Leasing out real property can be an attractive value proposition for charitable and not-for-profit entities. Such arrangements can be a useful method of maximising the value of a charity’s assets and generating additional finances for the charity to use in pursuing its charitable purposes and objectives.

Typically, leases of property may be attractive to charitable entities as legal ownership over a leased asset remains vested in the charity – rather than ownership being transferred to the Buyer under a Contract of Sale. Additionally, charitable or not-for-profit entities often enjoy the following benefits from leasing arrangements:

  • Steady income generation and diversification of revenue streams – charities who lease their property broaden their revenue sources and increase their capacities to pursue charitable purposes through additional rental income. This is especially useful in situations where charities seek to derive benefit out of land which is idle or unused.
  • Taxation minimisation – where a property is used for charitable purposes, the property may be eligible to receive specific types of taxation concessions or exemptions (such as state-based land tax exemptions or local council general rates rebates/exemptions). A charity may seek to lease out its property to ensure that property owned by a charity is being used for charitable purposes (which may be necessary for it to qualify for state taxation benefits).
  • Certainty of rights and obligations – Charities will often enter into leases to ensure they have certainty over the particular rights, responsibilities and potential liabilities of the parties to the agreement, which is particularly useful in solidifying and documenting tenancies which have previously existed as more informal arrangements (such as those which may occur between parties/entities related to the charity).
  • Alignment with charitable purposes – some charities, such as those established to provide housing assistance or affordable housing schemes, might acquire and develop property to lease out at reduced rates to persons experiencing hardship or disadvantage. Accordingly, entering into leases may form part of the charity’s charitable mission.

What should a charity consider before leasing its property?

A decision by a charity or not-for-profit entity as to whether to lease out its property should never be made rashly or hastily – there are a multitude of factors which should carefully considered before entering into such a lease. Generally, laws governing leases of property differ across different States and Territories, but some general considerations to which a charity or not-for-profit entity should turn its mind include:

  • Lessee – who is the lessee in relation to the Charity? If the proposed lessee is a related party to the charity, then you should seek legal advice to ensure that you are not breaching your charitable purpose and that the lease is at market rates (or rates more beneficial to the charity).
  • Termwhen will the lease commence? When will the lease expire? Will there be any options for the Tenant to extend the term?

Charities should be very careful in ensuring that the term for which property will be leased out is reasonable, and that the term’s length does not bring about any unintended consequences (for example, Queensland’s deemed subdivision laws for leases over a part of a parcel of land where the lease extends for a term beyond 10 years).

  • Type and Description of Property is the lease for residential property, commercial property or for personal property? If commercial, will the lease be for a retail shop, or will it be for some other kind of commercial space? Is the lease for the whole or part of the property, and in what state or territory is the property located?

Specificity in the description of leased property is essential, and depending on the nature of the property being leased the lease agreement may be governed by different rules and laws.

  • Rent and Outgoingshow much rent will the Tenant pay, and how will this be calculated? Will usage costs for critical services such as water, electricity and air-conditioning be included in the rent, or will the Tenant pay for these separately?

Typically, charities should ensure that the rent and outgoings amounts are set high enough to cover its costs for maintaining the property (plus some), but not so high as to be uncommercial. This is especially important for charities registered with the Australian Charities and Not-for-profits Commission (“ACNC”), given requirements of Directors of registered charities to act in the best interests of the charity. This means that generally any lease terms should be on market terms or on terms more favourable to the charity. Consider taking specialised financial advice on these aspects.

  • Rent Review How will the rent increase in each year – will it be annual increases in accordance with CPI? Will it be fixed percentage increases every period of time?

Charities should ensure that rental increases maintain the value of the rent and keep up with the rising costs of living. A charity should seek financial advice to determine an appropriate figure.

  • Permitted Use for what purposes is the Tenant intending to use the premises? Can the property be lawfully used for that purpose? Does the charity wish to restrict the Tenant’s use of the property for particular purposes?

For leases of commercial land, also consider whether the Tenant is to receive Exclusive Use – i.e. will the Charity guarantee to the Tenant that it will not lease another part of the property to a business similar in nature to the Tenant’s?

  • Privacy – if a charity leases its property, the Tenant will often require quiet enjoyment of the property free from unreasonable interference from the Lessor. How much will these privacy conditions impact upon the charity’s operations if the charity cannot access/use the property?
  • Retail Shop Leases – are the premises caught by your state’s respective retail shop lease legislation? If so, there are implications for the form of the lease and the disclosures you must make to the lessee. You should seek legal advice to determine whether these rules apply and how to comply with them.
  • Insurances, Maintenance and Damage to Property who is responsible for rectifying damage to a property and ensuring the property is maintained to an appropriate standard? Who will revert the property to its original condition at the end of the lease? Who bears the costs of taking out insurances over the property? Clarity on the answers to these questions are important to ensure each party understands its rights and obligations under the lease.
  • Prior Encumbrances – are there any encumbrances (such as mortgages, security interests or caveats) on the property title which may act as a barrier to the charity leasing out its property? These may need to be resolved prior to a lease agreement being signed.
  • Implication for State Land Tax exemptions – If you are currently recipient of state land tax exemptions as a charity, then you should seek legal advice to ensure that the proposed lease does not jeopardise any ongoing entitlement to such an exemption.
  • Termination Rights In what circumstances does the charity wish to be able to terminate the lease with the Tenant? Are there any actions of the Tenant which would justify immediate termination by the charity? Are these terms fair and reasonable?
  • Security How will the charity ensure that the obligations of the Tenant will be fulfilled? Will a bank guarantee, a security bond, or a personal guarantee be required from the Tenant as collateral?
  • Sub-letting and Assignment will the Tenant be permitted to assign or sublease their rights under the lease to a third party? Must the third party be approved by the charity prior to the Tenant entering into an agreement to sublet/assign?

 

Before you sign any form of leasing arrangement, it is always prudent (and, in some cases, necessary) to obtain specialised legal advice from a qualified professional. The experienced team at Vocare Law can assist you with preparing a lease agreement that is tailored to suit your charity’s needs. Contact us today on 1300 862 529 or send us your enquiry here. We look forward to meeting with you.

This article was written by Jackson Litzow & Simon Mason.