Why charities should consider a lease between related entities

Plenty of charities and businesses operate in premises which are owned by a related entity. The importance of having a proper lease in place between those entities is frequently misunderstood.

Often, such tenancy arrangements are informal – the land is owned by one entity and the business is operated by another – but because the same people are in control of both entities, there is no formal agreement in place for the use of the land by the operating entity.

This scenario can prove problematic on many fronts – set out below are some of the reasons why you should consider putting a lease into place between related entities.

Compensation claims

In the recent case of Olde English Tiles Australia Pty Ltd v Transport for New South Wales, land in Annandale, NSW was owned by a family who used it to operate a tile business through a corporate entity. There was no formal lease in place.

The land was compulsorily acquired by the NSW Government and the business entity sought compensation for its business relocation costs. However, as there was no formal lease in place, the NSW Court of Appeal held that the business entity had no “interest” in the land for the purposes of the compulsory acquisition law, and therefore they were not entitled to be compensated for relocation costs.

Risk management

Leases serve an important function of allocating liability for costs and risk. If an accident occurs on the land and a claim is brought for personal injury, a proper lease will go a long way to determining who is responsible for the costs of meeting the claim by addressing matters such as risk and indemnity.

In the absence of a lease, there may also be difficulties with recovering an insurance claim if the building is damaged.

Security of tenure

Things don’t always run smoothly, and if there is a rift between those in control of the land and those who run the charity or business from that land, this can have serious repercussions for the viability of the charity or business, especially if the landowner decides to sell the land. A formal lease will ensure that the charity/business operator has an enforceable right to continue operating from the land in these circumstances.

A lease (with the consent of any mortgagee) will also go a long way in protecting the occupier against the unfortunate circumstance where the bank might need to step in and conduct a mortgagee sale.

Sale of business

If the charity/business is to be sold or otherwise transferred, any knowledgeable buyer will insist on there being a lease in place which entitles the charity or business to use the land it operates on. Having a formal lease in place therefore adds value to the operations.

Land tax

Properties used for charitable purposes can be exempted from land tax upon making application to the State Revenue Office. If there is no lease in place with the charitable entity which occupies the property, it may be difficult to convince the State Revenue Office that the property satisfies the criteria for exemption.

Accounting/tax considerations

A properly drafted lease will clearly set out matters such as what rent is payable, when and how rent will be increased, and who is responsible for outgoings relating to the land.

This makes it much easier to justify payments and allocate liability for these matters when preparing the charity/business accounts, the landowner accounts, and tax reporting. Your accountant and auditor will always prefer you to have some kind of basis (like a signed lease) for setting rent payments at a particular amount.

How we can help

The team at Moores has extensive experience in handling these issues and can help you to quickly and easily get a lease into place between related parties, saving you the kinds of headaches we’ve outlined above.

If any of the above raises concerns for you, please get in touch with us and we’ll help you put into place a quick and effective solution.

Contact us

Please contact us for more detailed and tailored help.

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