Understanding charity lease agreements for commercial properties

Posted on November 8, 2024

In commercial property law what exactly are charity lease agreements, what are the benefits and what are the legal considerations involved for both landlords and charitable organisations?

What is a charity lease agreement?

A charitable lease refers to a charity lease agreement where a charity either leases property to or from another party under terms that are compliant with charity law. This type of lease is subject to specific legal requirements to ensure the transaction aligns with the charitable purposes of the organisation and avoids any potential conflicts of interest, or misuse of charitable assets.

“The main legal framework governing charitable leases is the Charities Act 2011, along with other property and charity regulations,” advised Commercial Property Solicitor, Gary Jones.

“There are key aspects to consider when looking at charitable leases, the duty of trustees and regulatory compliance are all key considerations and so the right advice is needed.”

“What the property is used for needs to be reflected in the lease and the heads of terms set out the key terms of the transaction,” he added.

Trustee of a charity

Charity regulators’ guidance makes it 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:

Duties of a charity trustee

The trustees of a charity have a duty to ensure that any property transaction, including leases, is in the best interests of the charity and supports its charitable objectives and must comply with the requirements set out in the Charities Act 2011.

If a charity is leasing out a property, the trustees must ensure that the terms are reasonable and that the charity receives market value, unless the lease is for a nominal or peppercorn rent to support another charity or charitable cause.

Professional charity trustee advice

Trustees must seek professional advice, such as from a surveyor or property expert, before entering into or granting a lease. The advice should confirm that the terms of the lease are fair and in line with market conditions, especially if the lease is being granted to a non-charitable entity.

A qualified surveyor's report is often required before leasing charity property to demonstrate that the trustees are acting prudently.

Failure to comply with this process may result in the charity being unable to enter or complete the property transaction unless it obtains a court order.

Public benefit requirement of charitable trusts

The lease must be aligned with the charity's public benefit purposes meaning any transaction involving property should further the charity’s goals and not unduly benefit private individuals unless part of the charitable mission.

Restrictions and Charity Commission approval

If the lease is for a term of more than 7 years, the charity will usually need to obtain formal approval from the Charity Commission or follow a specific process to ensure compliance.

Leases of charity land are often subject to restrictions on disposal to prevent improper use of charitable assets, including safeguards to ensure that the charity is not financially disadvantaged.

Peppercorn rents or concessions

In some cases, charities may lease property to other charities or community organisations at a reduced rent (sometimes called a peppercorn rent) to support charitable activities, provided this aligns with their objectives.

Types of charity

There are two main types of charity in England and Wales – ‘exempt charities’ and ‘non-exempt charities’ and the majority fall within the category of non-exempt charities. These are usually required to register with the Charity Commission and are bound by restrictions on purchasing, selling and mortgaging land and properties.

Exempt charities, such as museums and higher education institutions, are not subject to the same rules.

Benefits of charity lease agreements

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.

In addition, charities can apply for charitable rate relief of up to 80% if a property is used for charitable purposes. The trustees should contact the local council to check if they are eligible and find out if the Council will top up the discount to 100%.

If the landlord has chosen to waive the exemption for VAT on the property - known as ‘option to tax’ – VAT will be payable on the lease rent. Unfortunately, when it comes to charity VAT, many smaller charities cannot then recover VAT on the rent they pay as they are not registered for VAT.

However, if a charity intends to use their premises for a relevant charitable purpose (RCP) and not as an office, or more than 5% usage to administrative purposes, they are able to disapply the landlord’s option to tax under the VAT Act 1994. It is important to note that this will require the consent of the Landlord.

Legal tips on charitable leases

Whilst charitable leases can be beneficial, both parties must navigate specific legal considerations:

The lease terms should clearly outline terms regarding rent,
maintenance responsibilities,
and permitted uses of the property.

It's crucial for landlords to document the fair market value of the property. This documentation is essential for tax purposes and can help mitigate any potential issues with regarding the valuation of the charitable contribution.

Charitable organisations may have specific legal requirements related to their activities and use of the space and must comply with all regulations.

Like any commercial lease, it’s vital to address insurance requirements and liability concerns, different coverage may be required compared to traditional commercial tenants, and landlords should ensure adequate protections are in place

Clearly defined renewal and termination provisions can help prevent misunderstandings. Landlords and charities should negotiate terms that provide stability while allowing flexibility for changing circumstances.

“Charitable leases offer a unique opportunity for property owners and various charities to collaborate for mutual benefit, but there must be compliance with applicable laws and regulations on both sides,” added Gary Jones.

“Most charities enjoy favourable tax status but have definitive obligations regarding leasing premises and conducting property transactions.”

“As the landscape of commercial property continues to evolve, charitable leases stand out as a powerful tool for fostering social impact and making changes through commercial property but there are legal considerations and regulatory compliance which we can advise on,” he added.

How can we help?

For legal advice on commercial leases including charity lease agreements or lease renewals contact our commercial property solicitors on 0161 785 3500 or email enquiries@pearsonlegal.co.uk

Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.