Nick Burrows and Sophie Bird, in our Charities & Education team, break down the various factors trustees should bare in mind when considering charity borrowing.
Many charities will, at some stage, need to borrow money to operate or expand. Whilst borrowing can be a positive and often essential step in furthering a charity’s purpose, it is also a decision where trustees must exercise particular care.
This article outlines some of the key considerations for trustees when considering borrowing, drawing on the Charity Commission’s guidance.
Do the trustees have the power to borrow?
Before entering into any borrowing arrangement, trustees must ensure that the charity has the legal power to borrow and, where relevant, to charge its property as security.
Check the governing document
Most modern governing documents will include an express power to borrow. Where such a power exists, trustees must ensure that any borrowing is carried out in accordance with its terms.
If there is no such express borrowing power, trustees should check for a general (“sweeping up”) power permitting them to do anything calculated to further the charity’s purposes. In many cases, this will be sufficient.
For unincorporated charities, the power to borrow and mortgage land may also arise by implication under the Trusts of Land and Appointment of Trustees Act 1996 and the Trustee Act 2000.
What if no power exists?
Where neither an express nor a general power exists, trustees must take steps to obtain the power. This may involve:
- Amending the governing document, using either:
- the charity's own amendment power, or
- where none exists, the statutory power of amendment (for example, Section 280A Charities Act 2011 for unincorporated charities); or
- Applying to the Charity Commission for an Order under Section 105 Charities Act 2011, either granting a general borrowing power or authorising a specific borrowing.
Borrowing without adequate power may amount to a breach of trust and could expose trustees to personal liability.
Check for prohibitions
Trustees must also ensure that the governing document does not prohibit borrowing. If it does, the prohibition must be removed before the charity can lawfully borrow. Where trustees cannot remove a prohibition using their own amendment power, the Charity Commission may need to make a Scheme to permit borrowing.
Is borrowing in line with the trustee’s legal duties?
Even where the charity has the power to borrow, and as with all decisions made by trustees, the trustees must ensure that the decision to borrow complies with their general legal duties.
These include:
- Acting in the best interests of the charity;
- Managing risks prudently;
- Ensuring the decision is one a reasonable body of trustees could make;
- Avoiding conflicts of interest; and
- Keeping proper records of the decision-making process.
Further, borrowing inevitably involves financial risk. Trustees should consider:
- The charity’s ability to take on and repay the borrowing, including long-term sustainability;
- The implications of using charity assets as security, where relevant; and
- Alternative funding options.
Have the requirements of the Charities Act 2011 been complied with?
Where borrowing is secured on land, additional statutory requirements apply under the Charites Act 2011.
Section 124 - mortgages of charity land
A mortgage of land held by or in trust for a charity (other than an exempt charity) requires an Order of the Charity Commission or the court unless the trustees:
- have power under the charity’s trusts to grant the mortgage; and
- obtain and consider proper written advice before executing the mortgage.
The advice must specifically cover:
- whether the borrowing is necessary for the charity’s intended course of action;
- whether the proposed terms are reasonable for the charity; and
- whether the charity will be able to repay the borrowing on those terms without prejudicing its work.
Where a mortgage secures an obligation other than a loan or grant, for example a guarantee or deferred consideration, the advice must also address whether it is reasonable for the charity to undertake that obligation at all.
In practice, most mortgages proceed without an Order because trustees can satisfy the Section 124 requirements. The Charity Commission will not issue “comfort orders” simply to reassure lenders where trustees have the necessary powers and can comply with Section 124.
Section 125-126 - statements in mortgage documents
Every mortgage of charity land (including those granted by exempt charities) must include statements confirming:
- that the land is held by or in trust for a charity;
- whether the charity is exempt; and
- whether the mortgage is subject to Section 124.
If Section 124 applies, the deed must also state either:
- that the mortgage has been authorised by an Order; or
- that the trustees had power to mortgage the land and have complied with Section 124(2).
Certain statements must be included in a prescribed form where the land is registered with HM Land Registry.
Conclusion
If used carefully and correctly by trustees, borrowing can be a helpful and important tool for many charities. By considering the above, as well as seeking professional advice and referring to the Charity Commission’s guidance where appropriate, trustees can help ensure borrowing supports, rather than jeopardises, the charity.
For further information or legal advice on the charity borrowing, or another matter of charity law, please email law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
