Charities entering into mortgages – how feasible is it at the moment?

Andrew Small, Partner in the Russell-Cooke Solicitors, charity law non profit team.
Andrew Small
3 min Read

A very large number of charities are realistically going have to take on an increased amount of debt in order to weather the current crisis. Where the charity owns land it is likely to have to enter into a mortgage over that land to secure repayment of the loan or other facility.

Many banks are very reluctant to lend at the moment, other than to long-established borrowers, and accurately valuing property is also extremely difficult in the current circumstances.

For charities entering into new mortgages there is the additional compliance issue arising from ss124-126 of the Charities Act 2011. This requires the trustees to take advice from someone they reasonably believe to be qualified to give it (by reason of their experience and knowledge of financial matters) on the following issues in respect of the loan:

  • whether the loan is necessary
  • whether the terms of the loan are reasonable
  • the ability of the charity to repay the loan

The legislation contemplates an officer or employee giving this advice, most obviously the finance director, although for significant loans we would generally recommend that the advice is outsourced to the charity's auditors.

Clearly at present there will be a materially higher degree of uncertainty than usual for those giving this advice, particularly on the ability to repay point. Where the ability to repay a loan depends on, for example, a successful trading business or rental income from tenants, it will be almost impossible for the adviser to conclude that problems with repayment are not at least highly foreseeable.

This gives rise to the question of whether it is appropriate in those circumstances for the trustees to enter into the charge, having regard to the duty of care that they are under. It is a decision that needs to be taken extremely carefully by the trustees. If they do decide to proceed then the rationale needs to be carefully considered and fully minuted. If a bank has done its due diligence and is prepared to lend then the fact that they have taken this view is a factor that the trustees can properly take into account. For a corporate charity the company law duties to creditors also need to be considered.

However provided these steps are followed then it may well be reasonable for the trustees to conclude that it is reasonable for them to enter into the loan and charge, particularly if the alternative would be to cease all or part of the charity's operation. Clearly though if the conclusion of the s124 adviser is that failure to repay is highly likely then ultimately the better decision may be not to proceed.

It is important to note that s124 does contemplate a Charity Commission order as the alternative way to sanction a charge over charity land. However the usefulness of this option is likely to be limited, as to make an order the Commission will expect to see advice on the points outlined above, and if the trustees have not or cannot obtain that advice then realistically the order will not be obtained.

As with any significant property transaction, it is key that charity trustees comply with the duties imposed on them and with the specific requirements of the Act before giving a charge on their land. The challenges that will create at the moment make it even more important that trustees obtain early advice on their plans from advisers who understand the area.

Briefings Charities Charity law Russell-Cooke mortgages charities Andrew Small