Section 106 templates leave a grey zone for lenders taking possession

The government's proposed standard Section 106 agreements are intended to make planning obligations more consistent for medium-sized residential developments. In a consultation open until 20 October 2026, Juliet Baboolal examines whether their mortgagee provisions give bridging and development lenders sufficient protection – and what could happen when a lender takes possession. At first glance, the government's draft Section 106 templates look reassuring. They are designed to accommodate mortgagees alongside freeholders, leaseholders and developers. Look more closely, however, and the architecture is less generous than it initially appears. Only freeholders and leaseholders are expected to give the substantive covenants and become directly liable for the planning obligations. A mortgagee may be included to confirm its consent to the land being bound and to agree that the obligations will apply if it takes possession. That inclusion is not automatic. There is no statutory requirement for everyone with an interest in the land to become a party to the deed, and local planning authorities retain discretion over who should be included. For bridging and development finance providers, the message should therefore be clear: do not assume the standard template alone provides every protection a lender requires. My view is that lenders and their advisers should consider whether the lender needs to be joined as a party to the deed or whether separate contractual protection is required before completion. Protection while the lender holds security Once an existing mortgagee is formally included in the deed, the protection is reasonably well engineered. Clause 8 of the draft template states that an existing mortgagee will not be liable for the Section 106 obligations unless and until it takes possession of the land. That is a sensible safe harbour. As the consultation itself recognises, mortgagees would generally refuse to enter into these agreements if doing so made them immediately liable for the obligations. Clause 9 extends equivalent protection to future mortgagees and chargees. This matters enormously in practice. The government acknowledges that the absence of such protection can affect a developer's ability to secure the finance needed to deliver a scheme. The position is therefore reasonably clear while a lender merely holds security. The grey zone begins when it takes possession. What does a lender inherit on possession? This is the question that should concern lending committees and their advisers. Section 106 obligations run with the land and can bind successors in title. The templates separately contemplate a mortgagee becoming liable when it takes possession – whether by physical entry, appointing a receiver, or exercising a power of sale. The templates tell us that the mortgagee's exclusion from liability applies only until it takes possession. What they do not tell us clearly is precisely what liability it assumes at that point. Does the lender become responsible only for obligations arising after it takes possession? Or could it also be exposed to unpaid financial contributions or unresolved breaches that arose beforehand? The consultation does not expressly answer that question. Its silence is conspicuous. The nearest clue may be found in the provisions dealing with the sale of part of a development. A former owner can be released from liability for future breaches affecting the land it has sold, but not necessarily from existing breaches or outstanding financial contributions. It does not automatically follow that the same treatment would apply to a mortgagee taking possession. A transferee on a sale of part acquires a freehold or leasehold interest and steps into the owner's shoes; a mortgagee in possession holds a security interest and its relationship with the planning obligations is fundamentally different. That distinction would require a proper legal assessment of the particular agreement and enforcement circumstances. But the fact that lenders and their advisers must infer the possible answer illustrates the problem. A standard agreement intended to create certainty should state expressly whether possession triggers liability only from that point forward or can bring earlier defaults and unpaid contributions into play. That question should not remain unresolved until a scheme is already distressed and the lender is considering enforcement. Multi-phase development risk There is a separate issue around joint and several liability. Where a development has more than one owner and obligations apply across the site, the templates adopt the standard position that those owners will be jointly and severally liable. A mortgagee does not become jointly and severally liable merely because it holds a charge. The concern arises when enforcement changes its relationship with the land – for example, if it takes possession – and the agreement must then determine which obligations bind that interest. The government accepts that ringfencing may sometimes be appropriate where a development is divided into genuinely independent phases. In those circumstances, an owner of one phase might be made liable only for the obligations applying to that part of the site. However, the templates do not include standard drafting for phase-by-phase ringfencing. The government believes this is unlikely to be required frequently for developments of the size covered by the consultation, although it is expressly asking whether such drafting should be added. For a lender advancing against a single phase of a wider scheme, this could be material. It will need to understand whether the obligations affecting its security are confined to the phase being funded or connected to the performance of the development as a whole. Without suitable ringfencing, lenders may have to negotiate project-specific amendments. That could undermine some of the consistency and efficiency the standard templates are intended to achieve. The case for greater precision The government's intentions are sound. Standard agreements should reduce repeated negotiation, create greater consistency between local planning authorities and give developers and funders a clearer starting point. But standardisation only creates certainty if the standard wording answers the questions that matter when a development encounters difficulty. The mortgagee protections are designed to protect a lender while it merely holds security, but lenders should not assume that those provisions answer every enforcement risk. The consequences of taking possession need clearer treatment, particularly where there are existing breaches or unpaid financial contributions. The position of lenders funding individual phases also deserves closer attention. These are not arguments against standard Section 106 templates. They are reasons to make the templates more precise before they are finalised. What lenders should do now Lenders and their advisers should take three practical steps. Review each Section 106 agreement to determine whether the lender should be joined as a party to the deed or whether separate contractual protection is needed before completion. Consider what obligations would attach on possession and negotiate express provisions limiting liability to breaches arising after that point. Where funding relates to a single phase of a wider development, press for ringfencing so that the lender's exposure is confined to the phase being financed. The consultation closes on 20 October 2026. Bridging lenders, development finance providers and their advisers still have an opportunity to press for that clarity before the templates are finalised. About the author Juliet Baboolal is a Partner specialising in Real Estate Finance at gunnercooke. She has more than 20 years' experience advising lenders across short- and long-term property finance, including bridging loans, development finance, acquisitions, refinancing and restructurings. Her work covers residential, commercial and mixed-use property, bare land, mezzanine finance, second charges and transactions involving title insurance. Juliet holds an LLM in construction law and also has experience in mortgage litigation, enabling her to advise lenders on planning, construction, enforcement and property-related risks, including Section 106 obligations.