Ten questions to ask yourself before the grant of a lease as a charity landlord

1. Is what you are entering into a lease or a licence?

Consider whether the arrangement is more akin to sharing space with another organisation rather than granting the space to them exclusively. If the former then you will be looking at a licence rather than a lease though many of the points below will still apply.

2. Are you legally able to let the space in question?

If you yourself occupy under a lease, check whether the lease allows subletting and seek consent from the landlord where appropriate. Also check the planning history of the property and any restrictions on the Land Registry title to see whether they prohibit the proposed lease or the proposed use under that lease.

3. Are you transacting on the best terms reasonably obtainable for the charity in line with the trustees' duties under s.117-119 Charities Act 2011?

If you are a registered charity your charity trustees will have obligations, when entering into a 'disposition' of land (which includes granting a lease, but not a licence (see point 1 above)) to transact on the best terms reasonably obtainable for the charity. The specific rules you’ll need to follow will vary depending on whether or not the lease is for over seven years, and exceptions apply in certain circumstances such as where the lease is to another charity with similar objectives. It is always worth seeking legal advice in relation to your Charities Act obligations at the earliest possible stage in the transaction.

4. How long do you want to let for?

Bearing in mind the tougher requirements for leases of over seven years, and the circumstances generally, how long do you want the term to last for and do you want the flexibility of a break clause should circumstances change? Remember that you will need to contract out of the Landlord and Tenant Act 1954 if you don’t want to be obliged to provide a new lease when this one ends.

5. How will you capture increases in rent over that period?

If you are leasing for say five years or more, how are you going to ensure that the rent under the lease keeps pace with any increases in rent in the wider market? You could consider a stepped rent where you set different rents for different years in advance, or an increase at a certain point in line with the increase in inflation as measured by the retail prices index, or a market rent review.

6. What space are you leasing?

Think about the space you want the tenant to occupy and specifying this appropriately e.g. by reference to a plan. Are you letting a whole building or only part of a building, and what do you want (and trust) your tenant to be responsible for?

7. What rights will you and the tenant need?

Think about what rights the tenant might need to use areas outside you are letting to them e.g. to access their space or to use communal areas. Also think about what rights you need to reserve to enter their space e.g. to carry out repairs or inspections.

8. Who will be responsible for what repair?

(Related to point 6) – do you trust the tenant to be responsible for the repair of the whole building, or do you want them only to be responsible e.g. for the interior of the area they occupy while you control repair of the remainder of the building and recover the costs from them?

What level of obligation on repair do you want to be bound to as landlord and what level of repair do you want your tenant to be bound to?

9. How will you cover your costs?

You will want to ensure not only that you are being paid an appropriate rent but also that all of your costs relating to the building are covered. Think about all the costs you currently have in relation to the building e.g. costs as tenant under your own lease, costs in relation to utilities, statutory compliance, buildings insurance, repair costs etc and think about either passing responsibilities for these on directly to the tenant or recovering all or part of them from the tenant, either via a service charge (fiddly to administer but covers all costs) or a fixed sum per year (may not cover all costs in a given year but easier to administer).

10. How much control do you want to have?

Will the tenant have the right to make alterations, underlet the property to another organisation, transfer its interest in the lease to another party (so that they become your new tenant) or put up signs? Will there be an absolute ban on these things, or will the tenant be e.g. allowed to do them subject to your consent, or allowed to do some of them without seeking your consent?

Of course none of this is a substitute for professional advice on heads of terms negotiations and professional drafting of the lease.