Sale of Charity Land
Difficult economic times force individuals and businesses alike to consider their income and outgoings, critically where costs can be cut or at least contained. Charities and not for profit organisations are no different. This article focuses on some of the issues charities need to consider when reviewing their ‘property’ costs, whether they arise from owning property ‘freehold’ or under a lease.
For example a charity may own a freehold building but now needs only a part of it for the charity’s purposes. As a result the trustees decide it is in the best interests of the charity to relocate to smaller premises.
Generally, a charity will be able to sell but the trustees need to comply with certain conditions which will be found in the charity’s governing documents (for example the memorandum and articles of association) regulating the operation of the charity and in the Charities Act 2011 (principally section 117).
Those rules are imposed so as to ensure that the charity’s assets are managed properly. An order of the Charity Commission may be required before a sale can proceed. However, there are circumstances where such an order is not required, so long as the charity has complied with certain requirements. It will be key for the charity to take advice from a suitably qualified surveyor, who can certify compliance with the rules.
A sale to a ‘connected person’ (for example someone employed by the charity or a member of their family) will trigger the need for Charity Commission involvement. On the other hand, a sale of ‘designated land’ (land required by the charity’s governing documents to be used for a specific purpose) may not need Charity Commission approval, provided certain conditions are met, for example where the sale proceeds are to be applied towards the purchase of more suitable replacement land. Again, the advice of a suitably qualified surveyor is needed.
If a charity operates out of a property held under a lease, it is unlikely that the charity can simply ‘pack up’ and move away, when the lease comes to an end. The property owner (the landlord) may serve a notice requiring the property to be repainted and/or insist on more extensive repairs. This can prove an expensive commitment. A well advised charity will ensure that steps are taken to manage this liability:
• when the lease is granted, a schedule of condition of the property is prepared and attached to the lease. The lease then qualifies the charity’s repairing and decorating obligations by reference to that schedule; and
• a suitably qualified surveyor is appointed by the charity to consider any list of repairs (called a ‘schedule of dilapidations’) when served by the landlord, and to challenge that schedule as is necessary.
A charity may decide to move out of its existing property and share a space with a third party, possibly another charity. In such a case, care is needed to ensure that the sharing arrangement is permitted. A lease might say that a tenant is not allowed to share occupation of property with another or only unless that sharer is linked with the named tenant of the lease.
The current letting market may, in certain circumstances, give the charity an opportunity to negotiate favourable lease terms, which might include:
• a flexible lease break option (e.g. the charity takes a lease for 5 years but has the opportunity to break, for whatever reason, at the end of the second year); and
• an extended rent free period, which still allows the landlord to retain an apparently higher headline rent.
Whether a charity is looking to sell, downsize and/or take on new property, it is vital that legal and surveying advice is taken at an early stage.
Reviewed in 2015