Ownership/Management agreement is about how access to, control of and how the asset is used is put on a formal legal footing. It also covers how the organisation will hold the asset and its powers in relation to it, which will depend upon how the organisation is set up and also the type of legal arrangements it enters into.
Ownership/Management must be considered from the outset of the project. How an organisation is set up/what vehicle it operates through will determine its powers of ownership and management in relation to its assets.
In particular:
- charitable organisations and community interest companies are regulated by law with regard to the way in which they hold their assets;
- the “asset lock” is a term used to describe the law which ensures that a community interest company holds its assets and uses its profits for the benefit of the community. Further information about this can be obtained from the Community Interest Company Regulator’s website (see external links below);
- the way in which the organisation can use the asset may be determined by the powers in its governing document which may require the asset to be used in a certain way to further its community benefit aims; for example, the organisation’s governing document needs to include clear powers for the organisation to use its funds to acquire assets including entering into leases / licenses for any premises which are required to enable it to fulfil its community benefit aims. A charitable organisation or a community interest company will also be required to use its assets to directly further its charitable or community benefit aims. If these powers are not there at the outset, an organisation may lose time in that it will need to amend its governing document before it can proceed with the transaction.
- the way in which the organisation can use the asset may also be determined by any conditions which have been imposed by the transferring party or by planning law; for example, an asset may be transferred subject to a formal agreement that it be used for a particular purpose (e.g. a building that must be used as a community centre and for no other purpose without the prior consent of the transferor) or planning law/restrictive covenants may dictate that a particular building/premises are only used for a specific purpose. When acquiring an interest in property, always undertake appropriate title investigations and searches to flush out potential issues as soon as possible.
- charitable organisations and community interest companies are regulated by law with regard to the disposal of their assets;
- community interest companies can only dispose of their assets to third parties that are not other community interest companies or charities at full market value so that they retain the value of the asset for the benefit of the community. Charitable organisations must also take care that they abide by charity law procedures before disposing of any land or an interest in land which belongs to the charity. The purpose of these procedures is to ensure that the charity receives “best value” in return and legal advice should be obtained if necessary to guide the charity through these. Charitable organisations must also ensure that they check their governing documents first to ensure that they have the relevant powers to dispose of an asset and that the asset is not held subject to any special trusts that preclude its disposal.
The organisation may enter into different types of legal arrangements to secure access to, control of and use of an asset, including:
Purchase
The organisation may purchase the asset outright or a share in an asset such as a building. The organisation could purchase a share in the building which lasts for an indefinite period (a freehold interest) or it may purchase a right to occupy the building for a set number of years (a leasehold interest).
Lease/Licence
A contract between an owner (as landlord or licensor) and the organisation (as tenant or licensee) which states the conditions under which the organisation is given rights to use the asset in return for a deposit payment and thereafter, a periodic payment known as rent or a licence fee. An organisation could lease a building/part of a building from which to operate or carry out its activities for the benefit of the community. There are different types of lease and legally, a lease may offer greater protection for the organisation than a licence. Whereas a lease offers an organisation an exclusive right to use a building/part of a building for a defined period (a term), a licence offers a non-exclusive right of occupation. A licence will typically limit the hours of use/require the organisation to share the building/part of a building with another party. There are various statutory rights benefiting tenants which don’t apply to licensees.
How long a lease / licence should last depends upon the organisation’s needs and its project/business plan. For example, an organisation which is running a short term community project with a definite end date may only need premises from which to operate for a short, fixed period (e.g. two/ three years). In this case, the organisation may prefer to seek a lease or licence to use the premises only during the short term project Before entering into any lease or licence the organisation should prepare a clear business plan for the project (seeking taxation advice or assistance from accountants if necessary) before entering into any commitment for a lease / licence because this will determine how long it will need to hold the premises for.
If the organisation may need the premises for a longer period, they should ask the landlord for some flexibility (e.g. an option to renew their lease or a tenancy with statutory protection to remain in occupation of the premises beyond the term end date).
If the organisation may only need the premises for a shorter period, then they should ask the landlord for the ability to leave early if required (a right to break).
The ability of an organisation to request more flexible arrangements with their landlord will depend on the relative bargaining strength of the parties.
When negotiating the structure of a lease, it is a good idea to take tax advice. For example, a longer lease with a right to break at the mid-way point through the term may attract a higher Stamp Duty Land Tax bill than a shorter lease with an option for the tenant to renew.
For a longer term project an organisation will clearly need a longer lease / licence and this will be negotiated with the landlord or licensor at the outset and before the contract is signed. For a very long term project where sufficient up front capital funding can be secured, the organisation may prefer to purchase the freehold of the premises.
Leases granted for a shorter term (e.g. 10 years) are often called “occupational” leases. Typically little or no price is paid for them up front but they will attract a market rental payment throughout their term. Leases granted for a far longer term (e.g. for 125 or more years) will often be granted for a purchase price (known as a premium) which is payable when the Lease is taken with a lower ground rent being payable throughout the term.
Whether it is preferable to purchase a freehold or leasehold interest also depends upon the organisation’s circumstances, its needs and its business plan. For example, an organisation might not be able to secure sufficient up front capital funding to purchase a freehold interest. Purchasing a leasehold interest or entering into a licence might be preferable if it is more affordable or spreads payments. However, a funder may refuse to lend on any property interest which is less than a freehold or a long lease.
An organisation’s preference will also depend upon the valuation of the freehold/leasehold interest (which will impact on the tax (including Stamp Duty Land Tax) payable) and the amount of any deposit. Furthermore, it depends upon what the organisation’s aims are; is the organisation looking to manage a short term project which will come to a definite end in say, two years, or is it looking to participate in a long term community regeneration project, in which case it may require premises for many years?
Hire Purchase Agreements
These are contracts where an organisation may obtain the use of an asset by making an initial or deposit payment to the owner, followed by a series of payments plus usually a small option fee at the end, after which ownership passes to the organisation (up until that point the asset belongs to the finance company). This is a way in which an organisation may finance the purchase of an asset without having to pay for it up front in full. It may assist organisations which have limited capital funding and are unable to pay for assets in full up front (for example vehicles etc), but can secure access to these via this type of arrangement whereby a series of payments are spread out over a period of time as opposed to requiring one big up front payment to purchase the asset.
Hire Agreements
These are contracts by which an organisation will only obtain the use the asset from the owner for a short period of time and possibly, the duration of its useful life. The asset never belongs to the hirer; it remains in the lender’s ownership. Information, technology and communications equipment goes out of date very quickly and some organisations may prefer to lease the equipment for a set period of time as opposed to purchasing it outright. This can be useful in relation to computers and other communications equipment which can go out of date very quickly and can be expensive to purchase in full outright. It also enables an organisation to spread payments out if it does not have significant set up funding and needs to get up and running.
Choosing the wrong structure for the organisation. Some funders will only fund charities or community interest companies because they want the reassurance of the asset lock.
A poorly drafted governing document. The organisation will also require clear powers to enter into the types of legal arrangements above. Some funders will require the organisation to have clear powers to enter into funding contracts and to mortgage its assets as security in return for a loan or grant to finance the acquisition of an asset. Some funders will expect to see a clear power which enables an organisation to borrow and raise money and secure or discharge any debt or obligation of the organisation in such manner as the organisation thinks fit and in particular by the ability to mortgage or charge its property or undertaking as security for any loan.
Breaching the laws governing the holding and disposal of assets if the organisation is a charity or community interest company.
Breaching any conditions imposed by the transferring party on the use of the asset.
Entering into substantial contracts for the use of assets without obtaining legal advice on the terms of the contracts:
- leases/purchases may trigger a stamp duty land tax payment;
- purchases/some leases must be registered at the Land Registry;
- raise enquiries with the seller/landlord to flush out any property issues;
- check the seller’s/landlord’s title to ensure they can sell/let the land without needing any third party consents and for any covenants/rights which could stop the property being used as intended;
- check whether the seller’s land is subject is mortgaged –charges should be discharged by the seller at completion;
- searches reveal matters including whether all utilities etc. are connected directly to the property/whether further planning permissions are required;
- check your funder’s requirements A.S.A.P. in case any aspects of the proposed deal are unlikely to satisfy these.
- in addition, when entering into a lease take further legal advice;
- leases may have hidden charges/additional costs (e.g. service charges/rent reviews);
- if taking a lease find out who will be responsible for arranging insurance (typically the landlord) and where the organisation stands if the premises are damaged by an uninsured risk (does the tenant have to repair even though it may not be their fault?);
- take a surveyor’s advice on the repairing obligations in a lease – typically leases contain a “full” repairing obligation requiring the tenant to put the premises into good and substantial repair (often at great expense) even if they are in a relatively poor condition at the start of the lease;
- take a surveyor’s advice on any rent review provisions in the lease – are these are likely to lead to a significant increase in rent?;
- leases may limit your ability to sub-let or dispose of your lease to another party;
- can either party can end the lease early if required?
- check the rights granted/reserved and tenant’s covenants in the lease – do they prevent the property being used as intended?
It is not advisable to enter into any substantial contracts for the use of assets without obtaining legal advice on the terms as above because ultimately this may cost the organisation more money if mistakes are made, particularly in relation to stamp duty, land tax and covenants / rights etc. Even seemingly low value contracts could prove expensive (e.g. the lease which has a low rent but draconian repairing obligations or which has very landlord biased rent review provisions). It helps to keep solicitors’ costs down if very clear instructions are given to the solicitor at the outset explaining why the organisation wishes to acquire the asset, what use it wishes to put the asset to, how long it wishes to hold the asset for and how it is funding the purchase of the asset and what it’s deadline for entering into the transaction is. Being very clear about the organisation’s needs and why it wishes to obtain the asset / access to the asset and timings for the transaction will enable the solicitor to proceed as quickly as possible and without having to come back asking detailed questions. It also helps the solicitor negotiate the best deal for the organisation with the third party and ensures that the organisation’s needs are met.
Before committing to any property consider commissioning a structural survey and an environmental survey to flush out any potentially expensive issues
Always inspect any property in person during negotiations and immediately before committing to a purchase/lease.
This guidance is general guidance only and should not be used as a substitute for specific legal advice. Action should not be taken without obtaining specific legal advice.
www.cicregulator.gov.uk
www.charitycommission.gov.uk
www.rollits.com
www.landregistry.gov.uk