Charity Trustees - Beware hidden personal liabilities
Are you a Trustee of a Charity which intends to occupy or already occupies property under a commercial lease? If so you might be or become exposed to unexpected personal liabilities if the Charity transfers the lease to a new tenant.
What is the issue?
The issue is typically thatunder a commercial lease a landlord requires a tenant who transfers the lease to an incoming tenant to guarantee that the incoming tenant will pay the rent and perform the other tenant obligations under the lease and itself pay or perform those obligations if the incoming tenant defaults. This guarantee is known as an Authorised Guarantee Agreement (AGA).
If the incoming tenant is not an organisation that it is within the Charity tenant's objects to benefit such as another charity with similar objects, and if the landlord can insist on the Charity tenant entering into an AGA, the Charity trustees run the risk of exposing their Charity to meeting the obligations of an incoming tenant that it would not be within their Charity's objects to benefit. In that case the AGA is likely to be unenforceable against the Charity and may expose the Charity trustees to personal liability.
How could a Charity trustee incur personal liability?
The primary duty of charity trustees is to ensure that their Charity's assets are applied solely for the Charity's specific charitable purposes as set out in the objects clause of its governing document. If Charity trustees allow their Charity's assets to be applied in breach of this duty they may be personally liable for any loss the Charity suffers as a result.
What can Charity trustees do to avoid this?
If negotiating to take a new commercial lease try and agree with the landlord in the Heads of Terms that the lease will state that no AGA will be required from the Charity on a transfer of the lease.
If either the landlord won't agree that on a new lease or if the Charity is tenant under an existing lease and an AGA may be required by the landlord on assignment then the Charity should consider whether this is likely to restrict it's ability to transfer the lease. On a new lease it may be worth trying to negotiate a tenant right to determine the lease though this could have other implications, such as on any rent review.
Subletting the premises rather than transferring the lease would be another possible option if allowed to do so under the terms of the lease.
If the Charity does plan to transfer the lease and is required to enter into an AGA then before doing so the Charity trustees should consider whether:
the Charity's governing document gives it power to provide guaranteesthat power can be exercised in furtherance of their Charity's objects, in the best interests of the Charity.Make sure you obtain specialist legal advice!
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