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12 August 2020

8: Charities and COVID-19 – accessing cash and unlocking value from real property during the pandemic

The outbreak of COVID-19 has had a devastating effect on the charities sector. Charitable donations – a discretionary spend for most UK households – have taken a significant hit and there is now an acute pressure on cash flow and the day to day financial viability of those charities tasked with looking after the exceptionally vulnerable in the UK, who have been hardest hit.

As we reported early on in lockdown (see our 9 April blog here), trustees can use reserves to help cope with unexpected circumstances such as the current situation and the Charity Commission recognises this in its COVID-19 guidance.

However, trustees must consider their short, medium and longer term priorities to ensure spending the charity’s reserves is the right option for supporting beneficiaries both present and future – and, 5 months into the impact of the epidemic in the UK, charities are well aware that reserves can only tide them over for so long.

Therefore, in discharging their fiduciary duties as charity trustees, the most important thing will be to consider all the options, take appropriate advice, make a careful decision (see the Commission’s guidance, It’s your decision) and to record that decision. Trustees should also be mindful that if they do decide to spend down reserves, then it might be necessary to report this to the Commission as a serious incident, as well as updating their charity’s risk register.

Cash flow has been an increasing focus of the charities sector for several years, with increasing requirements for robust financial management, especially in the wake of high profile insolvencies, such as Kids Company. Therefore, whilst the circumstances in which charities operate have changed considerably these last few months, the essential duties of a charity trustee have not. As such, it is important that charity trustees continue to be mindful of the need to manage their charity’s finances responsibly, acting with reasonable care and skill and taking advice where necessary. Trustees with professional experience or qualifications in managing finances should also be aware of the additional duties (and expectations) on them to act responsibly in respect of financial management.

Making an informed decision will include trustees finding out what external funding opportunities are available when considering moving to spend reserves or liquidate assets (and trustees should be aware of and consider any restrictions on such assets). This will therefore require trustees to consider the amount sought and whether their charity is eligible under any remaining government measures or schemes – see our post here for more details of coronavirus-specific schemes.

Initially in the pandemic, lenders sought to mitigate their risk by only considering lending to existing borrowers (principally those with whom they already had a secured lending relationship). This position has changed as the government and media have exerted pressure on lenders and with the fact there are now over 60 accredited lending institutions providing government-backed lending. Some of these are not your typical high street lenders (see current list here); they are actively looking to grow their retail presence at this time and have more flexible credit profiles.

Greater choice can present charities with opportunities which may not have existed a few months ago, although legal advice should be sought to ensure that the terms of any documentation produced  (i) are generally market standard and (ii) cater for the specifics of lending to a charity. The opportunity to borrow by way of a term loan (a lump sum, repayable over time) or an overdraft (a committed amount which can be drawn and repaid multiple times during a specific period) can give additional flexibility to help manage cash flow, undertake capital expenditure or look to grow a charity’s business. It should be noted, however, that in most instances, security over certain of a charity’s assets will be a condition of a loan being provided.

If trustees are considering some of the options described here, they should be mindful of the requirements of Part 7 of the Charities Act 2011, specifically section 124 which requires trustees of most charities (there are some exceptions) to seek proper advice before entering into any mortgage or charge over real estate. These restrictions are in place to ensure that trustees act prudently when dealing with the charity’s assets and limit the risk to charity property when making decisions to enter into borrowing transactions. (They also apply if the charge is given to secure repayment of a grant). Trustees should also be mindful of any restrictions on assets which may prevent them offering such security and should seek legal advice if in any doubt about this.

It is crucial at this time to maintain good governance, strong leadership and a clear strategy. This will be supported by a charity creating a clear forecast of its cash flow, ensuring that trustees have the information they need to make vitally important decisions (including by way of external advice) and trustees continuing to be mindful of their duties to their beneficiaries and that these duties are applied to the same level as pre-pandemic, albeit in these different circumstances. The Charity Commission’s CC3 guidance, The Essential Trustee, is a useful tool to remind trustees of their responsibilities, including that trustees ensure they act within the powers and requirements of their charity’s governing document in furtherance of their charity’s purposes.

 

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