According to the Ethical Property Foundation’s survey ‘Risky Business – How Property is Shaping the Fate of our Voluntary Sector’, carried out in partnership with the Charity Commission, 52% of charities do not have a property strategy but yet 45% believe their property is the biggest threat to their organisation.
Most charity trustees sign up for the job because they want to make a real difference by delivering the charity's core objectives, not to be property managers; but having a property strategy is key to using the charity’s precious resources efficiently, maximising the amount which is available to deliver the charity's mission.
This article focuses on some of the key considerations for charities who own leasehold interests in property.
All leases are granted for a ‘contractual term’. The contractual term interacts with the statutory provisions in the Landlord and Tenant Act 1954 which gives qualifying business tenants the right to remain in their premises after expiry of the contractual term. It is open to the parties to ‘contract out' of the 1954 Act. If the lease is protected, the landlord can take steps to terminate the tenancy by serving statutory notice however the landlord must be able to cite a statutory 'ground' to justify why it objects to the grant of a new tenancy. Two of the most commonly encountered 'grounds' are the tenant’s failure to meet rent payments and the landlord’s genuine intention to redevelop the premises.
It is usually easy to tell whether or not the lease is ‘protected’. The Act is the default position so if nothing is stated in the lease this usually means the lease is protected by the Act. If the parties have excluded the Act there should be a statement to that effect in the lease.
Charity trustees should understand what the legal term of their lease is and whether they can remain in their premises at the end of their lease. Forward planning is essential as is opening a dialogue with the landlord early to negotiate the best possible terms.
Many leases contain provision for the rent to be reviewed at regular intervals. There are different methods for rent reviews; these can be based on the open market rent (which requires a surveyor's opinion in the absence of agreement), or on the basis of an index, such as the Retail or Consumer Prices Index.
Charity trustees should diarise the relevant dates and budget for any likely increases.
It is common in leases these days for there to be tenant (and sometimes landlord) breaks during the course of a lease and they can give the parties must needed flexibility. Break clauses must be treated with caution because they must be exercised strictly in accordance with the terms set out in the lease or they will fail. A well-advised tenant will accept as few conditions on the exercise of a break clause as possible but we do see leases with lists of conditions which make it much more difficult to exercise the break, the classic example is the tenant being required to have observed all the terms of the lease (that lease sometimes being upwards of 50 pages long!).
Charity trustees should diarise any break options well in advance and should instruct a solicitor to serve break notice on their behalf. The cost of the solicitor's fees is likely to be less than the consequences of failing to exercise the break properly.
As circumstances change during the course of a lease, charity trustees may wish the transfer the lease, underlet it or share it in order to produce some return.
Again, the charity trustees should understand what their lease entitles them to do in this regard and what conditions must be met.
At the end of the lease
At the end of the lease a tenant is usually required to yield up the property in good condition - the exact extent of this will depend on the wording in the lease.
Charity trustees should plan and budget for any necessary works well in advance of the end of the lease as dilapidations can be very costly.
Read the full text of the Ethical Property Foundation’s survey ‘Risky Business – How Property is Shaping the Fate of our Voluntary Sector’.