For many charities the purchase or leasing of a property will be one of their biggest financial commitments, whether this is to use as an operational base, or for service delivery. Charities need to be aware of a number of issues to ensure that any property supports their charitable aims, both now and in the future, to avoid the pitfalls which may hinder them.
We have noted below some of the key considerations for charities when purchasing or leasing a property.
First and foremost, it is important for a charity to check that it has the requisite power to purchase, hold or sell a property, or take a lease from an owner. It may also be imperative if a charity is borrowing money and using a property as security (in the form of a standard security registered against that property), that the charity has the power to do so. If a charity does not have the necessary powers, it will need to amend its constitution, which may entail an application to the Office of the Scottish Charity Register (OSCR).
Use of Property
Most properties will be subject to certain rules and regulations, which are set out in the title deeds of the property and are known as “title conditions”. Given the specific nature of many charities, it is important to ensure that the chosen property can be used for the intended purpose of the charity in order to meet their charitable objectives. This is particularly important if a charity is taking a lease, as many leases will contain a clause detailing the specific permitted use of the property.
Whilst the permitted use may be sufficient at present, charities should look ahead ten, twenty or possibly fifty years, to ascertain if any use restrictions will be a problem in the future. Charities and the causes they support change and evolve over time, so something that is a requirement now may not be needed in twenty years’ time. It may be as simple as ensuring that there is a sufficient and reasonable mechanism to change the permitted use of the chosen property, or reasonable break clauses to allow the charity to end a lease early if required . Careful legal drafting in the wording of a lease could become critical in allowing a charity to retain flexibility as to what it can and cannot do in future.
There are additional considerations if a charity is securing funding in connection with a property. Many funders will expect to be granted a standard security (commonly known as a ‘mortgage’) over the property owned or, (where the lease is for twenty years or more) leased by the charity. A standard security is usually required to;
- secure the repayment of the loan;
- facilitate enforcement of the loan conditions; and/or
- procure performance of the obligations tied to the funding, if for example the charity will be upgrading/developing the property.
Aside from ensuring that it has the requisite power to grant a standard security, a charity should also be acutely aware of the conditions and obligations created in the standard security which may amongst other things, limit the availability of future funding.
A charity should consider whether it may need to borrow further money in the future and whether there will be scope to do this within the context of the security conditions about to be entered into. Most mainstream lenders will want what is known as a ‘first ranking’ standard security. Many grant funders recognise this and will accept a ‘second ranking’ standard security.
In addition, grant funding may be subject to conditions. If the purchase or initial costs of a lease are funded by grant funding then it will be standard for there to be conditions stipulating how the property is to be used and maintained. It is important to have in mind the permitted use considerations mentioned above when agreeing to grant funding conditions to ensure that the charity can comply with the funding conditions and evolve in the future to support its charitable objectives.
Taking on a property can be a big step for any charity, no matter the size. Before taking the plunge, it may be useful to consider if other local organisations, such as housing associations or local authorities, have any properties or space available that the charity could make use of, either temporarily in order to determine if the space is needed or on a more permanent basis. It may be possible to benefit from discounted rates if the charity can show a ‘community benefit’. If a property is only required for a short period of time on a non-exclusive basis, a licence to occupy may be more appropriate than a lease.
There can be a lot to consider as a charity taking on property due to the somewhat unique and sometimes restrictive nature of a charity’s constitution. It is often a case of balancing several interests, including those of the charity and trustees and of the groups the charity supports. We have acted for a number of charities in acquiring property and navigating and balancing the various issues that can arise.
If you have any questions about the matters raised in this article, please contact our Charities team and we would be delighted to talk you through the process.