Charity Commission on the risks of leases

Date updated: Wednesday 3rd July 2024

Many charities play a very important role in the supported housing sector, helping beneficiaries with additional needs and disabilities access accommodation and support services to ensure their needs are met. In doing so, some charities are turning to the lease-based model to provide accommodation to their beneficiaries, entering into lease agreements in supported housing communities, such as group homes, hostels, refuges, supported living complexes and sheltered housing. In some cases, charities are selling a property and then taking out a lease on it in order to provide accommodation for a beneficiary.

Where this accommodation is leased rather than owned outright, there can be some challenges and risks. Any charity looking to enter into such an arrangement should carefully consider these risks and take necessary steps to manage them, in all cases ensuring the proper discharge of the trustees’ duties.

The Charity Commission notes that the primary risks for trustees to be aware of are as follows:

The trustees should ensure that appropriate legal advice is sought to thoroughly scrutinise the terms of the lease and, if necessary, negotiate any amendments for the benefit of the charity. They will want to avoid any obligations that would be challenging or impossible to comply with, or result in a great cost to the charity. Particular areas to be wary of are repair obligations, rent reviews, how the charity can end or sell the lease and, of course, service charges where the leaseholder is contributing towards the costs of the upkeep and maintenance of the building and any communal areas.

Related to the point above, the trustees should ensure (as with any long term contract) they are confident the charity will have sufficient income to cover any costs that may arise for the full term of the lease. Some questions trustees might need to ask themselves include:

Will the rent increase over the course of the lease?
Does there need to be an annual cap on the service charge, for example so that there is some certainty of the annual outgoings?
Does there need to be an opportunity to terminate the lease early?

The charity’s position should be regularly reviewed throughout the course of the lease, as there may be the option to take action to end the lease early if the trustees think there may be rough seas ahead.

The Charity Commission warns that much of the income for supported housing providers is derived from Housing Benefit, and its scope and rules can change without warning. Trustees should think about whether the charity could meet the costs of the lease if the income from Housing Benefit were to drop significantly.

The Charity Commission has seen some charities grow rapidly following the adoption of the lease-based model. While this might seem like good news, some charities have struggled to keep up with the additional administrative and financial burden that this growth entails. Trustees are reminded that they need to ensure they have the infrastructure and procedures in place to meet the needs of the beneficiaries and comply, as always, with any legal obligations.

While not specifically a risk relating to the lease-based model, the Charity Commission advises that it has seen cases where trustees have received personal benefits from supported housing charities. Trustees should always have their duties and responsibilities as trustees at the front of their minds. These conflicts of interest are likely to raise questions as to whether the decision has been made in the best interests of the charity, rather than in the best interests of a trustee. Conflicts of interest always need to be managed very carefully and the decision making process should always be properly recorded and documented in case it is called into question.

The Charity Commission confirms the importance of charities having “appropriate advice where necessary”. It is likely to be important for trustees to receive good quality commercial and legal advice upfront before entering into a lease arrangement or supported housing scheme.