Debbie Harmsworth, loans administration manager at Charity Bank, shares five common legal issues for charities & social enterprises to consider when seeking loan finance. Being aware of these issues may help you to avoid some of the common problems & delays.
1. Impact of your legal structure
Your legal structure will dictate the process you follow to obtain a loan, including who should authorise the transaction, how documentation should be signed and what steps you should take.
For example, registered charities are required by the Charity Commission to obtain written financial advice before taking a loan secured by property. Trustees need to be sure that:
- the loan is needed and will be used for an activity that fits with its charity's purpose;
- the terms of the loan are reasonable; and
- the charity will be able to repay the loan
If you're thinking about changing your organisation's legal entity, it is important that you inform your bank as it may be preferable for you to complete that change before you take out the loan.
2. Do your governing documents give you the legal powers to borrow?
Before you take out a loan you should check your governing documents (this may be a Trust deed or Articles of Association) to make sure they give you the legal powers to borrow and, if necessary, to pledge assets as security for the loan.
This is not always clear, so you may need to take professional advice. Unincorporated organisations have an implied power to borrow but may still require a specific power to charge assets. Charities using the Charity Commission model Articles should have the necessary power to borrow.
Changing your powers to allow borrowing or the giving of security is usually a relatively straightforward process and your legal advisers will be able to guide you through this.
3. Buying land or property
If you are seeking a loan to buy land or property, we recommend you read the Charity Commission guidance. Amongst other things, charities should ensure that:
- the property is suitable for the needs of the charity;
- the price is fair compared with similar properties on the market;
- the charity can afford the purchase and that any loan has been made on reasonable terms (taking everything into account, not just the interest rate);
- you have taken independent advice as necessary (for example, a surveyor's report); and
- you understand any legal obligations relating to the purchase of the land, such as planning restrictions.
4. Potential for personal liability
If you are an unincorporated organisation, be aware that your trustees will have joint and several personal liability for the loan and you will need to ensure they are willing to go ahead on that basis. If not, consider changing the legal structure. Some banks may require charity trustees to give personal guarantees. You may wish to take this into consideration when selecting your preferred lender. Charity Bank does not seek personal guarantees from trustees or directors other than in exceptional circumstances.
5. Property registration
Before taking on a loan it is advisable to check on the Land Registry that the property is already registered in the correct name. If the property is not registered, this can often cause delays when the property is offered as security for a loan. If the property is not registered you will need to locate the title deeds and take professional advice in order to register the title. As part of the loan transaction, you will also need to register a charge at the Land Registry (and at Companies House, if the charity is incorporated). Your legal advisers will be able to carry out this process with you.
If you have any questions, you can talk to our team directly by calling us on 01732 441919 or sending us an email. You may also like to read our blog on how to avoid the common pitfalls & delays of loan finance.