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Charity premises and land transactions – avoid the traps

Charities enjoy favourable tax status but must follow a range of statutory rules, and this includes obligations in regard to leasing premises and property transactions.  The trustees must take care to follow the proper process if they want to sell or let their land or use it to secure borrowing.

There is also a possible trap for charities which are offered leases of empty commercial units to allow landlords to avoid paying business rates on them, which could expose trustees to personal liability.  An offer of premises rent-free could seem to be a valuable opportunity, but charity trustees should seek legal advice to make sure that everything is done in the right way.

An expert commercial property solicitor can help you comply with the statutory requirements and avoid any breach of the law.

Formalities for charity land transactions

The trustees of a charity have a duty to act in the interests of the charity.  Before entering into a lease as a tenant, they must be satisfied that the property is suitable for the charity’s purposes and that the rent and any other tenant obligations in the lease are reasonable, compared with other similar properties on the market.

If a charity wants to dispose of land it owns, by selling or letting it out, or to use it as security for borrowing, the trustees must comply with a range of statutory formalities.  Your solicitor will be able to advise you in detail, but the steps include getting advice from a designated advisor who must produce a report containing prescribed information and, in some cases, advertising the proposed property transaction in a particular way.

The Charities Act 2011 is being implemented gradually and a number of changes affecting land transactions came into force in June 2023.  These extend the range of professionals who can give the required advice on proposed transactions and simplify the contents of their report, as well as relaxing some of the advertising requirements.  These changes should reduce the administrative burden on charities and lead to cost savings.

Business rates and hard-to-let units

One of the fixed costs for businesses which own or occupy commercial property is business rates.  Charities can benefit from a significant cost saving here, because they are entitled to relief on business rates for properties used wholly or mainly for their charitable purposes.  In contrast, commercial landlords can face an extra business rate burden on empty units.  After an initial period, the landlord becomes liable for business rates on the unit, despite not receiving any rental income from it.

A popular business rates reduction scheme involves leasing a hard-to-let unit to a charity at a low rent or even no rent.  If this is a genuine arrangement, it works well for both parties because the charity gets useful premises without incurring costs in rent or rates and the landlord is relieved of the burden of business rates.  However, the Charity Commission and HMRC are alive to the risk that this could be used as a rates avoidance scheme.  The Charity Commission has investigated hundreds of these arrangements, to make sure that the charities involved are using the land for genuine charitable purposes and that the properties they are occupying are actually fit for those purposes.  If these tests are not met, the charity may be liable for full business rates and its trustees may be personally liable for breach of trust and possible tax avoidance.

It should be straightforward to assess whether an empty property that is being offered to a charity is in an appropriate location and condition to be used for charitable purposes, but it is important for trustees to consider this question rather than simply accepting a poor quality unit because it is rent-free.

Charitable purposes and public benefit

Trustees should also be prepared to satisfy HMRC that the particular use to which the charity intends to put the property is primarily for one of its charitable purposes.  This can be tricky and there have been some high-profile court decisions on this issue.  A key component of a charitable purpose is that it is for the public benefit.  This is not defined in statute but the Charity Commission has issued guidance.  Your solicitor will be able to advise you about how this applies to your particular situation but, broadly, the activity must benefit the public or a section of the public; access to that benefit should not be unreasonably restricted, for example by difficulty in paying any fees charged; and people of modest means must not be excluded.

The nature of charitable purposes has been examined in relation to charitable fee-paying schools and, most recently, by the Supreme Court in relation to member-only gyms run by the Nuffield Foundation.  The answer may be different in specific situations, but the broad message is that providing a service in return for a fee can meet the charitable purpose test, as long as people who cannot afford the full fee are not entirely excluded.  In the Nuffield case, the gym provided a service which furthered Nuffield’s charitable purpose of promoting health for the public benefit.

How we can help

The statutory framework that governs the way charities use and dispose of property can be complex and our specialist lawyers are here to help.  For further information, please contact Hedley Adcock in the commercial property team on 01543 442100 or email hja@adcocks.com.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.

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