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Mortgagee Protection Clauses in residential leases — are they necessary?

3 min read

Housing, Real Estate

A new build housing estate in the UK

We often receive requests to include a Mortgagee Protection Clause (MPC) — also known as a ‘Mortgage Cure’ clause — in residential long leases (excluding Shared Ownership) to protect the buyer's lender. 

Lenders request this because they want to be notified of any lease breaches before forfeiture proceedings begin, allowing them to remedy the breach and protect their security.

Yet are such clauses always necessary? Here, we demystify MPCs and when they should be used.

 

Statutory limitations on forfeiting a residential lease 

There are several statutory limitations on forfeiting a residential lease, particularly under the Commonhold and Leasehold Reform Act 2002. This legislation restricts a landlord's right to forfeit the lease, providing some protection for mortgage lenders.

 

Non-payment of rent

If the breach involves non-payment of rent, a mortgagee can apply for relief from forfeiture or a vesting order under the Law of Property Act 1925, Section 146(4).

 

Other breaches

For breaches other than non-payment of rent, the court has the discretion to grant relief from forfeiture to the mortgage lender or make a vesting order. The extent of the court's equitable jurisdiction — especially in cases of ‘wilful breaches’ or ‘irremediable breaches’ — is debated. However, relief from forfeiture is generally preferred over a vesting order as it prevents the landlord from claiming mesne profits (rent for the relevant period) and protects against any overriding or registered interests that may have arisen since the mortgage was registered.

 

Is the request reasonable?

The key question to answer is whether including an MPC is reasonable — especially if there’s no forfeiture provision in the event of bankruptcy. Should we accept the request and include such a variation or is it unnecessary given the existing protections?

  • Awareness of forfeiture

A mortgage lender must be aware of potential forfeiture to take steps to secure relief. This means that the lender might learn about proceedings too late to take remedial action.

  • Shared Ownership leases

An MPC is a fundamental clause in Shared Ownership leases due to their vulnerability to easier repossession under the Housing Act 1985 and their priority over a registered provider's security in the property.

 

Do you need an MPC?


Conventional residential leases

It has become common for practitioners to demand an MPC in conventional residential leases. While remedies are available to prevent forfeiture, lenders understandably want to ensure that they’re notified of any potential breaches to protect their interests. The clause typically states that a landlord can’t forfeit without notifying the mortgagee and allowing time to remedy the breach.

 

Long residential leases

In most cases, a long residential lease includes a standard forfeiture clause for breaches of covenants. A landlord would usually notify any mortgagee to allow remediation before taking forfeiture proceedings. 

The UK Finance Mortgage Lenders' Handbook doesn’t require an MPC for a long residential lease to be acceptable security. Therefore, the absence of an MPC doesn’t make a lease defective.

Some suggest serving notices of transfer and charge on the landlord after completion to ensure that they’re aware of the mortgagee's interest and receive any potential forfeiture notices.

 

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