There may come a time when your charity has property which is sitting idle or is too big for current needs. There are options available to generate income or capital from charitable assets by either selling a property or leasing it on a short or long term basis to a third party.
Here are a few questions to consider before making a decision as to whether to sell or to lease a property owned by a charity
What is the difference between selling and leasing?
The sale of a property will result in a change in ownership of the asset to a third party. The charity would receive a lump sum payment and would have no further obligations in respect of the building. However, under a lease, ultimate ownership of the asset is kept by the charity. The property is leased to a third party for a certain number of years, and your use and access is restricted for the duration of the lease. A lease can be short term, which is anything up to five years, or long term, which is typically over 5 years, but no longer than 25 years.
What type of income stream do you require?
An important consideration is whether the charity wishes to achieve a once off capital sum or a regular income. Should the charity require a capital sum, then a sale may be the best option. On the other hand, should the charity require regular income, then a lease will provide you with regular (usually quarterly) rental payments.
What are the main questions/considerations that you need to consider before leasing out a property?
Lease or Licence?
At the outset, it is important to consider whether the charity wishes to lease the property to a third party or whether a licence would suffice. There are several elements that differentiate a licence from a lease. The distinguishing feature of a lease, as opposed to a licence, is “exclusive possession”. A licence is merely permission to do something with that property, for example, occupying it. A licence does not create a legal interest in the property. It does not grant a right of exclusive possession of the property to the licensee. A licence is usually for a determinable period of time and is often revocable by the licensor at any time.
In contrast, a lease creates a legal interest in land for the tenant. It grants exclusive possession of the property to the tenant, such that the tenant can exercise the rights of landowner to the exclusion of all others. This includes the landlord, save for any rights that have been specifically reserved for the landlord such as a right of way or a right to inspect the property.
Term: How long do you want to rent the property for?
Commercial leases are generally either short-term, with a term of up to five years, or long-term, with a lease term typically between 6 to 25 years. The length of the term of the lease is freely negotiable between the charity and any tenant.
Will the tenant get renewal rights?
A tenant of a long term lease will typically get statutory renewal rights after the expiry of their lease. This means that the tenant would be entitled to be granted a new lease with a term of between 5 and 20 years with a rent review every 5 years after the expiry of their current lease. It is possible for a tenant to carry out a deed of renunciation which effectively renounces or waives any statutory renewal rights they may have to a new lease on the expiry of their current lease.. The charity can then take back possession of the property on the expiration of the current lease if such a renunciation is executed by the tenant.
In contrast, the tenant of a short term lease (less than 5 years) does not get any statutory rights to renew their lease and when the short term lease is finished, the property is normally handed back to the charity as Landlord unless the parties have agreed contractually to renew the lease.
Does the charity retain possession of the property?
As mentioned above, a lease grants exclusive possession to the tenant for the defined term of years of the lease. The charity would not be able to re-take possession of the property other than in very limited circumstances.
Can the charity increase the rent?
It would be usual in a long lease to have rent reviews every 5 years which generally must be upward and downward to the current market rent as at the date of each review. It is no longer possible to include what is known as an “upward only” rent review provision but it is possible to have a rent review which is by reference to changes in the Consumer Price Index (CPI) or a fixed rent increase at specified intervals. This is a matter for commercial negotiation between the parties and a landlord will typically engage a letting agent to negotiate the commercial terms.
Who repairs and who insures?
Long leases are normally full repairing and insuring leases and the tenant will have extensive obligations relating to repair. These obligations are usually in the form of a covenant in the lease to keep the premises in good repair and where necessary to put the premises into good repair and replace and reinstate.
The charity as landlord, normally insures the premises and the tenant reimburses you the amount of the premium. On that basis, the tenant is responsible for all repairs of the demised premises (property which has been leased) and is also responsible for the costs of insuring the premises albeit the landlord typically puts the insurance in place.
Can the lease be terminated?
The lease can be terminated early if the lease contains a break option for the charity, or the tenant, or both
Do we need Charities Regulatory consent?
Consideration must be given to whether or not consent from the Charities Regulator is needed before leasing the property. A review of the title deeds for the property would need to be carried out to consider this question.
What are the main considerations that you need to consider before selling a property?
The main consideration in selling a property is to ensure that the charity has good marketable title i.e. that the charity as seller is the rightful owner, has the right to sell the property and there are no factors which would impede a mortgage or re-sale. In order to have good marketable title in the case of a leasehold interest, there must be at least 70 years left on the term of the lease. Prior to any sale, the charity should have all planning compliance documents in order and the property should be fully vacated (including all contents). Following the sale, the charity would no longer have any right to use or access the property which has been sold.
If the Charities Regulator has granted charitable status to your charity, you can apply to Revenue for charitable tax exemption. This means that the charity will be exempt from capital gains tax on the sale of the property.
There are a number of considerations for a charity to take into account before deciding what to do with a property which it owns. It will depend on a number of factors such as income and/or capital requirements and on-going obligations the charity is willing to retain.
For more information and expert guidance on the above issues, contact a member of our Real Estate team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.