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Legal considerations

From the outset it is critical to address the question of what is the best legal structure to use for your project. This is in addition to the need for thorough business planning. While there may be a perception among some involved in the project that this stage is an unnecessary waste of time and expense, a failure to plan properly is likely to be costly and time-consuming in the long run and could result in the failure of the project.

There are two key legal questions that need to be addressed at an early stage:

 

The project vehicle

In any project there are inevitably significant risks and potential liabilities. With this in mind it is always best to ensure that the organisation running the project, and whatever building is taken on, is a corporate entity with limited liability (a project vehicle).

You will need to use a solicitor to help you decide what legal structure best suits the organisations hoping to co-locate and your business plan. Follow this link for more advice on finding and using solicitors.

You have a number of choices when thinking about the project vehicle. However, a co-location project should never be run through an unincorporated trust.

Do you want to be a:
  • Charitable organisation
  • Community Interest Company (CIC)
  • Commercial company
  • Hybrid structure of charity and commercial company

Charitable organisation

It is now accepted that promoting the efficiency and effectiveness of charities and voluntary groups is a charitable purpose in its own right, and if the project vehicle is a charity then these are likely to be its objects.

There are significant advantages to the project vehicle being a charity, such as relief from stamp duty, land tax and 80% mandatory rates relief (increasing to 100% at the discretion of the rating authority) - provided that the property is wholly or mainly occupied for charitable purposes.

The rental income from the occupiers will also be exempt from tax unless there is significant income from commercial tenants.

There are two incorporated legal forms for a charity: either a company limited by guarantee or a charitable incorporated organisation (CIO).  Put briefly, both forms will afford the trustees, or directors, better protection from personal liability for the charity’s liabilities and debts. The CIO however is a new corporate entity designed specifically for charities and is regulated only by the Charity Commission rather than also by company law.  The CIO therefore provides the benefits of incorporation without the dual regulatory burdens of a company limited by guarantee, and its associated costs and red tape.

The rules governing CIOs were established by the Charities Act 2011 and more information can be found on the Charity Commission website.  Similar rules apply to the newly created Scottish charitable incorporated association.  Please see the website of the Office of the Scottish Charity Regulator for more information.


Community Interest Company

The Community Interest Company (CIC) is a new legal form suitable for non-charitable social enterprises with a community purpose. 

A CIC is a type of limited liability company and must comply with both company law and special CIC legal requirements.  A CIC cannot have charitable status and is liable for the usual company taxes.  There are no specific CIC reliefs or exemptions available although some local authorities are granting discretionary rates relief to them.

One of the key features of a CIC is the ‘asset lock’, which is designed to ensure that its assets are used for the benefit of the community.  Consequently, the profits and assets of a CIC must generally be retained within the CIC and can only be transferred out in limited circumstances, for example to another CIC or charity or where the transfer is at full market value and the proceeds will be used for the CIC’s community purpose. For further detail see the website of the CIC Regulator and the CIC Association.


Commercial Company

If the project wishes to have the maximum commercial freedom and to be free from the constraints of charitable status (if, for example, it is felt that paid directors are essential rather than voluntary trustees), then the project vehicle can be a normal company limited by shares.

Hybrid structure

It may be necessary, or appropriate, to use a combination of the above options. For example, if there are a mix of charitable and commercial occupiers then the commercial element may be best managed through a wholly owned trading subsidiary of the charity.

The tax advantages of charitable status can still be maintained through the trading company gift-aiding any profits it makes back up to the charity, and if there are commercial occupiers of the project then the income from them could be used to cross-subsidise the charitable occupiers.

Acquiring a property

So you have put together a business plan and considered the project vehicle you intend to use for the co-location project. You will now be ready to take on a building.
There are three main options for how you do this:
  • short lease
  • long lease
  • freehold

Short Lease

A short lease typically means a lease of between 5 and 15 years. Such a lease might well be suitable for a project with a clearly defined duration. However, a lease such as this will generally require a market rent to be paid, together with other financial contributions such as insurance and service charge.

The business plan for the project will need to be able to generate sufficient cash flow from the beginning in order to meet these commitments. If you have a short lease you will not be able to raise funds against that lease (ie. taking on a loan or mortgage) and the landlord will generally have a high degree of control about what your project is permitted to do through the terms of the lease eg. subletting and alterations.

If you are not sure that you can meet the financial commitments for the pull length of the lease term, you should request a tenant’s break clause, which would enable you to end the lease early (usually after a minimum period). This can be particularly useful if your lease contains a rent review clause, and you concerned that you won’t be able to pay the increased rent.

Long Lease

By long lease we mean a lease for generally more than 50 years. Whilst the rent under a long lease is generally quite nominal and the lease is not so prescriptive, a capital premium may have to be found to buy it at the beginning. If a secured loan is to be taken out to fund the purchase and/or fit out costs, then the business plan in this case must also generate sufficient cash flow to service a mortgage.

An increasing number of co-location projects are being based around the transfer of public assets to community groups – known as asset transfer – as highlighted in the Quirk Review. Typically local authorities are transferring assets to project vehicles under a long lease at a peppercorn rent, significantly reducing the upfront capital funding required. However, even if no rent is payable, there will be other significant financial commitments, such as insurance and repair which will have to be met.

Long leases can generally be sold on to a third party (‘assigned’) in the event that you wish to dispose of the property at the end of the term. You should ensure that the lease enables you to do this, and take your solicitor’s advice regarding any conditions the lease imposes upon this right.


Freehold

Freehold is absolute ownership of the property asset, and if freehold property can be acquired it will give the project vehicle a strong asset base to underpin its operations, and freedom to do what it likes with the building without the control of a landlord. But funding a freehold purchase will be a major undertaking. For more information on buying follow this link.

In the cases of acquisitions from local authorities and other public bodies, as envisaged by the Quirk Review, the authorities seem more willing to grant long leases through which they can retain some control as the landlord.
Charities do have a wide range of options for borrowing money to fund capital purchases, both from the mainstream banks and specialists such as Charity Bank and Triodos. Grant funding from the Big Lottery Fund’s Community Assets Fund, for example, may also ultimately be available. To find out more on financing your project please follow this link