Charities and Borrowing: Practicalities and the Charities Act 2011

With the term ‘charity’ capturing a huge variety of organisations including schools, faith groups, heritage groups and industry bodies, spanning a huge range of sectors and having a multitude of possible objectives, there are many reasons why a charity may require lender funding. These could include a need to purchase property to operate from, to develop property, to invest in technology, or to fund projects not covered by grants.

Regardless of their status; unincorporated, charitable incorporated organisation or charitable company, not all charities will have the power to borrow. It is crucial that the charity’s constitutional documents are reviewed as early as possible in the borrowing process, so that arrangements can be made to amend them to allow for borrowing, if required. Lenders will want to be satisfied early-on that the charity has the power to borrow, and may have requirements as to how explicit this power is within the charity’s constitution. It is also advisable to consider at the outset which internal authorisations will be required to green light the borrowing, to avoid any hold-ups stemming from the charity and trustee approval formalities.

A common type of security for lender funding is a mortgage (or legal charge). As with the basic power to borrow, it is important to ensure the charity’s constitutional documents allow the charity to mortgage property. Provided that it does, the vast majority of charities will also need to comply with the requirements of the Charities Act 2011; to obtain and consider proper written advice prior to entering into a mortgage, otherwise the charity will be required to obtain an order of the Court or Charity Commission. The Charities Act sets out who can provide the advice and the elements it must cover, and also requires that specific wording is included in the mortgage deed.

Trustees who enter into a loan or grant security on behalf of an unincorporated charity will be personally liable to repay the loan, and for other associated liabilities. Whilst they will usually be entitled to be indemnified out of the assets of the charity, they may be liable for any shortfall. It is important for charities to consider seeking to limit trustees’ liability to the assets of the charity in the loan and security documentation.

If your charity is considering obtaining lender funding, or you are a lender proposing to provide funding to a charity, it is important to obtain advice from a legal team familiar with the requirements of the Charities Act, to ensure the lending and security is lawful.

If you need any advice or assistance, please contact a member of our Banking team on 0113 207 0000.