Property considerations in a charity merger
If your charity is planning a merger and you are currently leasing property from a Landlord, this article will help guide you through the process and inform you of what you can consider in the preparation for a proposed merger.
When charities merge, as part of the process, the property they hold must also transferred.
There are two types of charity mergers:
- A new charity is formed taking on the assets of the original charities; or
- One charity assumes control of another and their assets are transferred.
If you have a lease, how can you prepare your charity for a merger?
If the merger is in the early stage the first step is to consider all the property that both charities hold. Whilst this article focusses on leaseholds this list should include any property including freehold too as this may influence decisions regarding the combined portfolio after completion.
For instance, if both merging charities rent an office space in close proximity it may not be necessary for both leases to be assigned.
The leases or freehold properties are usually assigned to the new or merged charity.
Can the lease be assigned?
The leases should be reviewed for terms which may impact the proposals for future use of the leased property. In particular clauses setting out the permitted use of the property, term, rents and break dates may have significance.
The lease will also indicate whether it can be assigned and any conditions or consents required to do so. There is typically a specific assignment clause in the lease if it is permitted.
If the lease allows assignment a common requirement is that the landlord must consent to the assignment. The landlord may require reassurance from the acquiring charity that they can afford the lease and they may ask for a rent deposit. The costs incurred by the landlord, in relation to granting the consent, will need to be paid by the charities. It is, therefore, important to factor these costs into the costs of the merger.
If the lease does not permit assignments, the charity leasing the property should consider contacting the landlord regarding if they would be willing to permit an assignment and if so if there are any conditions they require to be met.
What evidence and information might the acquiring charity want to see?
It is important to note that even as part of a charity merger the trustees will have a fiduciary duty to act in the best interests of the charity. This means that the acquiring charity or newly formed charity will need to be certain that taking on the lease is in their best interests. The trustees are likely to want to see the lease, service charge documents and outgoings in relation to the lease to inform their decision.
The due diligence the acquiring charity chooses to undertake may vary depending on their current knowledge of the leasehold. Some charities will work together for a while before merging so an acquiring charity may already have some knowledge of the property. Some however, will only have limited practical knowledge of the property and require a more thorough approach to due diligence which may include searches and replies to standard enquiries.