Charities Act mortgage procedure
Lenders for funders requiring mortgages from organisations will often require that their directors certify that the organisation has power under the terms of the organisation’s constitution (e.g. memorandum and articles) to enter into the mortgage. Before entering into a mortgage, organisations should ensure that their constitution is read by someone with appropriate skills to identify whether this is the case.
- Some powers are implied by law (for example in the case of trusts, the Trustees of Land and Appointment of Trustees Act 1996). If these powers are lacking, it is likely that the organisation can change their constitution under powers in the constitution itself or under the general law, but this step must be undertaken before the mortgage is taken out, otherwise the charity trustees or other strategic managers of the organisation may find that they are acting in breach of duty and in extreme cases may be entering into an invalid transaction.
- Section 124 of the Charities Act 2011 requires charity trustees of registered or excepted charities to take financial advice before entering into any mortgage. It follows that they should obtain this advice before they enter into a commitment such as a loan or a grant that will require them to enter into a mortgage either before or after funding is released.
- The trustees must obtain the advice from a person who is reasonably believed by the charity trustees to be qualified by his (or her) ability in and practical experience of financial matters; and who has no financial interest in relation to the loan, grant or other transaction in connection with which his advice is given. This may be an employee or trustee of the organisation.
- The advisor must advise on three things. The first is whether the loan or grant is necessary in order for the charity trustees to be able to pursue the particular course of action in connection with which they are seeking the loan or grant.
- The second thing that the valuer must advise on is whether the terms of the loan or grant are reasonable having regard to the status of the charity as the prospective recipient of the loan or grant.
- Finally, the advisor must advise on the ability of the charity to repay, on those terms, the sum proposed to be paid by way of loan or grant. The application of the provisions to grants as well as loans were made by subsequent amendment with apparently little thought to this part of the requirement, but advisors must make as much sense of this as they can in applying the provision to grants, where there is no intention ever to repay the funding.
- The advice should be considered at a Board meeting, which could be the meeting at which the mortgage is considered and approved and other formal assurances that the funder or lender require to be made by resolution or written statement.
- The trustees must certify in the mortgage that the above procedure has been followed. There is a view that this means that all trustees must sign the mortgage in their individual capacity. For this purpose, a resolution under section 333 of the Charities Act 2011 authorising any trustee to execute documents on behalf of the others would mean that two directors executing the document for the charitable company can also give the certificate on behalf of their directors in their capacity as trustees.