Charities entering into mortgages
Coronavirus has created a short term need for borrowing for a great deal of organisations – and charities are not exempt.
Short term cash flow issues need to be addressed quickly to ensure the long term future for charities, and, therefore, many charities are considering entering into loans, including mortgages over their properties.
On the other hand, charities may also wish to own properties for retail or business administration purposes, i.e. premises to operate from.
While a large proportion of transactions will always remain the same irrespective of who the charity is, nevertheless there are some key questions charities and their trustees will need to consider before buying property or entering into mortgages.
DO THE TRUSTEES OF A CHARITY HAVE THE POWER TO OWN PROPERTY? The short answer is yes, any charity can own property. However, many charities may wish to limit their own ability to do so. A charity’s governing document will state whether specific consent will be required in order to buy property. Ordinarily, consent is not required. However, there are situations where charities do need to seek consent from the Charity Commission or the court.
CAN A CHARITY ENTER INTO A MORTGAGE? The first thing to consider is whether the charity has the power to borrow and to enter into a mortgage as security for the loan. This power may be expressly stated in the governing document for the charity or can be implied. The default position would be that the charity can borrow. However, if no expressed or implied power can be relied upon, an order from the Charity Commission or the court will be required.
Charities Act requirements
A registered charity can only place a mortgage on land in accordance with the Charities Act rules. If the transaction does not comply, it may be void. The rules require registered charities to follow strict procedures, which, while relatively straightforward, must be complied with in order to avoid the loan becoming invalid.
If a registered charity is entering into the mortgage as security for the repayment of a loan, it must receive written advice by a qualified person who does not have a financial interest in the making of the loan. This should be given before the loan documents are approved and signed.
The mortgage documents should also state that the land belongs to a charity and that the relevant advice has been given. The advice should state why the loan is required, whether the loan is reasonable and whether the charity is able to repay the loan.
The requirements for trustees
The charity’s trustees should consider the advice given and make a decision as to whether the loan would be a suitable investment to enter into. On the basis that the above requirements can be fulfilled, the process is likely to be straightforward.
However, the trustees will be under an obligation to act reasonably and in the best interests of the charity, which means that if they do decide to buy property, they need to ensure they understand the implications of the purchase and take both legal and financial advice.
ARE CHARITY TRUSTEES PERSONALLY LIABLE WHEN BUYING PROPERTIES? When entering into legal documentation, trustees can expose themselves to liability for all the covenants they agree to under the title documents, mortgage and any lease. In order to protect the trustees, a solicitor will try to limit their personal liability.
Unless a charity is incorporated, the trustees of a charity will be personally liable for the full amount borrowed, plus any interest or charges. Your solicitor would usually ensure that the facility agreement includes a limitation of liability clause to ensure that the loan is limited to assets owned by the charity. However, if this is not included, trustees may find themselves personally liable for charity debts.
Servicing loans
Trustees of the charity should also be aware of the continuing need to service their loans. This includes collecting and sending all monthly payments; keeping a clear record of all payments and balances; ensuring that taxes and insurance payments are up to date; and following up on any late payments. This ensures that the charity maintains its creditworthiness and is in a position to take further loans, if required.
Ultimately, the liability of a charity trustee depends on the constitution of the charity itself. There are four main types of charity: a charitable incorporated organisation (CIO), a charitable company (limited by guarantee), an unincorporated association and a trust (also unincorporated).
Broadly, a charity trustee can find themselves liable for losses if they have breached their duty to the charity: in the case of an incorporated charity, if they traded wrongfully or fraudulently; and in the case of an unincorporated charity, if they entered into contracts on behalf of the charity.
No separate legal identity
An unincorporated charity is not a corporate body and for this reason, does not have its own separate legal identity. It cannot be sued or sue in its own name and cannot hold property or a contract in its own name. If an unincorporated charity is insolvent, there is no mechanism for placing it into an insolvency process. Therefore, one or all of the trustees may have to petition for bankruptcy or enter into an individual voluntary arrangement.
Practical arrangements should be made by the trustees of a charity in order to limit their liability. These can include:
- Limiting individual liability under contracts to include the assets of the charity only.
- Allowing the trustees to be indemnified out of the assets of the charity within the trust deeds.
- Taking out trustee indemnity insurance/director’s liability insurance.
- Becoming an incorporated charity in order to create a separate legal identity.
- Regularly seeking financial advice.
- Ensuring that your constitution allows quick decisions to be made and that adequate records are made to avoid any potential claims against the trustees.
Following completion
Following the completion of the loan, the charity should also note that if further advances are to be made, the charity trustees must repeat the above process of obtaining appropriate advice and this is usually insisted upon by the lender.
