Charities warned not to bury their heads in the sand when it comes to property
Your landlord may be the last person you want to speak to if you find your organisation unable to pay the rent on a building. The reality, however, is that they should be the first.
Nothing good ever comes from burying your head in the sand. I was reminded of that recently when asked what my simplest piece of advice was for anyone struggling to make a property payment. My response: don’t blindside your landlord.
Warning them about any predicament - as soon as you realise - is better than simply hoping for the best come payment day or not putting the money through. You’ll undoubtedly get more credit for your honesty than you might realise. You may also be able to come to an understanding.
No-one likes the thought of having to endure payment pains when it comes to the buildings occupied by our third sector organisations, particularly not after the upheaval of the coronavirus pandemic.
Yet there’s no denying the fact that rising costs - coupled with a challenging funding environment - is piling pressure on charities, as they are everyone else. For some, heftier outgoings - whether on energy, staffing or transport - may unfortunately impact on their ability to meet day-to-day costs.
The most recent Scottish Third Sector Tracker found that 93% of organisations surveyed were experiencing rising costs. Almost half (43%) felt this was having a negative impact on their ability to deliver services. A third reported dipping into their financial reserves.
We, of course, know that well-run charities have measures in place to raise financial red flags to avoid unpleasant surprises and so action can be taken.
When it comes to buildings, though, the solutions for cost-cutting are rarely straightforward. But it’s important to stay aware of the steps you could consider to prevent problems from deepening and avoid the most difficult of conversations with your landlord.
The most important thing for any organisation to understand is its tenancy contract. What’s the end date? And when are the break options? That way you know the timescales you’re working to. It is also critical to know how much advance notice has to be given to bring the lease to an end.
While it’s sometimes possible to negotiate with a landlord to exit a lease outwith these two dates, those discussions can often not be without challenges.
If you find yourself in a situation where you have to stay in your current building, but do not need all the space - particularly against the post-Covid backdrop of hybrid working - you could consider sub-letting some of your space.
Many lease agreements allow for this - and it’s a way in which you can use the space you have to earn income while also splitting the running costs.
Collaboration is key in so much of the third sector’s work, why not be in sharing spaces too?
The more extreme measure is to step out of the building entirely, either by transferring the lease to another entity or to sub-let the whole space, if the terms of your lease allow.
For those making the move to a new building, it’s important that you too know the terms of your lease, particularly around service charges and liability for common parts to avoid large and unexpected bills. Are service costs capped? What are your repair obligations should unforeseen costs emerge?
And, generally, have you made sure that, as an organisation, you have claimed all that you are entitled to? Remember that charities using the premises “wholly or mainly for charitable purposes” are entitled to a mandatory 80% rates relief - and that some councils waive their discretionary 20% too. Water rates relief can also be applied for as well.
The good news is that reports suggest wholesale energy prices are falling. Here’s hoping that they are passed on soon. In the meantime though, good housekeeping can help minimise the risk of rental payment pains.
Kenny Gray is a partner in the Commercial Property team at legal firm Lindsays, which works with charities and third sector organisations across Scotland.