Taking a lease? What trustees need to know
According to a recent survey, more charities than ever are renting premises. However, over one in three charities feel that taking a lease poses a high risk to their organisation.
That’s why we have teamed up with CAF Bank, to produce this guide to taking leases for charity trustees. Learn what to look for before taking a lease, when to appoint a solicitor and how they can assist you through the process.
Why take a lease?
A lease is a contract by which the landlord conveys property to the tenant for a specified time and for a payment of rent. In return, the tenant benefits from exclusive possession of the property excluding all others, including the landlord.
There are many benefits to taking a lease of property, especially when the future outlook is uncertain. Leases can provide flexibility to charities in the event that their plans may change, and allow them to test a new geographical area.
What should charities do?
For directors and trustees, the first priority is to ensure that they are acting within the terms of the charity’s constitution. Review your charity’s governing document to check there are appropriate powers.
The charity regulator’s guidance makes clear that you, as a trustee of a charity, are ultimately responsible for protecting the charity’s resources and assets. This means you should make sure that:
- The property is suitable for the charity’s needs;
- The rent is fair compared with similar properties; and
- You understand any legal obligations such as planning restrictions.
Directors and trustees have a duty of care to act in the best interests of the charity and to agree terms that are reasonable and proper. Keep this in mind throughout the transaction.
First steps: Negotiating heads of terms
It’s important that you think about what you will, or may need to do, with the property as early as possible and how this needs to be reflected in the lease.
The heads of terms set out the key terms of the transaction, agreed in principle between you and the landlord. Heads of terms assist solicitors when drafting and negotiating the lease. However, they are not legally binding.
You should appoint a reputable agent to deal with the negotiation of the heads of terms.
Download PDFPoints to agree in the heads of terms
How long will the lease be in years? Will you need an automatic right to renew it at the end of the term?
Might you need to break the lease if the term is particularly long or you are aware of any likely future changes you might need to make to the lease?
What will the rent be? Is it subject to VAT? How frequently will it be reviewed? Will there be a rent-free period? Will the landlord require you to pay a deposit?
Is this payable in addition to the rent? Can a limit on the service charge be agreed?
Who will insure? What proportion of the premium is payable by you?
What is the permitted use of the property? Keep this as wide as possible. Should you wish to transfer the lease to a third party in the future, they may wish to use it for a different purpose. If the lease is prescriptive as to use, they will need to seek a variation to the permitted use clause from the landlord which may make the lease less attractive to a potential transferee.
Can the tenant transfer or sublet the lease to a third party, charge the lease to a funder?
What are the repairing obligations? If the property is in a poor state of repair, consider a schedule of condition showing the state of repair of the property at the date you take the lease, which will limit your repairing obligations.
What works can you carry out with or without the landlord’s consent?
When do you want to complete?
Next steps
Once heads of terms are agreed, you will need to appoint a solicitor who specialises in commercial property. Make sure that you send the solicitor all relevant documentation (including the charity’s governing document) and request a fee quote at the outset.
When solicitors get involved
Consider carrying out searches against the property including a search of the local authority, drainage and water provider, an environmental and flood search, and a search as to chancel repair and the extent of the adjoining highways. These searches will give you further information about the property.
Your solicitor will also request replies to standard enquiries for commercial properties. These are completed by the landlord, providing further information on the property. Ensure that you see the Energy Performance Certificate, Fire Risk Assessment and Asbestos Survey (if applicable). You should also ask for a gas safe certificate (if there is gas at the property), and an electrical safety report. If they are not available, the onus will be on you to obtain these.
Your solicitor will receive a draft lease from the landlord’s solicitor. There may be several rounds of negotiation where your solicitor proposes amendments and the landlord’s solicitor responds.
Once the lease is agreed, copies will be circulated for signature.
Other formalities to consider
Charities benefit from relief from Stamp Duty Land Tax when leasing property for charitable purposes. HMRC can withdraw the relief if within three years of the transaction the charity stops being a charity or uses the property for purposes that are not charitable.
The Land Registry holds records of the title to properties. Following completion of the lease, your interest should either be noted on the landlord’s title or registered with its own title (depending on the lease term). Your solicitor will deal with this.
Leases over seven years will be registered in the name of the charity if you are a company or a charitable incorporated organisation. If not, you can appoint individuals to hold the land on behalf of your charity (usually some or all of the trustees). The downside of this is that when the trustees change, applications will need to be made to the Land Registry to amend the register. Alternatively, you can transfer the charity’s land to the Official Custodian, which is a service provided by the Charity Commission that holds your property in the same name regardless of who the trustees are.
Charities can apply for charitable rate relief of up to 80%if a property is used for charitable purposes. Contact your local council to check if you are eligible and find out if they can top up the discount to 100%.
Key points
- Make sure you consider from an early stage what you need the lease to do with reference to your intentions for the property.
- Appoint a specialist commercial property agent and solicitor to help with agreeing terms of negotiating the documents.
- Don’t forget to account for ancillary costs, such as searches and registration fees.
Charity Property Matters Survey 2018, Ethical Property Foundation
Find out more
To find out more about leases of commercial property, for either charity landlords or tenants, contact our commercial real estate team.
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