Are you doubly dependent on your Local Authority?

So what do you do when you are dependent on your local authority for both your revenue funding to carry out your activities and your occupation of the premises from which those activities are carried out? What are the risks for charities and voluntary organisations in this scenario – of being doubly dependent on increasingly pressurised local authorities?

The obvious answer, of course, is that if you lose one, you risk losing the other and ultimately the future of the charity itself is at risk. For example:

• your Local Authority is your landlord – usually you have restrictions on the use of the premises for the particular services for which you are commissioned. But the minute your funding is cut or reallocated, you are potentially in breach of your lease, through no fault of your own.  Usually they also have the right to end your lease should you fail to pay your rent – for which you are dependent on them.  There is no easy legal solution which stops them doing this.
• a Local Authority may hold a charge over your property . In addition to the revenue funding you receive for the provision of services, you may have had the benefit of a loan or capital grant from the Local Authority towards the purchase, maintenance or alteration of your premises. In all likelihood, any substantial amount of capital monies loaned or granted will need to have been secured over the premises – giving the Local Authority the power to sell the premises if the terms of their charge or grant are breached. A common requirement of any such charge or grant is that the premises will continue to be used for the services/activities you were providing at the point the grant/loan was made.  Some grant agreements carry claw back provisions for as long as 80 years! As where the Local Authority is landlord, a withdrawal by the Local Authority of revenue funding and an inability to continue to provide services from the premises, not only means that a charity could lose its work stream but that it may also lose its property.
• Charging your property to the Local Authority brings with it additional risks if the property is held for specific purposes, on particular trusts or is permanent endowment (property held for specific purposes where only the income from it is expendable). The original intention of those who created the trust or permanent endowment may well have been that it would be held by the charity forever, without being sold or transferred. The rules on special trusts and permanent endowment mean that it generally can’t be sold and the sale proceeds spent (at least not without a like for like replacement property on the same trusts or Charity Commission consent).  However, it is possible to charge (mortgage) permanent endowment property as long as you adhere to the process under the Charities Act 2011 for mortgaging charity property generally.  But what the charge does is give the Local Authority the right, if you default on the loan or grant terms, to sell the property - effectively free from the trusts.
• The Local Authority may have been the original owner of your property and transferred it to you at less than the going rate on the basis that if it ever ceased to be used for your purposes, then they would have the option of clawing it back. Again, such an “option” gives a local authority the right to claim the property from under you should they ever withdraw your revenue stream and put you in default of this arrangement.

Ultimately if the trustees have acted in a way which is negligent in getting into a situation where they risk the future of the charity or its property, and/or they didn’t take appropriate advice or follow the regulatory requirements for such actions, they run the risk of being held to account by the Charity Commission – either by means of a regulatory report, investigation or inquiry or potentially being held personally liable for any losses to the charity.

We know that Local Authorities are under extreme financial pressure and do need to make sure that they get value for money from both the services they commission and the property they own and/or have a vested interest in. So there may be little that can be done in the bigger scheme of things to right the balance between diminishing public funds, Councils’ statutory duties and the need for charities and voluntary organisations to have security – both within their premises and in the funding for the services they provide. Long term contracts for services or grants from Local Authority funds are few and far between.

So what can you do to minimise the risks associated with being or becoming doubly dependent on your Local Authority?

Where you are already doubly dependent, even if you are unlikely to be able to negotiate better terms on existing legally binding arrangements, you can:

• check the terms of any lease arrangements to see exactly what rights you have and what obligations you owe to your Local Authority
• similarly if you own a property that is subject to a charge securing a loan or grant from the Local Authority, familiarise yourself with its terms
• if you are not sure, try to establish whether your property is permanent endowment or restricted under the trusts on which it is held and whether there are additional regulatory requirements you need to consider because of the special nature of your property (you will probably need to seek professional advice on this)
• try to make the risks associated with such arrangements a priority in your risk management and planning
• ultimately, you may need to consider the possibility of sourcing other income streams and/or reducing the extent to which you are doubly dependent on any public funding.

If you’re facing the possibility of becoming doubly dependent on a Local Authority, then any property and/or grant arrangements need to be very carefully considered before proceeding. In particular:

• is the rent which you are being asked to pay under a lease still affordable should you lose your Local Authority funding?
• are the circumstances in which the Local Authority as landlord is able to end the lease linked with your continued provision of certain services/activities?
• If you are charging your property to secure a loan or capital grant, is your property permanent endowment?
• Are you able to meet the requirements of the Charities Act 2011 which govern the process for mortgaging/charging charity property?
• What are the provisions for clawback in any grant agreement you’re being asked to enter into? How long do they last? Is the time period over which you are expected to fulfil the grant terms reasonable? Is it possible to negotiate clawback on a sliding scale so that the risks diminish over time?
• If you are entering into any sort of property or financial arrangements with a Local Authority (or anyone else for that matter) have you taken sound and proper advice on the risks?

For more information

If your charity is facing any of the potential risks outlined above, then this may be an opportune time for a review of your arrangements with your Local Authority.  If we can assist in identifying whether your property is permanent endowment, what rights and obligations you have under your lease or grant agreement, advising on entering into such arrangements with a local authority, developing further income streams, regulatory requirements and/or  further risk management for your trustees then please contact Sarah Tomlinson.