Section A - Introduction
These frequently asked questions are to be read in conjunction with the Non-Residential Lease (Landlord) Guidance for Managing Trustees and Non-Residential Lease (Landlord) Guidance for Solicitors and cover issues that are often raised when Managing Trustees consider granting a non-residential lease.
Section B - Frequently Asked Questions
Q1. Renting out Methodist property
As a Church Council we have been looking at ways to raise additional funds and make the most of our buildings. The members usually meet in the Sunday school rooms as they are more suitable so we have a largely unused former chapel and some ancillary office space. Can we let out the available space?
A1. In short, yes. Letting out the whole or part of a church site is one of the options that Managing Trustees could consider. Managing Trustees can grant a lease or leases of Methodist property provided that the lease(s) is granted in accordance with the requirements under charity law and Methodist law, policy and best practice. The requirements are summarised in the Non-Residential Lease (Landlord) Checklist and detailed in the Non-Residential Lease (Landlord) Guidance for Managing Trustees. Non Residential Lease (Landlord) Heads of Terms are also available which set out the terms on which Model Trust property can be let.
In terms of the requirements under charity law and Methodist law, policy and best practice, Managing Trustees would need to obtain the following: (1) Final Consent after they have logged a project on the Methodist Property Consents Management System (Consents Website) for each lease, (2) appropriate professional advice from a surveyor (a full qualified surveyor’s report (QSR) for a lease of more than 7 years), (3) confirmation of market rent (and adequate marketing if the lease is of more than 7 years), (4) confirmation that the proposed tenant is not “connected” to the charity (or a Charity Commission Order to authorise the lease) and (5) TMCP's approval of the form of lease and any accompanying lease documents, such as a rent deposit deed. The Non-Residential Lease (Landlord) Template Clauses would need to be included in the lease(s) before it was sent to TMCP Legal for approval.
The advice of the Managing Trustees’ surveyor and solicitor should help Managing Trustees to decide how best to proceed. These professional advisers would be able to explore all the options with the Managing Trustees and provide advice on how best to manage the parts of the church site that the Managing Trustees no longer have a use for. Questions Managing Trustees and their professional advisers should be thinking about include: What are the Managing Trustees’ intentions in the long term? How often do the Managing Trustees still use the former chapel? Should the Managing Trustees grant a lease reserving rights to them for continued occasional use of the chapel or is such use not essential to Mission (perhaps because the Managing Trustees usually worship in the Sunday school rooms at present)? Would a short or long term lease fit in best with the Managing Trustees’ intentions for the whole church site? Could the parts of the church site that are unused be divided from the rest of the church site and sold outright? Managing Trustees may decide, based on the professional advice received, that an outright sale would be the best way to proceed (please see the Sales page for guidance) or that they use the whole church site to such an extent that more casual arrangements would actually be preferable in the circumstances such as licence arrangements (see the Licences page for guidance). It would be helpful if Managing Trustees could confirm what their intentions are for the whole church site both at present and in the future so that TMCP Legal can provide any specific guidance that may be required.
Q2. Market rent
We have been looking for a new tenant for a few months and a local business has expressed an interest. Our surveyor valued market rent at £14,000 per annum and somebody told us that we have to charge market rent. However, the business has suggested paying us a share of their profits. We understand the level of rent will depend on how well they do, is this ok? Some of our Church Council members know the people who have set up the business and it could prove embarrassing if we have to say no.
A2: Managing Trustees are obliged to charge no less than market rent pursuant to s.120(2)(b) of the Charities Act 2011 (2011 Act) and Methodist policy. There are no exceptions to the policy of the Methodist Council in respect of non-residential leases. It may help to explain to the local business that the Managing Trustees' decision is not personal, it is simply that as charity trustees and managing trustees, they are obliged to act in accordance with charity law and Methodist law, policy and best practice. Unlike a commercial landlord, the Managing Trustees are not able to accommodate such a proposal due to the risks involved if the business does not do as well as hoped. Accepting less than market rent would also be contrary to the policy of the Methodist Council.
The Managing Trustees’ consideration, first and foremost, is to ensure that they act in the best interests of the charity. Letting out charitable premises for the full market rent ensures the charity maximises the income it receives which can then be used for the beneficiaries of the charity, the Mission of the church and also ensures that the charity is not out of pocket. The only way that such a proposal could be accepted would be if a minimum rent was paid which was confirmed to be market rent by the Managing Trustees' surveyor.
Managing Trustees may want to explain why the proposal is not viable and ask the proposed tenant to put forward its best offer. If the property has been on the market for a while with little interest the Managing Trustees’ surveyor may feel that the original rental valuation was too optimistic or suggest incentives that could be offered to secure a tenant or works undertaken to make the property more attractive.
Hopefully the proposed tenant will understand the restrictions placed on Managing Trustees, respect the fact that they are dealing with a charity rather than a commercial landlord, and come back with a better offer that does secure no less than market rent.
Q3. Market rent and lease renewal
Part of our site has been used by a local charity as offices for a couple of years now. The current lease ends in a few months and we are happy for the tenant to continue in occupation. The tenant also wants to stay but has asked whether we will reduce the rent as their funding has been cut by the Local Authority. Can we let them stay and reduce the rent?
A3. Please bear in mind that a new lease to an existing tenant is treated in the same way as a lease to a completely new tenant. All the requirements set out in the Non-Residential Lease (Landlord) Checklist and detailed in Section B and Section C of the Non-Residential Lease (Landlord) Guidance for Managing Trustees will need to be fulfilled.
In terms of the rent reduction, as explained in the Non-Residential Lease (Landlord) Guidance for Managing Trustees, one of the first steps is to obtain professional advice. This advice will be in the form of a full qualified surveyor’s report (QSR) if the lease is for a term of more than 7 years (please see the QSR Focus Note for further information and details of what this will need to cover), or competent professional advice from a surveyor covering the points set out in Section B of the Non-Residential Lease (Landlord) Guidance for Managing Trustees if the lease is 7 years or less. The Managing Trustees’ surveyor will need to confirm what the level of market rent is. As explained in FAQ 2, the new rent can be no less than market rent. The tenant's proposal can only be considered if the reduction ties in with the surveyor's rental valuation. Please ask the surveyor to advise the Managing Trustees whether the tenant's proposal would secure market rent.
The Managing Trustees’ surveyor will also confirm in the QSR/ competent advice whether it is in the charity’s best interests to proceed with the proposed lease renewal and if so on what terms. As well as it being a statutory requirement, Managing Trustees will find it useful to obtain and consider the surveyor’s advice on the rent proposals and lease terms in general to assist them in deciding whether or not to proceed with another lease and to draw up heads of terms (a list of key lease terms) to use in negotiations. Please refer to the Non-Residential Lease (Landlord) Heads of Terms which set out the terms on which Methodist property can be let.
As the existing lease was only granted in the last couple of years, in accordance with Methodist policy it is presumed that the existing lease is excluded from the security of tenure provisions in the Landlord and Tenant Act 1954. This means that the tenant will not enjoy the automatic statutory right to request a new lease at the end of the existing term that would otherwise apply.
If the current lease is excluded from the Landlord and Tenant Act 1954, Managing Trustees will be keen to ensure that the position is resolved and a new lease entered into without delay. They need to ask their solicitor for advice on how to conduct the negotiations for a new lease so that it is clear the tenant is not simply being allowed to remain in occupation to avoid a possible “protected” lease arising (as discussed below) which would be contrary to Methodist leasing policy and restrict the Managing Trustees’ options in the future to deal with the premises as they so choose to best further Mission. Managing Trustees should ask their solicitor for advice on whether they can continue to accept rent after the end of the current lease term if a new lease has not yet been entered into and what steps they should take to protect their position if the tenant is unwilling to start meaningful negotiations. If the Managing Trustees are unable to conclude a new lease and fear that the tenant will not simply move out at the end of the term, advice will be required on how to ensure that vacant possession is obtained.
If it is the case that the existing lease is what is known as a “protected” lease then the Managing Trustees’ options on whether or not to grant a new lease and on what terms would be limited by statute. The surveyor would need to consider this in the QSR/ competent advice.
It would help to speed up the lease renewal process if the Managing Trustees provide their solicitors with a link to the Granting a Non-Residential Lease to a Third Party page on TMCP’s website so that they can download the current guidance including the Non-Residential Lease (Landlord) Guidance for Solicitors and ensure that the charity law and Methodist law, policy and best practice requirements are fulfilled. Evidence that the correct steps are being taken will need to be provided to TMCP as soon as possible. The Managing Trustees’ solicitors can also ensure that the process runs smoothly by ensuring that the draft lease includes the current Non-Residential Lease (Landlord) Template Clauses and that a copy of the QSR or competent advice is provided at the same time so that the lease can be reviewed by TMCP in conjunction with the surveyor’s advice.
A4. It is a matter of Methodist policy that Sunday trading is not permitted within the curtilage of a church site. The "church site" is not limited to the worship space, but also includes the land and buildings within the chapel’s boundaries. This will be the case even if the retail space in question is completely self-contained and accessed separately to the rest of the building. It is still on the ground floor of a building partly used as a chapel and falls within the curtilage of the church site.
However, if Managing Trustees can show that the premises they want to let out are Investment Property (as defined under Standing Order 908), then Sunday trading would be permitted. In some cases buildings are designed with self-contained areas that are reserved for non-Methodist purposes to generate an income to further Mission, i.e. for purely investment purposes. The question here is whether the ground floor, or the part of the ground floor that the Managing Trustees want to let out, has ever been used for Methodist trust purposes. These purposes are set out in Model Trust 13, heads (b) to (m). If the Managing Trustees feel that the premises in question do fall into the category of Investment Property then please provide TMCP Legal with details so the position can be confirmed. What were the premises designed for and what have they been used for since? If it is unclear whether the premises fall under the definition of Investment Property, perhaps there has been a major redevelopment of the site or reconfiguration of space since it was first built, TMCP Legal will be able to ask the Conference Office to provide an interpretation on whether the space in question can be classed as Investment Property.
Managing Trustees should bear in mind that while TMCP is obliged to apply policy, policy is made by the Methodist Council and interpretation lies with the Conference Office. Sunday trading is an issue that often falls into a grey area and if the premises fall within the curtilage of a church site, in its widest sense, and have at any time been used for Methodist purposes set out in Model Trust 13, heads (b) to (m) then Managing Trustees may feel that it would be helpful to clarify whether Sunday trading would be allowed as early in the transaction as possible before agreeing terms with the tenant or incurring legal costs.
Q5. Sale of alcohol and lottery tickets
We have retail space on the ground floor below our worship space that we want to let out to a third party. Our surveyor has told us that one of the big supermarkets is looking for premises in the area to set up one of their convenience type stores and could be interested. However, we understand that the lease would need to exclude the sale of alcohol and lottery tickets. Is this true? If so this would be a deal breaker.
A5. The general rule is that the sale of alcohol and/or lottery tickets must not be permitted under a non-residential lease of Methodist property. The restrictions on use that are imposed under the Non-Residential Lease (Landlord) Template Clauses arise from Standing Order 922 and Standing Order 924. However, since the beginning of the 2016/ 2017 Connexional year, the sale of alcohol and/or lottery tickets and scratch cards is permitted in very limited circumstances under Standing Order 926 and only if the Managing Trustees want to allow it.
The sale of alcohol and/or lottery tickets and scratch cards could be permitted under the lease if:
- the premises in question are no longer required for the Methodist purposes set out in Model Trust 13, heads (b) to (o);
- the lease will be of whole (i.e. self-contained premises that are not part of other premises used for such Methodist purposes);
- the lease will be for a term of 10 years or more; and
- the requirements in Standing Order 926 are followed.
Standing Order 926 requires that the lease must contain specific restrictions on the tenant to ensure that the premises are not used as a drinking establishment under use Class A4 of the Town and Country Planning (Use Classes) Order 1987 or nightclub. In terms of gambling, the lease must include an obligation on the tenant not to permit any gambling except the sale of lottery tickets and scratch cards or as permitted under Standing Order 924(2) (gambling permitted by law at non-commercial events – the guidance in Volume 2 CPD, Book VII B, Part 7 provides helpful guidance to Managing Trustees). In short, the sale of alcohol, lottery tickets and scratch cards must not be the primary use in a tenant’s business. The amendment to Standing Orders aims to accommodate a supermarket that sells alcohol and lottery tickets as an ancillary part of its business, rather than an off-licence or betting shop.
The Managing Trustees’ solicitors will need to ensure that the lease includes these tenant obligations (covenants) for approval by TMCP on behalf of the Connexional Team under Standing Order 931(3). However, before the drafting stage is reached, it is highly recommended that Managing Trustees ensure the proposed tenant is clear as to the restrictions that will need to be imposed as soon as possible to avoid misunderstanding and wasted time and costs if the obligations are not acceptable to the proposed tenant.
If it is unclear in the circumstances whether the lease is of whole, whether use for Methodist purposes is in fact discontinued or whether the sale of alcohol or lottery tickets is ancillary to the main use (i.e. not the primary use) then it will be necessary to refer the point to the Conference Office for consideration. TMCP Legal will liaise with the Conference Office on behalf of Managing Trustees to ensure further guidance is given on the application of these Standing Orders.
A6. A lease is an important legal arrangement and it is highly recommended that the Managing Trustees instruct a suitable professional legal adviser, or perhaps in the case of a very simple, short term lease, the Managing Trustees’ surveyor, to act for them to ensure that the drafting protects the best interests of the charity and the particular circumstances of the lease in question. However short or “simple” the lease may be, the Managing Trustees will also need to ensure that all the charity law and Methodist law, policy and best practice requirements set out in the Non-Residential Lease (Landlord) Checklist are fulfilled.
At the moment there is no standard ‘short’ form of lease but this is something which is under development by TMCP. In the meantime, the Non-Residential Lease (Landlord) Heads of Terms, Non-Residential Lease (Landlord) Guidance for Solicitors and Non-Residential Lease (Landlord) Template Clauses that are available should assist the Managing Trustees’ legal adviser in drafting a form of lease that complies with charity law and Methodist law, policy and best practice so that the draft can be approved as quickly as possible.
Please also ensure that the Managing Trustees’ legal advisers have a copy of the qualified surveyor’s report (QSR) or competent advice received from the Managing Trustees’ surveyor so that they can ensure that the lease complies with the surveyor’s recommendations before sending it to TMCP Legal for approval.
The Non-Residential Lease (Landlord) Heads of Terms set out the standard terms on which Model Trust property can be let. These Non-Residential Lease (Landlord) Heads of Terms have been approved by the Connexional Team and reflect the requirements under Methodist law, policy and best practice on leasing Methodist Model Trust property. Using the Non-Residential Lease (Landlord) Heads of Terms when negotiating the lease with the proposed tenant should assist Managing Trustees in ensuring that the terms agreed are acceptable and avoid terms having to be renegotiated at a later stage if a conflict between what is permitted under Methodist law, policy and best practice is only discovered when the draft lease is sent to TMCP Legal for approval.
Managing Trustees may find the Instructing a Legal Adviser Focus Note of assistance when choosing a solicitor and negotiating fees. If the solicitor has a precedent short form lease that can be easily adapted to include the Non-Residential Lease (Landlord) Template Clauses then it may be that the Managing Trustees can negotiate a reasonable fixed fee. The more Managing Trustees can do in terms of complying with the charity law and Methodist law, policy and best practice requirements set out in the Non-Residential Lease (Landlord) Checklist will also assist to keep costs lower.
A7. This is correct. TMCP need to approve leases as Custodian Trustee under Standing Order 930(3) and on behalf of the Connexional Team under Standing Order 931(3). Please forward a copy of the draft lease with evidence that the charity law and Methodist law, policy and best practice requirements summarised in the Non-Residential Lease (Landlord) Checklist and detailed in the Non-Residential Lease (Landlord) Guidance for Managing Trustees, have been fulfilled. TMCP will only be in a position to approve completion once: (1) the lease is in an approved form, (2) final consent is in place, (3) advice of the Managing Trustees’ surveyor is obtained and approved (as the lease is for just 5 years a full qualified surveyor’s report (QSR) is not required), (4) the surveyor’s confirmation of best terms and market rent is on file and (5) connected person confirmation or a Charity Commission order authorising the lease is provided.
If there are any ancillary (accompanying) lease documents such as permission to carry out works (Licence for Alterations) or a deed confirming the terms on which a deposit will be held (Rent Deposit Deed), these would need to be approved by TMCP Legal and then sealed and signed by two members of the Board of TMCP.
Please allow up to two weeks for the required Memorandum of Consent to be obtained once the transaction has received TMCP’s approval under Standing Order 930(3) and for ancillary lease documents to be sealed. The Memorandum of Consent is a document required on the grant of a lease under paragraph 26 of Part III of Schedule 2 of the Methodist Church Act 1976. It is signed on behalf of the Methodist Council by the Conference Officer for Legal and Constitutional Practice or such other person as may be authorised from time to time.
A8. A 15 year lease is possible, subject to the consent of the Connexional Team. Such consent is required for any non-residential lease where the term is for more than 10 years. TMCP Legal will assist the Managing Trustees by requesting the required consent on their behalf and presenting their case to the Conference Office. When submitting the Managing Trustees' case, the advice of their surveyor is key in confirming that it is in the charity's best interests to enter into such a long lease.
Before proceeding any further with the negotiations, the Managing Trustees will need to decide, based on their professional advice, whether a 15 year lease is suitable given the Managing Trustees' long term plans for the premises and their Mission aims. Managing Trustees will need to consider how letting the premises for 15 years will further the Mission aims of the Church. Will the long lease secure income for use in Mission without impacting on the Managing Trustees' continued use of space? Is there a risk that tying the office space up for 15 years will inhibit Mission growth and/or prevent the Managing Trustees from exploring redevelopment/reconfiguration of space at the church site? Could the proposed lease bind the Managing Trustees to a building that they may otherwise want to sell outright?
Managing Trustees may find it helpful to discuss the position with their surveyor if they have not done so already. Please speak frankly about the Managing Trustees' plans for the future so that the surveyor can provide helpful advice on how best to proceed, either in the form of a full qualified surveyor’s report (QSR) (which would be required for a 15 year lease in any event) or preliminary written advice.
Q9. Restrictions on types of tenants
We have let out a self-contained former Sunday school for some time to various not-for-profit organisations. The premises are currently empty and a local commercially operating business has asked if they can rent the former Sunday school. Is it ok to let our premises to this sort of tenant?
A9. There is nothing under charity law or Methodist law, policy and best practice that would prevent Managing Trustees from granting a lease to a commercial profit-making company or organisation in principle.
One thing to bear in mind is that the nature of the tenant and intended use could impact on any exemptions and reliefs that the premises currently enjoy in terms of business rates and have other implications for the charity. As long as Managing Trustees check out the position and are happy to proceed, this should not necessarily prevent the lease from going ahead.
Premises occupied by a charity and mainly used for charitable purposes enjoy mandatory and discretionary reliefs from business rates of up to 100%. The Managing Trustees’ professional advisers will be able to provide Managing Trustees with advice on the implications on the use of the premises by a commercial tenant and how to address this through obligations placed on the tenant under the lease (tenant covenants). Provisions would usually be included in the lease to ensure that the tenant would be responsible for any rates and agree to indemnify the landlord against the loss of any reliefs. Please bear in mind the effect on the Local Authority’s treatment of the premises for business rates as it may be difficult to reverse the position after the tenant vacates the premises even if the premises are mainly used for charitable purposes once again. If Managing Trustees have concerns, their surveyor will be able to advise whether it is in the best interests of the charity to proceed.
In addition, if Managing Trustees have concerns over the tax treatment of the rental income, their accountant or financial adviser will be able to provide advice on this. Managing Trustees may find the information in the HM Revenue & Customs booklet “Charities: detailed guidance notes” to be a useful starting point; “Annex iv: trading and business activities - basic principles” . This explains that the rental income received by charities is “usually” exempt from tax provided that the profits are used for charitable purposes. If Managing Trustees propose providing any additional services to the tenant that could be viewed as “trading” such as cleaning, then it is strongly recommended that Managing Trustees obtain confirmation of the position and the tax implications.
If the Church Council is not already registered with the Charity Commission Managing Trustees will also need to check whether any additional rental income will require them to register with the Charity Commission. Registration is currently required for Methodist bodies where income exceeds £100,000 per year.
The information in this response is provided by way of guidance only and does not constitute advice. Taxation is a very specialist area, liable to constant change and Managing Trustees should ensure that they seek appropriate advice from their accountant or a tax specialist if they wish to rely on any particular taxation treatment.
Please note that this document is to provide guidance and assistance to Managing Trustees and their professional advisers. This guidance note is general in nature, may not reflect all recent legal developments and may not apply to the specific facts and circumstances of any particular matter.
Also note that nothing within the documents and guidance notes provided by TMCP nor any receipt or use of such information, should be construed or relied on as advertising or soliciting to provide any legal services. Nor does it create any solicitor-client relationship or provide any legal representation, advice or opinion whatsoever on behalf of TMCP or its employees.
Please remember that Managing Trustees need to take advice that is specific to the situation at hand. This document is not legal advice and is no substitute for such advice from Managing Trustees’ own legal advisers.