Can Charities Enter Into Mortgages?

The coronavirus has created a short-term need for borrowing for many businesses, and charities are not exempt. Short-term cash flow issues need to be addressed quickly to ensure the long-term future for charities and therefore many charitable organisations are considering entering into loans including mortgages over their properties.

1. Can a charity enter into a mortgage?

The first thing to consider is whether the charity has the power to borrow and to enter into a mortgage as security for the loan. This power may be expressly stated in the governing document for the charity or can be implied.

The default position would be that the charity can borrow, however, if no expressed or implied power can be relied upon then an order from the Charity Commission or the Court will be required.

2. Charities Act requirements

A registered charity can only place a mortgage on land in accordance with the Charities Act rules. If the transaction does not comply then the transaction may be void. The rules require registered charities to follow strict procedures, which whilst relatively straightforward, must be complied with in order to avoid the loan becoming invalid.

There are three categories of charities that are addressed under the Charities Act rules, however, I will address the requirements for a registered charity. If a registered charity will be entering into the mortgage as security for the repayment of a loan and therefore they must receive written advice from a qualified person who does not have a financial interest in the making of the loan. This should be given before the loan documents are approved and signed. The mortgage documents should also state that the land belongs to a charity and that the relevant advice has been given.

The advice should state the following:

• Why the loan is required;
• Whether the loan is reasonable; and
• Whether the charity is able to repay the loan.

3. The obligation of charity trustees

The charity’s trustees should consider the advice given and then make a decision as to whether the loan would be a suitable investment to enter into. On the basis that the above requirements can be fulfilled then the process is likely to be fairly straightforward, however, legal and financial advice should be sought.

4. Following completion

Following the completion of the loan, the charity should also note that if further advances are to be made, the charity trustees must repeat the above process of obtaining appropriate advice and this is usually insisted upon by the lender.