Taking on a new property, whether a freehold purchase or a new lease, can be a daunting prospect and there is much to consider. Below we discuss some of the key things for charities to think about before taking the plunge. By considering these issues at an early stage you can assist the smooth running of the transaction and may even limit your financial expenditure later on.
It is essential to ensure that the charity has the requisite power to enter into the transaction. You should review your governing documents and ascertain whether there are any specific requirements you need to meet before proceeding.
In particular, if the transaction is with a trustee or person connected with them, you will need to carefully consider whether this is authorised under your governing documents. If in doubt, seek specialist advice from a lawyer with expertise in advising on charity property transactions.
A whole host of issues are likely to arise during the course of the transaction on which your legal adviser will need instructions. It is common for charity trustees to delegate such matters, but it is essential that the board of trustees is clear about the scope of delegated authority.
Consider the extent to which decisions need to be taken at board level, what should be delegated and to whom. Put in place appropriate arrangements to ensure that the trustees receive the information they need to discharge their legal duties.
What about costs?
Costs are always a concern for charities, and buying or leasing any property can be an expensive process. You will need to consider:
- the purchase price of the property or the rent you will pay under the lease
- ancillary costs relating to the property, whether they are running costs or additional sums due under the lease, such as a service charge and/or insurance rent
- legal fees – these are often dependant on how complex the transaction is and its overall value
- search costs incurred during title investigations and any relevant Land Registry fees. Searches, in particular, can be expensive and the price varies depending on the size of the property and complexity of the information you require.
Due diligence and title investigations
Investigating a property’s history and condition is important as the charity will be acquiring liabilities with the property. A tenant under a lease may not assume responsibility for all historic liabilities, but a freehold owner will. It is essential to know what these liabilities are, and you should consider what investigations you want your legal advisor to carry out into the property’s history and condition.
These investigations could include property searches, title investigations and raising enquiries with the seller/landlord. Searches, in particular, might reveal something of concern affecting the property. For example, a property with a history of flooding will impact your insurance liability and a property with contamination could require remediation works, which can be very expensive.
Establishing that the property has adequate planning permission for your intended use is particularly important. If searches reveal that a property does not have the planning permission you need, you will have to apply for this and should think about whether you want to make this a condition of completion, in case your application is not successful.
Property repairs are a significant consideration and should be given high priority. When acquiring a freehold property, you take on its current condition and all responsibility for historic damage or contamination. You should therefore consider whether a full structural survey would be prudent and whether the charity has adequate funds to meet any repair liabilities.
A tenant can seek to limit its repair liability in a lease by taking an “internal-only” demise or through the use of a schedule of condition. Any repair issues identified in the schedule would be excluded from the tenant’s responsibility and, for this reason, it is crucial that a schedule is as thorough and detailed as possible. A surveyor can prepare a robust schedule of condition for you and, whilst this can be costly, the risk you offset is usually worth the initial outlay.
Another important consideration under a lease is the responsibility of insurance. Usually, a landlord will retain control of buildings insurance but charge the cost of the premium back to the tenant. Your legal advisor will need to check that the insurance provisions in the lease cover all of the usual risks and whether there are any particular risks which need to be insured against for the property you are acquiring, for example if it has a history of flooding.
As a freehold owner, you will need to arrange all appropriate insurance cover yourself including, where appropriate, buildings, contents and public liability insurance.
Signing and execution
When the transaction is sufficiently progressed and you are making arrangements to complete, your legal advisor will send you various documentation for signing. You need to ensure that trustees are available to execute on behalf of the charity, or properly authorise others to bind the charity.
This article is from the January 2021 issue of Essential Trustee, our newsletter for charity trustees and senior management. To download the latest issue, please visit the newsletter section of our website. To keep up-to-date with the latest news, legal updates and seminar information, please register and select the areas that are of interest to you.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at January 2021.