Keep it legal: Bank borrowing

One way a charity can raise finance is through bank borrowing. This may be secured by a charge over the charity's assets.

To do this, a charity must have the requisite powers, which may be outlined in its governing documents. Otherwise, the following will apply.

Trustees of an unincorporated charity have the power to borrow and grant charges over any land that is in their possession, just so long as the borrowing is connected with the function of acquiring, managing or maintaining that land.

If the charity does not hold land, trustees will have to approach the Charity Commission for an order giving them the requisite power to borrow, unless they are doing so to fund the charity's primary purpose.

The memorandum and articles of association of a charitable company will usually contain powers to borrow and charge the charity's assets.

If not, the Charity Commission takes the view that a sweep-up power in the memorandum and articles would be sufficient, provided the borrowing furthers the purposes of the charity.

The requirements of Section 38 of the Charities Act 1993, as amended by the Charities Act 2006, apply when a charity grants a charge or a mortgage over its land.

This section provides that a mortgage shall not be granted without an order from the Charity Commission unless the charity trustees have considered proper advice on "relevant matters". These are: whether the loan or grant is necessary for the charity trustees to pursue a particular course of action; whether the terms of the loan or grant are reasonable with regard to the status of the charity as the prospective recipient; and the ability of the charity to repay the loan or grant on the terms proposed.

Section 38 also now covers cases where, after a mortgage is granted, future advances are made to the charity, to be secured on the same mortgage - for example, on an all-monies basis. Provided proper advice is obtained by the trustees, both initially and before any further advances, no consent will be required from the Charity Commission.

Where the land to be charged is a permanent endowment, then the trustees will have additional considerations to make.

- Ros Harwood is a partner and head of charities at Dickinson Dees.

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