Karli Hiscock, a Senior Associate in Druces LLP’s Property team and a member of the firm’s Charities Group takes us through a “Q&A” of some key issues for charities owning property.
DOES A PROPERTY NEED TO BE HELD BY ALL THE TRUSTEES?
If the charity is incorporated the property will be held in the names of the charitable company. Charities which are unincorporated do not have a legal identity and cannot therefore hold property in their own name. The property must therefore be held on behalf of the charity by nominated Trustees or a corporate body.
Where the property is held in the name of nominated Trustees the charity may wish to apply to the Charity Commission to vest the property in the Official Custodian for Charities. Where a property has been vested the charity will not need new deeds each time a Trustee retires or dies to transfer the property to their successor. The charity will therefore save the expense of making new deeds when the Trustees change and will avoid the risk that the property is vested in people who are no longer involved with the charity.
The application process is relatively simple and can be made online via the Charity Commission website.
WHAT RESPONSIBILITIES DO TRUSTEES HAVE IN CONNECTION WITH PROPERTY?
The Trustees must act in accordance with the terms of the trust and must act reasonably. The Trustees should take appropriate professional advice to ensure that terms for the acquisition of a property are reasonable, appropriate for the intended use and that the price is reasonable and affordable. Various statutory procedures must be followed where the charity wants to dispose of property (including by way of a sale or the grant of a lease).
The procedures are set out in the Charities Act 2011 and require the charity to either obtain an Order from the Charity Commission or a report from an appropriately qualified surveyor. Contracts for the sale of charity property must not be exchanged before the Trustees consider and approve the surveyor’s advice. Failure to follow the statutory procedure could result in the disposal being void or voidable.
There are some limited exceptions where the statutory procedures do not need to be followed. If you are in any doubt as to whether or not the statutory procedures apply you should seek legal advice.
DO CHARITIES HAVE TO PAY BUSINESS RATES?
A property owner has to pay full business rates on all commercial properties that lie empty for more than three months. Under section 43(6) of the Local Government Finance Act 1988, properties are eligible for business rates relief if they are “wholly or mainly used for charitable purposes“. A property occupied by a charity is automatically eligible for 80% ratings relief. The local authority also has the discretion to grant the remaining 20% as a further discount, resulting in 100% relief.
During the recession it has become common for landlords to approach charities to enter into tenancy agreements to relieve the landlord of the requirement to pay full business rates. In return landlords often grant the leases at a low or nominal rent and may also give charitable donations to reflect a percentage of the business rates that they would otherwise have to pay.
However, these arrangements are not without risk. If the charity is not making sufficient use of the property for charitable purposes then the charity may become liable for full business rates. The Trustees may also be personally liable if they have not carefully considered the proposed future use of the property before entering into a tenancy agreement and a claim for rate relief then subsequently fails.
In May 2013 the Charity Commission published an alert warning of the risks to charities when entering into tenancy agreements and taking advantage of business rates relief. The Commission lists the following as points that Trustees take into account before entering into any tenancy agreements:
1. the Trustees must be assured that the tenancy agreement is for the exclusive benefit of the charity, will further the charity’s purposes and is in its best interests;
2. The Trustees must ensure the property is genuinely required and is fit for purpose;
3. The Trustees must consider the potential liability of the charity to pay outstanding rates if the local authority disputes use of the premises and refuses rates relief;
4. The Trustees must very carefully safeguard the charity’s independence and ensure that the charity is not being abused for the benefit of a commercial company;
5. The Trustees must, where appropriate, take suitable professional advice, including legal advice, before entering into a tenancy agreement.
For further information please contact Karli Hiscock, Senior Associate, or Nicholas Brent, Head of Druces LLP’sProperty team.