ensure any future funding models are covered.
The drafting must also ensure that the agreed strict timing limits in which the asset may be sold, are not exceeded and that all cost and expenses of such sale and enforcement action are recoverable.
We are very happy to review any documents which may contain any form of restriction and to advise on (a) whether or not it is binding and will affect value and (b) obtaining a deed of variation to enable a higher value to be available. Such review can save problems later in the life of a property and may even enable you to quickly realise extra value from the property.