OPERATIONAL GUIDANCE

BORROWINGS AND MORTGAGES

POWER TO BORROW

OG 22 B1 – 12 February 2007

Functional responsibility

For action

Charity Support Division

For information

All operational divisions

Contents

1. Section 38 of the 1993 Act
2. Our current policy
3. Governing document
4. Statutory power
5. Borrowing for the purpose of a trade
6. Unsecured borrowing
7. Pressure from trustees' lenders
8. "Comfort" Orders
Glossary of Terms used in this Guidance

Index to further related information

The Law	Refer to a lawyer	Refer to an accountant

1. Section 38 of the 1993 Act

Before trustees can mortgage land as security for a loan, they must have power to borrow. Before trustees can mortgage land as security for a grant or other obligation, they must have power to accept a grant upon conditions or incur some other obligation and charge their property by way of security. In many cases these powers may be implicit in the governing document – for instance, where a power to incur an obligation is given, a power to charge property by way of security may be implied. S.38 does not confer on trustees the power to borrow or the power to charge property. S.38(2) merely removes the need to obtain an Order of the Court or of the Commissioners when mortgaging land in the circumstances set out in s.38(2).

2. Our current policy
	Power to permit trustees to borrow money and/or charge the charity’s property can be found:
	in the governing document;
	in the Trusts of Land and Appointment of Trustees Act 1996 (TLAT 1996);
	in the Trustee Act 2000 (TA 2000); and
	by implication - see OG 22 A1.
	Where trustees do not have the power to borrow and/or charge property, they can confer a suitable power on the charity by using the power of amendment for unincorporated charities (s74D of the Charities Act 1993 as inserted by the Charities Act 2006) or the power of amendment available to companies under the Companies Acts following our s64 consent. In the unlikely event that the governing document specifically precludes borrowing, a Scheme will be required to authorise it. The exercise of any power of borrowing and/or charging property must be strictly in accordance with the terms of the power.
	There may be cases where banks and other lenders will be unconvinced that the new statutory powers do in fact authorise borrowing and/or the giving of security because of the absence of any explicit reference to it. However, an "absolute owner" undoubtedly has power to borrow money on the security of their property and to charge property. We should refer doubters to paragraph 10.8 of the Law Commission Report on Transfer of Land and Trusts of Land (No 181), published in June 1989. This sets out the policy of the new land management powers.
	If lenders persist in the view that TLAT and TA 2000 do not give power to borrow and/or charge property, you should obtain legal advice.
	The statutory trustee powers are not available to charitable companies, except in relation to funds of which the company is trustee. However, charitable companies are usually empowered by their governing documents to charge property for the purposes of borrowing money.
	The power to borrow for any purpose relating to the repair, maintenance, improvement, etc of buildings and land which the charity trustees own also applies to unsecured loans. Our view is that this is within the land management powers. See section 6.

3. Governing document
	The governing document of a charity may give trustees power to borrow. This is normally found in the powers recited in furtherance of the main object of the charity – eg "power subject to any consents required by law to borrow money and to charge all or part of the property of the charity with repayment of the money so borrowed". The Commission’s model governing documents GD1, GD2 and GD3 contain power to borrow.
	A charitable company will usually find suitable powers to borrow in the "powers" section of its memorandum, even if this is in the "sweeping up" power to do such other things as are expedient in the interests of the charity.
	Where a charity has a power to accept grants on conditions or to give guarantees or enter into other types of obligation, a power to charge the charity’s property as security for such actions may be implicit.

4. Statutory power
	The statutory provisions conferring a power to borrow were, prior to 1 January 1997, found at s.29 Settled land Act 1925. Trustees were given the powers of a tenant for life by s.71 of that Act. This empowered a tenant for life to raise money by mortgage for the purposes set out in s.71(1). These purposes did not include the purchase of property.
	From 1 January 1997, s.29 of The Settled Land Act 1925 was replaced by TLAT 1996. TLAT radically altered the statutory basis upon which charity land is acquired, managed and disposed. Almost all land which is held on charitable, ecclesiastical or public trusts is now subject to a "trust of land" as the result of TLAT. TA 2000 and other statutes which define the powers and duties in relation to a trust of land are relevant to most charities other than companies. See OG 86 B2.
	The intention of TLAT 1996 is that charity trustees’ wide powers of management should give them a power to borrow for any purpose relating to:
	the acquisition of land and buildings;
	the repair, maintenance, and improvement of their land and buildings; and
	to charge the land as security for the borrowing of funds for these purposes.
	This replaces the more limited powers in s.71 of the 1925 Act.
	TLAT 1996 does not expressly refer to this power but an absolute owner has power to borrow on the security of his property.
	If lenders remain unconvinced that TLAT 1996 gives charity trustees power to borrow and to charge property, advice should be sought from Legal Division.

5. Borrowing for the purpose of a trade
	A charity which carries out its charitable purposes by the exercise of a trade (eg a private hospital or independent school) will, if its governing document contains no express power to borrow, have an implied power for the purposes of its trade. Otherwise, power to borrow will only be implied if there is a need to incur emergency expenditure. It would need to be shown that the expenditure was both necessary and cannot reasonably be financed without recourse to borrowing. These principles emerge from the decision of the court in Mansell v Viscount Cobham (1905) 1 Ch 568.
	Legal advice should be taken whenever there is any uncertainty about an implied power to borrow.

6. Unsecured borrowing
	The power to borrow for any purpose relating to the repair, maintenance, improvement, etc of the buildings and land which the charity trustees own also arises in the case of unsecured loans. Our view is that this is within the land management powers.
	This view is not accepted by all the corporate lenders which charity trustees may approach for finance. This difference arises from differing interpretation of the law rather than questioning the financial viability of lending to a charity. NatWest Bank, for example, has indicated that it does not accept that the statutory powers give trustees a power to borrow on an unsecured basis. It also takes this view if the loan is secured using property which does not belong to the charity, such as, for example, the trustees' personal property. However, it may be prepared to accept in the circumstances of the case that the trustees have an implied power to borrow money.
	In fact, the lender may have legitimate concerns where any proposed loan is not secured on land belonging to the charity. These concerns arise from the supposition that trustees may not have power to borrow - whether with or without security - notwithstanding the new statutory provisions. If trustees do not have this power, then they may not be entitled to indemnify themselves out of trust property for the repayment of the loan and the payment of interest. In that case, the lender would also not have the right, which it normally would have if the trustees were borrowing within their powers, to recover the payment of the loan and the payment of interest out of the trust property. OG 22 B10 explains in more detail the circumstances in which trustees can properly repay unsecured loans from their charity's assets. NatWest Bank have indicated in discussions with us that where they are not prepared to rely on the existence of an implied power to borrow, in order to protect their interests, they will ensure that the charity trustees provide a reasoned argument to us, justifying why we should be prepared to grant an Order to authorise the borrowing. We should be prepared to consider such an approach whatever the identity of the lender. See also section 8 below.
	For guidance on trustees' indemnity when dealing with unsecured loans, see OG 22 B10.

7. Pressure from trustees' lenders

Lenders tend to be concerned that, even though the trustees have complied with the requirement to obtain proper advice, and certify this on the deed of charge, their security will be invalid if the trustees did not have the necessary power to enter into the mortgage in the first place. Despite the provisions of s.39(3), the lender may attempt to influence the trustees to apply for an Order to safeguard its position. Our position is set out in section 4 above, and we should in these cases follow the approach set out in section 8 below.

8. "Comfort" Orders
	Section 6(1) of TLAT 1996 states that:
	for the purposes of exercising their functions as trustees, the trustees of land have, in relation to the land subject to the trust, all the powers of an absolute owner.
	The expression "in relation to land" has, in the similar context of section 28 of the Law of Property Act 1925, been the subject of judicial comment on a number of occasions.
	These comments make it clear that the words "in relation to land" are not confined to powers of disposal. They extend to all actions which trustees may take in the management of land, including the raising and expenditure of money.
	In our view the powers of an absolute owner clearly include a power to borrow money and/or to charge the land, and if the power is exercisable in relation to land comprised in the trust then the power to borrow and/or charge the land falls within the ambit of section 6(1) of TLAT 1996.
	In practice, borrowing by charity trustees will almost invariably be for a purpose connected with the use of the land for the purposes of the charity. Borrowing for the purposes of acquisition, improvement, repair and maintenance and equipment of land and buildings are all within the scope of section 6(1) of TLAT 1996.
	In addition, we should not allow a charity’s interests to be harmed by any difference of view between the charity’s lender and ourselves over the need for an Order. Where the circumstances of the case indicate that the matter is genuinely urgent, we should be prepared to make an Order for the avoidance of doubt if agreement cannot quickly be reached. If there is persistent disagreement on the issue with a particular lender, caseworkers should consider whether the disagreement should subsequently be raised between the Commission and the lender at a policy level.
	We should also make an Order where the borrowing is demonstrably in the interests of the charity, and the lender ultimately insists on an explicit Order being given. Provided, therefore, that:
	the borrowing is clearly shown to be expedient in the interests of the charity; and
	proper financial advice has been taken (which we should ask the trustees to provide us with);
	we will have to continue to make Orders in such cases to safeguard the interests of the charity (as opposed to those of the lender).

Glossary of Terms used in this Guidance
	the 1993 Act
	trustees

Index to further related information