Newham Council in east London has been accused of "making a profit at the expense of the community" by a local charity it funded and helped to set up in 2009 but which is now faced with closure because the council is withdrawing funding.
The local authority has proposed that, from 1 January, it will end a rent subsidy to Newham New Deal Partnership, which runs three office and community buildings.
The council owns the buildings and rents them to the charity. It gives the charity a subsidy equivalent to the rent, but does not provide any other funding.
The council wants to withdraw the rent subsidy "because as a council we face a number of financial challenges", according to a council consultation document about the proposed changes.
Two of the three buildings run by Newham NDP were purpose-built and opened in 2005. They were constructed with about £4m of funding received from the Department for Communities and Local Government, part of a larger programme called New Deal for Communities.
The two buildings, along with a third, were passed into the management of Newham NDP in 2010.
But Jessica Wanamaker, chief executive of Newham NDP, said the charity was left with little choice but to accept an unfair contract when it took on the buildings. "The council put the leases down in front of the charity and said ‘take it or leave it’," she said.
Wanamaker said that although the charity was nominally independent, its board contained a number of councillors who "had little regard for the conflict of interest arising".
"The council decided to set the rent at what it called a ‘market rate’ and then subsidise the rent for the same amount," she said. "In fact the rent is nothing like the market rate. It’s much higher.
"The lease also requires us to put the building only to community use, and to be open seven days a week, from early morning to late evening. They’re very expensive buildings to run, but we’re very restricted in what we can do to raise money.
"We aren’t even allowed to give the buildings back. The only way out of the lease for us is to go bust."
Wanamaker said that the charity had agreed to waive any protection that a commercial tenant would have when it signed the contract, so the council could "easily evict us with little notice".
She said a last-minute council consultation on its proposal to withdraw its grant was going to run only until 9 December, three weeks before it was due to withdraw the subsidy.
A council spokeswoman said: "No decision has been made yet on Newham New Deal Partnership's rent subsidy and we are consulting with all groups who use their services.
"Due to the Government’s harsh cuts, we have had to make some tough decisions on where to allocate resources and this is why we are looking at the rent subsidy.
"As our funding has been significantly reduced so we have to look closely at the services we fund to ensure they meet the needs of residents, are efficient and provide value for money."