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An easy way to give?

16 August 10

Charities are often required to grant standard securities in favour of substantial funders, but these can present unexpected issues for the unwary solicitor, perhaps acting pro bono

by Gavin McEwan, Emma Ledsom

Many solicitors advise charities on a daily basis as a key strand of their business. Others take the view that acting for a charity provides an opportunity to engage in corporate social responsibility (CSR). There is no doubt that legal firms, like other businesses, benefit in all kinds of ways from engaging with the charity sector as part of a CSR strategy. The provision of pro bono advice may be helpful to a charity which is trying hard to conserve funds for project work, and it may provide some reflected glory for the solicitor involved (or may simply be a means for the solicitor to “give something back”).

There are also times when pro bono advice may be inappropriate – and that can often include cases where grant-makers seek to secure obligations against an interest in land. Too often such transactions turn out to be more complex than the charity envisaged at the outset (how difficult can it be to check a standard security?) and solicitors who are unfamiliar with grant-makers’ requirements or who do not deal with land and property work on a regular basis can easily underestimate the amount of work involved.

Regular practice

Particularly where larger grants are being awarded, a grant contract will ordinarily state that the recipient charity must execute a standard security in favour of the grant-maker.

Practice varies from one funder to another, but the requirement for a standard security is most common when the grant exceeds a certain sum, making it a material commitment in terms of monetary outlay on the part of the grant-maker. A standard security is the best protection that the grant-maker can seek to obtain if it wishes to secure obligations (and possible repayment) in the event of a default by the recipient charity of the conditions attached to the grant. The standard security will be taken – as with any other standard security – over the recipient charity’s heritable property or its leasehold interest in a property.

As part of the standard security process, the recipient charity’s solicitor will usually be asked to complete a certificate of title which will be passed to the solicitor acting for the grant-maker. The purpose of the certificate of title is twofold. First, it establishes whether or not the recipient charity can grant a valid standard security over its property. Secondly, it identifies any title issues which may prevent the project being delivered now or in the future.

While a grant-maker will often take a pragmatic view in connection with some of the disclosures made in a certificate of title, there are occasions where remedial conveyancing is required to correct anomalies in the title or to ensure that any fundamental difficulties are removed at the outset. It is in the interest of the recipient charity to ensure that its solicitor completes the certificate of title as early as possible in the process, so that any title issues which may prevent the fulfilment of any grant obligations can be identified and addressed in plenty of time. Unfortunately, it is often the case that the certificate of title and standard security are not given proper consideration by the charity until there is a need for funds to be released. Solicitors should not forget that in granting a certificate of title they may be providing warranties for which they themselves will ultimately be responsible.

Once the certificate of title and standard security have been signed and delivered, the grant-maker will be advised by its solicitors that grant funds can be released. A number of grant-makers have a weekly payment run and grant funds will not necessarily be released on the same day as the signed documentation is delivered. It is worth bearing this in mind if the recipient charity has a payment deadline to meet, either because it requires funding for an outward payment or to demonstrate to third party grant-makers that there is matched funding already banked for a charitable project. Planning in advance is essential if there is any question of a tight deadline for the receipt of a promised grant.

Leasehold issues

Problems are more likely to arise if a standard security is to be granted over a leasehold interest. Contractual grant conditions can contradict the required length of a lease under property law.

If a standard security is required, the lease has to be registrable, which means that it must be for a period exceeding 20 years. The grant-maker, however, does not always take account of this legal requirement when stating the “required” length of the lease in the body of the grant contract. That contract may provide that a term of less than 20 years is sufficient. But if a standard security is required, notwithstanding that a shorter term may be stated in the grant contract, the lease term must nevertheless be of at least 20 years and a day in duration.

A grant-maker will typically also require confirmation that the lease does not contain a break clause which would allow the landlord or tenant to terminate the lease prior to the end of the grant contract – a further point with which some care must be taken and which should be checked at an early stage in the process overall.

The grant-maker will wish to ensure that the lease can be assigned to another organisation with similar aims and objectives as the recipient charity so that a project is capable of being continued by an alternative, but similar, organisation if necessary. It is important that the recipient charity’s lease, therefore, includes a right of assignation and, where the consent of the landlord is required to an assignation, consent should not be unreasonably withheld or delayed and should at least be subject to no unreasonable conditions.

It goes without saying that the use clause in the lease must permit the activities which will be carried out under the project and the lease should not incorporate onerous rent review provisions, which would result in the recipient charity facing an unaffordable increase in rent which could jeopardise the whole project at a later stage.

Looking a little closer

Another problem which often comes to light in the certificate of title is the ability of the recipient charity to grant the standard security. The recipient charity must make sure that its constitution gives it the power to grant a security. If the recipient charity is a trust, it is important to check whether or not the current trustees are infeft in the property over which security will be granted. If a deduction of title clause is required, the recipient charity may have to gather together deeds of assumption and conveyance and/or trail through trustees’ minutes for evidence of an intention to take on (or record the resignation of) trustees.

A more fundamental point may be a question mark over the recipient’s charitable status and clarity about the legal entity which will contract with the grant-maker. If a grant has been applied for by a working party with the intention of creating a charity subsequently in order to receive the grant, then drafting a constitution and having it cleared by the Office of the Scottish Charity Regulator and HM Revenue & Customs will be critical prerequisites and could be the most time consuming part of the process. If paperwork cannot be found, a title indemnity policy may be required to remedy flaws in title, but such a policy will not cure a lack of charitable status.

Where a solicitor acts for a charity on a pro bono basis, it is understandable that the draft certificate of title and standard security can struggle to make it to the top of an in-tray – fee-paying clients may automatically be given priority.

If a problem does arise and it is only spotted late in the day, this can lead to serious delay in securing the release of grant funds and may put a charitable project in jeopardy.

There is no question that pro bono advice can be a useful and valuable part of any solicitor’s practice – even if the benefits are not directly measurable in financial terms. But the temptation to provide pro bono advice to a charity which is about to receive a large grant may be a misplaced act of philanthropy. Not only can it result in a more complex and time-consuming transaction than had been anticipated at the outset, the solicitor is at risk of providing a disservice both to the non-paying client and himself or herself.

What is intended to be a well meaning act by a solicitor can create an undesired end result – all the more so if the solicitor does not possess the requisite skill and experience to take on all aspects of the job in hand. Where grant obligations and standard securities come together, extending a charity a favour by providing some free advice could be an offer you later regret.

  • Gavin McEwan is a partner and deputy head of the Charities Legal Team at Turcan Connell. Emma Ledsom is an associate in Land and Property at Turcan Connell.

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