Borrowing Money (UK)

Charity Law on Borrowing Money (UK)

A few FWBO Centre’s have reported recently that they’d been surprised at the costs incurred when arranging further loans from banks/building societies with which they already had a mortage. Lokabandhu and myself asked Triodos Bank about this, and were given the following advice concerning charity law and borrowing.

Costs arise when charities arrange to borrow extra funds because the 1993 Charity Act required Trustees to take out a new mortgage every time they borrowed money, even where the security provided was the same for both the original loan and the new loan.  This results in legal costs, including solicitors fees.  Trustees must also receive professional advice (from, for example, an accountant) regarding the appropriateness of the borrowing – known as Section 38 Advice.  A charge is likely to be incurred for this Advice unless a “proper person” from within the Charity was able to provide it.   

The Charities Act 2006 came into force this year which amended the restrictions on borrowing within the 1993 Act and enables charities to take out a mortgage covering both money being borrowed at that time and future borrowing.  Below, I have copied the passage explaining this from the Charity Commission website.  However, it will only apply to new mortgages going forward.  We implemented the new Charity legislation at the earliest date, 27 February 2007 and mortgages since this date cover “all monies”. The mortgages currently in place for most FWBO centres DO NOT cover further borrowing and would need to be replaced by ones that do if further borrowing were required.  This means that legal costs would be incurred on the first occasion that they increased their borrowing although our legal requirements are not as detailed as they would be if taking a mortgage over a property for the first time. Before a Charity can borrow further against an “all monies” charge they would still need to satisfy the requirements of Section 38 of the Charities Act.  

Here is the excerpt – for further information see http://www.charity-commission.gov.uk/supportingcharities/ogs/g022b003.asp#_Toc155757775 

12. Further Advances

Following amendments made in the 2006 Act it is now possible for trustees to enter into a mortgage which permits them to take out further advances without the need to come to us for an Order and without the need to undertake an entirely separate transaction. This is detailed in ss.38(3C) and (3D). Where the trustees have executed such a mortgage they may “tack on” further lending if, before entering into the further transaction, they obtain and consider proper advice, given to them in writing, on the matters mentioned in subsection (3)(a) to (c) or (3A) as appropriate – see section 2 above. This is a change from the previous situation where the trustees would need either to obtain an Order from us authorising a mortgage that permitted the “tacking on” of future loans or take out a fresh mortgage each time a further advance was required. The new regime puts the onus back on the trustees to work through the same considerative process as they did for the first loan or grant but without the need for an Order from us.

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