Ownership and Management Agreements

Ownership and Management Agreements

Both community organisations and Local Authorities involved in library transfers need to consider the most appropriate terms for transferring an interest in the asset. Broadly speaking, there are three options to consider:

Licence
Lease
Freehold
Ownership / Management Agreement
Lease length
Lease cost
Key Question

 

License

This is a permission given by one party to another to enter, use, and occupy property on specified terms. There are often restrictions on an owners ability to give licenses. A license is different to a lease as it gives no interest in the property.

This arrangement may be suitable where the local authority wants to retain ownership of the asset, but transfer management to a community organisation. A licence agreement will restrict a community organisations ability to raise funding to invest in the building, and may be restrictive in terms of what it allows it to do. A licence / management agreement may be appropriate where the building is already fit for purpose, and does not require investment, or where it is desirable to trial community management before proceeding to an asset transfer.

Lease

The written document recording the deal made between the Landlord and the Tenant. This document is what gives the Tenant a legal interest in property.

A long term lease is the most common form of Community Asset Transfer. Depending on the terms, they can give sufficient flexibility to community organisations to manage and invest in the asset, whilst enabling the local authority to maintain a longer term interest in the freehold.

Freehold

The legal term for when the owner has complete and absolute ownership of land, and all buildings on the land subject only to any mortgages, easements, leases etc. revealed by other documents.

Freehold transfers will give the community organisation the freedom to use the asset as appropriate. While local authorities will effectively surrender their interest in the asset, assurances that the asset will continue to be used for community benefit can be provided through ‘asset locks’.

Ownership / Management Agreement

Ownership / Management must be considered from the outset of the project. How a community based organisation is set up and what legal 'vehicle' it operates through will determine its powers of ownership and management in relation to its assets.
In particular:

  • Charitable organisations and Community Interest Companies are regulated by law with regard to the way in which they hold their assets.
  • The 'asset lock' is a provision which ensures that a Community Interest Company / Cooperative and Community Benefit Society holds its assets for the benefit of the community.
  • The way in which the organisation can use the asset may be determined by the powers in its governing document, which may require the asset to be used in a certain way to further its community benefit aims, e.g. the organisation’s governing document needs to include clear powers for the organisation to use its funds to acquire assets including entering into leases / licenses for any premises which are required to enable it to fulfil its community benefit aims. A charitable organisation or a Community Interest Company will also be required to use its assets to directly further its charitable or community benefit aims. If these powers are not there at the outset, an organisation may lose time in that it will need to amend its governing document before it can proceed with the transaction.
  • Charitable organisations and Community Interest Companies are regulated by law with regard to the disposal of their assets.
  • Community Interest Companies can only dispose of their assets to third parties that are not other Community Interest Companies or charities at full market value so that they retain the value of the asset for the benefit of the community. Charitable organisations must also take care that they abide by charity law procedures before disposing of any land or an interest in land which belongs to the charity. The purpose of these procedures is to ensure that the charity receives 'best value' in return. Charitable organisations must also ensure that they check their governing documents first to ensure that they have the relevant powers to dispose of an asset and that the asset is not held subject to any special trusts that preclude its disposal. Legal advice should be obtained if necessary to guide the charity.

Lease length

How long a lease / licence should last depends upon the organisation’s needs and its project / business plan. Before entering into any lease or licence the organisation should prepare a clear business plan for the project, (seeking taxation advice or assistance from accountants if necessary), before entering into any commitment for a lease / licence, because this will determine how long it will need to hold the premises for.

If the organisation may need the premises for a longer period, they should ask the landlord for some flexibility, (e.g. an option to renew their lease or a tenancy with statutory protection to remain in occupation of the premises beyond the term end date). The ability of an organisation to request more flexible arrangements with their landlord will depend on the relative bargaining strength of the parties.

For a very long term project where sufficient up front capital funding can be secured, the organisation may prefer to purchase the freehold of the premises. A funder may refuse to lend on any property interest which is less than a freehold or a long lease.

Some funders will require the organisation to have clear powers to enter into contracts to mortgage its assets as security in return for a loan or grant. Some funders will expect to see a clear power which enables an organisation to borrow money and in particular the ability to accept a 'charge' over its property as security for any loan.

Lease cost

Typically, no price is paid up front for a short term lease, but they will often attract a market rental payment throughout their term. Leases granted for a far longer term, (e.g. for 125 or more years), will often be granted for a purchase price, (known as a premium), which is payable when the lease is taken out and a lower rent being payable throughout the term, i.e.: a nominal annual sum of 1 pound – a 'peppercorn'.

 

Key Questions

Are all stakeholders satisfied that the asset can be secured on the right terms and conditions?

 

 

Saving Dorset's Libraries

Posted by Marcus  |  28th Oct 2011
Two stories of efforts to transform and save community libraries in Dorset. Thanks to our contributors from Lyme Regis Development Trust and Friends of Charnmouth Library.