OG 546 Restrictions on Mortgages and Other Borrowing

Last reviewed:
12 December 2014
Last updated:
14 July 2016

Policy Statement/Overview

The reasons why charities borrow money can be many and varied but usually fall into two groups, ie, for charitable purposes or for investment. In most cases trustees have powers to borrow without our authorisation and we will not usually get involved in authorising borrowing by charities. Circumstances that give rise to the need for our authorisation are very limited. 

Trustees must not charge charity property to secure borrowing without compliance with section 124 of the Charities Act. These restrictions are in place to ensure that trustees act prudently when dealing with the charity's assets and limits the risk to charity property when making decisions to enter into borrowing. This is emphasised in our external guidance CC3 The Essential Trustee: what you need to know, what you need to do. Charges over charity property usually take the form of a mortgage but can also include grants or more complex arrangements such as indemnities, guarantees or deferred considerations. It is usually where trustees have problems in complying with section 124 that they may seek our help.

Not all borrowing by charities is secured but trustees are still required to act properly and lawfully in carrying out their duties with regard to unsecured borrowing. The duty to conserve the charity's property and quality of decision making is the same whether or not the borrowing is secured.

Where trustees act recklessly or unlawfully we have authority to seek further information and use our regulatory powers as appropriate. 

This guidance sets out the legal basis for trustee borrowing powers and the requirements of section 124 where a charge is made over charity property. Because our involvement with borrowing cases is generally limited this guidance seeks to highlight the more difficult types of arrangements that involve charging of charity land on which we may be asked to comment or take regulatory action where we are alerted to difficulties that have been encountered.

Summary of the guidance

The chart at section C1 provides an overview of the legal borrowing powers and the purposes for which borrowing can be undertaken. This is looked at in terms of risk and where our regulatory concerns may lie. Section E1 considers the legal position in more detail.

The table at section B1 sets out the basic principles and what, in a charity's governing document, might indicate borrowing powers. Section B2 looks at the requirements for trustees in protecting charity property when charging it as security for borrowing. Section E3 gives more detail about the legal requirements for charity trustees.

Section B2.2 looks at different types of mortgage or borrowing arrangements.

Section B3 considers the circumstances in which we might be asked to give authority to borrowing and charging of charity property and the approach we need to take in different circumstances.

Section B4 sets out circumstances where we may have a regulatory interest because of the nature of the transactions that trustees have undertaken.

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Casework Guidance

B1 Overview of borrowing powers and protection for charging charity property 

Charities may need to borrow money or enter into financial obligations to purchase land and buildings and maintain charity property as part of a charity's wider remit for pursuing its objects. They may also borrow money to make investments and thereby create income for the charity - see chart C1 and section E1 which give more detail on the legal basis of borrowing powers. Our casework interest in borrowing is usually where a charity wants to create a charge over charity land to secure the loan but they are unable to comply with legal requirements to do this. The legal power to borrow applies also to unsecured loans as well as those where a charge is raised.

Before trustees can grant a charge over charity land as security for a loan they must have:

  • a power to borrow 

Before trustees can charge land as security for grant funding or the performance of other obligations they must have:

  • a power to accept a grant upon conditions or incur some other obligation and charge their property by way of security  

Charity trustees may get their power to borrow, accept grants and incur other obligations from the charity's governing document and/ or by law.

In many cases these powers are implicit in the governing document. However, in other cases the governing document may set out a specific prohibition on borrowing. Such a prohibition may, depending on its terms, means that the charity would not be able to rely on a statutory power to borrow and would then need to take action to alter the governing document before they would be able to borrow - see section B3.

In the absence of explicit powers to borrow or where no prohibition on borrowing exists our view is that trustees are able to use the powers contained in TLAT 1996 and the Trustee Act 2000 to provide power to borrow - see section E1.  

Where charities grant a charge over charity land they need to comply with section 124 of the Charities Act (measures to protect charity property) before the borrowing can go ahead. Where terms for charging property are renegotiated and a new contract made the trustees will need to seek further advice in line with section 124(7).

The table below gives an overview, setting out:

  • from where the trustees may get their legal powers to borrow 
  • what wording may be found in a governing document to confirm those powers
  • the purpose of section 124 and the circumstances in which it does or does not apply

Incorporated charity Unincorporated Association Charitable Trust CIO (Foundation or Association)
The Law Companies Act 2006

Trusts of Land and Appointment of Trustees Act 1996  (TLAT)


Trustee Act 2000

Trusts of Land and Appointment of Trustees Act 1996 (TLAT)


Trustee Act 2000

Charities Act 2011
Governing Document Articles of Association Constitution Trust Deed

CIO Model

(Association or Foundation)

What the GD is likely to say "The directors shall manage the business of the charity and may exercise all the powers of the charity unless they are subject to any restrictions imposed by the Companies Acts, the articles or any special resolution." "To borrow money and to charge the whole or any part of the property belonging to the charity as security for repayment of the money borrowed. The trustees must comply as appropriate with section 124 - 126 of the Charities Act 2011 if they intend to mortgage land." "To borrow money and to charge the whole or any part of the property belonging to the charity as security for repayment of the money borrowed. The trustees must comply as appropriate with section 124 - 126 of the Charities Act 2011 if they intend to mortgage land." "To borrow money and to charge the whole or any part of the property belonging to the charity as security for repayment of the money borrowed. The CIO must comply as appropriate with sections 124 and 125 of the Charities Act 2011 if it wishes to mortgage land."
What s.124 does

Section 124 of the Charities Act provides further protection where charity land is used as security for the borrowing but in itself does not give a power to borrow. 

Any  charity (except for those highlighted below) must get permission of the court or Charity Commission to secure borrowing by mortgage of charity land UNLESS it can and has complied with the provisions of section 124. Those provisions are explained more fully at section B2.1 below and section E3. They must ensure that proper advice is taken in written format and that the loan is reasonable in terms of what it is for, the terms of the loan offer itself (proposed interest rate to be charged etc) and in terms of the charity's ability to repay on those proposed terms.

When s.124 does not apply                 

Section 124 may not apply because

  • of statutory reasons such as those applying to a disposal of land under section 117 (3)(a) or (b), eg charities which are subject to Universities and College Estates Act, United Reformed Church Acts, the Homes and Communities Agency regime

The charities that fall outside of the section 124 provisions because of statutory reasons are:

  • exempt charities

and those having a general or express provision to mortgage charity land given by

  • an Act of Parliament
  • a Statutory Instrument
  • a legally established Scheme

These exclusions are covered further in section E2.1 of this guidance.

Section 124 will not apply where the borrowing is unsecured. Even where borrowing falls outside of section 124 we expect trustees to conform to the principles and duties of good decision making, this includes appropriate professional advice, in entering into any form of borrowing. Part of this process for trustees will be considering any legal obligations that arise from such an arrangement. 

Our assessment of risk for unsecured borrowing will depend upon the purposes for borrowing and the type of arrangement entered into - see Chart C1 and the table at section B4.1. Often, we will not know about such cases unless the charity encounters difficulties and we will need to consider the action taken by the trustees in entering into the borrowing arrangement to determine any further regulatory action we take. Even though section 124 only applies to charging land its provisions may provide a sound framework regarding certain matters to be considered by the charity in undertaking the borrowing in the first place.

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B2 Security for borrowing and section 124

B2.1 The protective nature of section 124

Section 124 sets out measures to be undertaken by trustees when charging charity land to secure borrowing or as a guarantee for other obligations. Those measures ensure that decisions to charge the land are properly taken.

Where it applies, section 124 provides that any mortgage of land held by or in trust for a charity requires an Order of the court or the Commission, unless:

  • the mortgage is by way of security for the repayment of a loan or grant or for the discharge of other proposed obligations


  • the trustees, before executing the mortgage, have obtained and considered proper written advice as set out in section 124(3)&(4)  


  • the mortgage is excluded from the provisions of section 124 by section 124(9) - restrictions on dispositions of land 

The provisions of section 124 are set out in full at E3.2 to E3.6.

In practice, this means that in most cases trustees will be able to proceed with mortgage transactions without the need to come to us or the court because they will be able to comply with the requirements of section 124.

Under section 125 of the Act there are particular statements and certifications required in documents where charity land is mortgaged; this section applies also to exempt and excepted charities. Trustees will need to take their own advice on the wording which is applicable in their individual case, however, the prescribed forms of statement or certification can be found in the Land Registry Practice Guide 14 which can be found at the www.gov.uk website.


B2.2 Types of mortgages and charges 

Charities borrow or enter into agreements for charging charity property for many different reasons. Borrowing may not always be about land or buildings; charities may also borrow money to fund new IT systems, purchase medical equipment or be involved in less traditional lending such as social return. They may also make agreements to retain an interest in charity land that they have sold.

This section looks at the types of transaction where the trustees will need to comply with the requirements of section 124. We might also get enquiries about types of transactions and whether they need our authorisation - generally they won't but see section B3.

A charge on the property may be achieved by a conventional type mortgage, these come in different forms and can comprise:

  • a repayment mortgage - where both the capital element and interest on that capital element are repaid together within a defined period
  • an endowment mortgage or interest only mortgage - where there is a capital element and interest on that capital element, with the interest being repaid within a defined period whilst an endowment policy is purchased alongside (or Individual Saving Account (ISA) provision is made) which is intended to provide the capital repayment at the end of the term  
  • mortgages without interest (usually for religious reasons) - consists of a capital element only which is repaid over a defined period 

Mortgages are used regularly where charities borrow money to buy new property and also where existing land held by a charity is charged as security for money the charity wishes to borrow. Where interest is charged it is considered as an integral part of the arrangement and does not require any separate consideration or authorisation.

Some mortgage arrangements allow for additional lending at a future point as needed. Again, this is considered as part of that arrangement and does not require separate consideration or authorisation, providing that the trustees have followed section 124(7).  

Overdrafts where charity property is charged by way of security will also fall under section 124. An overdraft may be by single advance or by a series of advances, which may also be specified or fluctuating amounts. 

Less conventional cases involving charging charity land as security may include:

  • by way of indemnity or guarantee - often arising as part of a property development scheme where a charge is given over the land to ensure assets are available to cover the costs of the development and by this means ensure that it can be carried through to completion and all obligations under the contract fulfilled. An example of this may be where a developer is contracted to build a series of housing blocks and takes a charge over the houses until various phases are completed (and the "stage payments" for the relevant phase triggered) or, alternatively, completed and sold and the building costs recouped out of the proceeds of sale of the individual units. In other cases this may involve "stage payments" and partial releases of the charges at significant points in the development. By having a charge over the land the developer would be able to take possession of land and buildings and sell them in order to recover the costs of the work undertaken in the event of the charity being unable to fulfil its part of the development contract (usually to pay the contractor as and when the relevant payments fell due). Significant points might include:
    • the granting of planning permission
    • the granting of the certificate of practical completion of building works (or relevant phase of it)
    • the granting of an occupation lease
    • the public adoption of roads or sewers by the local authority or relevant utility provider
  • as security for deferred consideration or overage payments - this refers to situations where there is potential additional value in a property which is not realised or capable of being realised at the time the sale is completed and the charity retains an interest in the property. Whilst this is not a conventional borrowing model such arrangements might allow others to have access to charity land without the full cost of it being paid over (see the deferred consideration example below). Reasons for this type of arrangements may be where a charity's land is subject to:
      • a restrictive covenant against development
      • limitations on its use 
      • is without planning consent but has potential to obtain it for development of the land 

The lifting of such restrictions or obtaining planning permission might improve the value of the land substantially. In such cases it is common for the charity to sell the land but secure a charge over it (for a specified period). Such a charge will often be for a percentage of the uplift value of the land (ie a percentage of the difference in value of the land with planning permission or relevant restriction or encumbrance and the value of the land without it). This type of arrangement is sometimes known as 'overage'.

Another example of the use of deferred consideration may be in the case of a joint venture development. The purpose of this is similar to the indemnity/ guarantee situation above but with the charity retaining the charge on the land because the charity developer does not have the money to pay the full cost of the development. The developer receives payment of the element of deferred consideration (and releases the charge it has over the land) as the land is developed and properties sold. In these cases it is about the allocation of risks, it may be that the developer would not have the resource to purchase the land outright and develop it alone and/ or the charity does not either. The risk of allowing the land to be developed without receiving full payment upfront or conversely of developing it without the comfort of knowing full payment for the development of it will be received on completion of the works is mitigated by the charge in the relevant party's favour. The complexity of these arrangements must be properly thought through and advice taken by the trustees, especially as trustees may be deemed to be negligent where they do not properly protect charity assets by failing to recognise the potential for uplift in the value of land being sold without securing such potential overage payments.  

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B2.3 Unsecured loans and trustee indemnity

We recognise that not all loans will be secured against charity property. This can raise questions about what happens if the charity defaults on its repayments and who is held responsible.

In cases where the charity is unincorporated the loans will have been taken out in the names of trustees on behalf of the charity and the lender is reliant on a personal covenant with those trustees to make good the repayment. However, trustees who borrow funds to apply for the purposes of the charity will expect to be indemnified out of the charity's assets rather than having to pay money back personally. Such a right of indemnity is secured  by an equitable charge over the property of the charity. The charge does not depend for its validity on compliance with section 124 of the Charities Act. However, that right of indemnity exists only if the trustees have, in incurring the loan, and when using the monies borrowed, been acting properly in the administration of the charity.

If the charity is incorporated then the unsecured loan will be repayable under the corporate covenant. In an insolvency situation the loan will have its appropriate priority in accordance with insolvency rules. 

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B3 When authorisation may be needed and our approach 

B3.1 Circumstances where our action is required

We expect in most cases, where charity land is subject to a charge, that the charity will not need to come to us for an Order to authorise that charge. Our expectations extend also to trustee management of conflicts where there are loans from connected persons - unlike section 117, section 124 does not refer to connected persons, nevertheless loans from such persons still involve a conflict of interest which needs to be addressed and managed in line with our guidance - Conflicts of Interest: a guide for charity trustees (legal underpin).

The table below looks at circumstances when we would be called to make an Order and sets out our approach in such cases.

Circumstances Approach
A governing document that requires consent of the court to borrow and charge charity land as security (see E2)

We can authorise the transaction under section 124(1) of the Charities Act but will use the principles contained in section 124 when considering whether to give our consent. 

The sanction of the court or other regulator is required because of legislation related to the type of charity.

We cannot authorise the transaction as we have no jurisdiction and the applicant should be told to seek consent from the relevant body.
A governing document (including a Commission Scheme) of a charity which is not a company or body corporate which expressly prohibits the trustees from borrowing and charging charity property as security. 

Where there is a power to amend in the governing document the trustees should use this to remove the prohibition.

Where there is no power of amendment the trustees should use section 280 of the Charities Act to provide a borrowing clause.

No amendment can be made where that amendment interferes with charitable status, the charity's dissolution clause or confers a benefit to the trustees, which is highly unlikely in these circumstances.   

A charitable company has articles that expressly prohibit borrowing and charging charity property as security.

The trustees should use section 198 of the Charities Act to amend the articles. Providing the amendments have no impact on charitable status or the dissolution clause and do not confer benefit on the trustees there will be no need for our regulated consent - see OG518 B2.

If the governing document requires that no amendment can be made without our permission we should ask the trustees to provide a special resolution enabling them to seek our consent as in OG518 B2.3. The trustees may then go ahead and make a further amendment using section 198. 

A Scheme of the Charity Commission provides that the power to borrow or mortgage charity property is "subject to the authority of a further Order of the Commissioners" or "subject to such consents as are required by law".

Schemes that have these provisions were made prior to the Charities Act 1992. Our view is that these provisions provide the power to enter into a mortgage or charge over charity land but that our authorisation is no longer required. The trustees will be subject to the provisions in section 124 of the Charities Act 2011. This is based on Decisions of the Commissioners Volume 5 pages 21 - 24.

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B3.2 The information we need to make an order under section 124  

If the trustees cannot fulfil the requirements of section 124(3) & (4) and (8) they will need to approach us for an Order. Such circumstances will be rare; it may be that the charity has advice which states that it is not an appropriate action for the charity to enter into. In those circumstances it is highly unlikely that we would authorise something that a charity's own advisers have advised against.

Before we even consider making an Order we must ask the trustees for:

  • the reasons why they cannot comply with the statutory requirements

We should make Orders under section 124(1) only if we are:

  • satisfied that the trustees cannot comply with the statutory requirements and that they are not simply applying for the sake of convenience or comfort rather than going through the section 124(3) and (4) process
  • satisfied that the proposed transaction is one which a reasonable body of trustees might enter into and is in the interests of the charity and the charity is able to comply with the repayments terms or other obligations
  • satisfied that the trustees understand the nature and terms of any loan including associated guarantees, covenant or linked derivative contracts 
  • clear about exactly what the transaction involves (eg how much money is being borrowed, what undertaking is being given, the fact that the trustees understand the different elements of the transaction - this type of information will need to be described in an Order)
  • sure about the purposes of the transaction and how this advances the charity's objects
  • satisfied that any potential conflicts of interest have been recognised and properly managed
  • satisfied that the charity trustees have taken professional advice and have acted upon it or have acted as a reasonable body of trustees might act in departing from it
  • satisfied that the trustees have identified any risks to the charity if they proceed and how these risks have been managed or minimised

In all cases where we consider making an Order we should ask for:

  • a copy of the financial advice received, including information about
    • how reasonable it is for the charity to enter the agreement on the proposed terms
    • the ability of the charity to discharge the obligations imposed by the proposed terms
    • existing borrowing and liabilities and the impact of new borrowing on these
  • copies of all documents and paperwork relating to the loan, grant or other obligation being secured 
  • a copy of advice received by the trustees confirming their ability to enter into the arrangements
  • information about any other sources of finance available but not provided by the loan or grant

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B4 Risks presented by borrowing and mortgaging of charity land

B4.1 Identifying risks

The chart at section C1 highlights how risk changes depending upon borrowing powers used and the extent of legal controls. Unsecured borrowing reduces the extent of legal control over borrowing and heightens the risks involved. We may have an indication that something is wrong but we may not always be aware of circumstances until we have asked for further information. However, certain actions or circumstances may give us an indication that management of the charity and actions of trustees are not always as they should be and that a risk assessment should be carried out.

The table below considers

  • actions of trustees or those involved with a charity that may indicate that something could be wrong
  • the legal issues involved which give us the reason to take regulatory action 
  • various circumstances taken from investigation and regulatory casework examples where intervention has been necessary to protect charity property and the way it is applied for charitable purposes.

 The issues highlighted give us the legal basis for our action in asking for further information and the use of regulatory powers where needed. 

  Actions which may alert us to regulatory risks Possible issues for us Circumstances where remedial action has been required
Source or destination of a loan

Loan from a charity to a charitable subsidiary company or private company within a company group of which the charity is part 

Loan to a charity from a charitable subsidiary company or private company within a company group of which the charity is part

Personal loan from a trustee to a charity

Loans to a trustee from a charity or to an entity in which the trustees and/ or related parties have an interest

Loans to employees of a charity

Loans from investors in schemes whereby the money is used to set up a charity

Unusual, repetitive and/ or unexplained transactions in and out of a charity's accounts which may, or may not, be made to look like loans and repayments

Foreign currency transactions that would not normally be expected for the type of charity.

Unexplained short-term loans or loans that don't fit with a charity's purposes.

Are there unmanaged conflicts?

Has the viability of the undertaking in the subsidiary  or private company been properly assessed?

Have monies loaned been secured?

Should professional advice have been taken?

Have legal financial duties been carried out? 

Has there been a breach of trust?

Has there been a breach of tax law such as tainted donations?

Is there evidence of poor governance particularly in trustee decision making?

Could the charity be a vehicle for money laundering?


Complex arrangements for funds being passed between charitable companies and charities within a group of companies that included a charity or charities. Such arrangements gave rise to conflict of interest where private reward exceeded benefit to the charity. Proper policies and procedures not in place to manage any potential conflict. Decisions were not impersonal, taken rationally, based on independent advice or in line with the law or our guidance  

Informality concerning personal loans from a trustee to a charity which lacked proper agreement, documentation and enforcement. Trustees lending money to the charity whilst continuing to regard those funds as their own personal property believing that the loan gave them greater rights than other trustees in the way that the money was spent.

Charity money used to support a trustee or a concern in which the trustee had a financial interest giving rise to conflicts of interests and creating inconsistencies with the duties required for a person not to benefit from their position as trustee.

Charity money provided as a loan, at preferential rates, to the CEO of a charity, where that person defaulted on the loan.

Setting up a charity with complex arrangements relating to donation of shares involving a claim to Gift Aid and where the trustees were outside our jurisdiction.  

Numerous cases show lack of proper assessment of viability of an undertaking by the charity in a subsidiary or private company and are unable to provide audit trails for decision making when taking out and receiving loans or show from where a loan has been received.

How the money will be used

Change of arrangements to facilitate early repayment of a loan as the money is needed by a trustee.

Charity provides a loan or grant to be used to assist a failing venture or business

Loan to be used to buy property or used for other purposes that do not appear to be for the purposes of the charity and seem strange investments.


Are there unmanaged conflicts - have individuals benefited at the expense of the charity?

Should professional advice have been taken?

Have legal financial duties been carried out? 

Has there been a breach of trust?

Has there been a breach of tax law?

Is criminality involved?

A trustee allowed personal business interest to interfere with the proper running of the charity by using its funds to support that interest and cause a shortfall in charity funds. Other trustees were unaware of the movement of funds.

Charitable funds were used for a non charitable purpose in supporting a failing business that had once supported the charity. Trustees were swayed into making improper decisions because of misguided loyalties.

Trustees took out loans to invest in empty property which belonged to other trustees as part of a property syndicate. Those trustees were trying to avoid paying business rates by using the charity to take a lease over the premises.


Financial management

Loans taken out but without proper concern given to the ability to repay them.

Money borrowed without adequate security or too many assets used as security for borrowing.

Charities becoming insolvent

Dramatic deviations in values of charitable assets between accounting years without apparent good reason.

Dramatic drop in income between accounting years without apparent good reason. 

Poor financial management shown by failure to submit accounts and Annual Return.

Failure to assess the value of charitable assets on a regular basis.

Numerous loans taken out by the charity indicating a lack of control over charity borrowing.  

Should professional advice have been taken?

Have legal financial duties been carried out? 

Has there been a breach of trust?

Do loan arrangements indicate poor decision making and lack of proper governance?

Has a charity borrowed more than its assets are worth?

Have individuals been allowed to benefit at the expense of the charity?

We have found a number of charities that have haphazard financial management and have failed to balance their portfolio of investments. Some have all or a majority of assets that are subject to mortgages. This can create problems where the value of those assets drop or charitable income drops - charity debt is more than the value of the property owned and repayment of mortgages can become a problem without sufficient income.

Charities have been left at risk where trustees have failed to take proper action in accordance with section 124 when purchasing property and taking out a charge on property to do so. Failure to take advice over loans can lead to a charity being subject to less favourable terms than might be achieved from another lender. 

Charities where insolvency has become an issue have found themselves subject to enforcement proceedings against trustees or the charitable company. Charitable companies have also been struck off at Companies House.

Repeated failure to tackle financial issues where advice had been given by professionals and us, as the regulator, led to serious financial problems for the charity and questions of conflict of interests with regard to the trustees.


B4.2 Regulatory action when potential risks are identified

The table above provides a starting point for considering whether issues brought to our attention should be looked at in a regulatory context. Any issues will need to be assessed against the Risk Framework and in most cases more information will be needed before deciding on a course of action. OG117-6 sets out when and how we use our information gathering powers.

When assessing issues about loans and borrowing we expect to see a clear audit trail for decision making and evidence to show that decisions can be justified and were made in accordance with our decision making guidance available on our website.


lawyer_refer      Legal and accountancy advice should be taken where there is uncertainty about the nature of transactions and their legal validity. 


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C1 Borrowing Overview Chart and potential for risk

The chart below gives an overview of borrowing powers showing from where power is derived for different purposes. It also considers where the measures under section 124 apply; these measures help trustees to make sound decisions on borrowing and the charging of charity property.

Our concerns in terms of risk will veer towards unsecured borrowing where the controls are not so obvious as those contained in section 124 and also where the purpose(s) of borrowing may be more wide-ranging than those set out under TLAT. 

  • Secured borrowing for the purchase of land and buildings etc for the purposes of the charity is viewed as a lower risk than unsecured borrowing for the same purposes - section 124 will not apply for unsecured borrowing.
  • Secured borrowing for investment or other purposes create a greater risk because the purpose(s) are more wide-ranging. However, this is mitigated by compliance with section 124.
  • Unsecured borrowing for more wide-ranging purposes may create greater risk as the constraints of section 124 do not apply.





























The risks represented here may be increased or decreased depending on other inherent risk factors based on the nature of individual charities.

A decision to borrow on an unsecured basis remains a trustee decision subject to the usual trustee duties such as acting solely in the interests of the charity.

See section B4 which looks in more detail at risks associated with certain borrowing transactions.

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Legal / Policy / Accountancy Framework

E1 The legal basis for charity borrowing

E1.1 The situation prior to January 1997

The statutory provisions conferring a power to borrow were, prior to January 1997, found at section 29 of the Settled Land Act 1925. Trustees were given powers of a tenant for life by section 71 of that Act. This allowed a tenant for life to raise money by mortgage for the purposes set out in section 71(1). These powers did not include the purchase of property.


E1.2 The situation after January 1997

From 1 January 1997 section 29 of the Settled Land Act 1925 was replaced by the Trusts of Land and Appointment of Trustees Act 1996 (TLAT). TLAT radically altered the statutory basis upon which charity land is acquired, disposed of, and managed. Almost all land which is held on charitable, ecclesiastical or public trusts became subject to a "trust of land" as a result of TLAT. The Trustee Act 2000 and other statutes also have relevance as they define powers and duties in relation to a trust of land and apply to most charities other than companies - see OG86 B2.

The intention of TLAT 1996 is that charity trustees' wide powers of management give them a power to borrow for any purpose relating to:

  • the acquisition of land and buildings
  • the repair, maintenance and improvement of their land and buildings


  • to charge the land as security for the borrowing of funds for these purposes

This replaced the more limited powers in the Settled Land Act. TLAT does not expressly refer to this power but an absolute owner has power to borrow on the security of his property. This is the view we take should lenders raise the question of whether a charity has a power to borrow.


E1.3 Concerns of lenders

Some lenders may have concerns about whether the charity has a power to borrow (with or without security of a charge over charity land), usually because they do not accept our view of the statutory powers. The lender may try to influence the trustees to apply for an Order from us to safeguard its position, despite the trustees having taken all necessary advice under section 124. We will not make 'comfort' Orders in these cases and will decline any request where there are no serious issues that would justify the exercise of our powers - see section B3.1 which sets out our action in different types of circumstances.

This policy relies on section 6(1) of TLAT, which states that for the purpose of exercising their functions as trustees:

"the trustees of land have, in relation to the land subject to the trust, all the powers of an absolute owner"

The expression "in relation to land" has in the similar context of section 28 of the Law of Property Act 1925, been the subject of judicial comment on a number of occasions. These comments make it clear that the words "in relation to land" are not confined to powers of disposal. They extend to all actions which trustees may take in the management of land, including the raising and expenditure of money.

In our view the powers of an absolute owner clearly include a power to borrow money and/ or to charge the land, and if the power is exercisable in relation to land comprised in the trust then the power to borrow and/ or charge the land falls within the ambit of section 6(1) of TLAT 1996.

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E1.4 An Implied power to borrow for carrying out trade

A charity which carries out its charitable purposes by the exercise of a trade (eg a private hospital or an independent school) will, if its governing document contains no express power to borrow, have an implied power to borrow for the purpose of its trade. Otherwise a power to borrow can only be implied where there is a need to incur emergency expenditure. It would have to be shown that the need was both necessary and could not reasonably be financed without recourse to borrowing. These principles emerge from the decision of the court in Mansell v Viscount Cobham (1905) 1 Ch 568.


E1.5 Whether deposit of title deeds create an equitable mortgage

Before 1989 it was considered that the deposit of title deeds created an equitable mortgage over a charity's land (ie no written charge is entered into as security: the lender merely holds the deeds). However, since the Law of Property (Miscellaneous Provisions) Act 1989 came into effect it is no longer possible to create an equitable mortgage of land by deposit of the title deeds alone - see United Bank of Kuwait Plc v Sahib (1992) 2 WLR 94. To create an equitable mortgage or charge using the title deeds, they must be accompanied by a written memorandum of agreement between the borrower and lender and section 124 of the Act will apply to the creation of such a charge or mortgage. 

If there is no written memorandum accompanying the deposit of title deeds the mortgage or change will be invalid and the borrowing will be unsecured.

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E2 When authority of the court is needed

If the sanction of the court is required to the grant of a charge, and that sanction is required by something which is in the trusts of the charity, then we can authorise the grant of the charge, on the court's behalf, under section 105(7) of the Charities Act. We would normally require compliance with the provisions of section 124(1) and (2) in providing authority.

If the sanction of the court is required to the grant of a charge, and that sanction is required by general legislation, then the sanction of the court is necessary because it is not then required by "the trusts of the charity" and section 105 cannot apply. 

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E3 Section 124 of Charities Act 2011 

E3.1 Where section 124 does not apply

Section 124 of the Charities Act provides protection for property which is charged to secure borrowing requirements. However, there are charities to which these requirements do not apply.

None of the provisions of section 124 apply to:

  • exempt charities

Also, certain mortgages are excluded from the provisions of section 124 by section 124(9) which provides that nothing in that section applies to mortgages of land for which a general or special authority is given as set out in section 117(3)(a) of the Act or for which the Secretary of State's consent is required as set out in section 117(3)(b).

In executing such mortgages trustees will not need to follow any of the requirements of section 124, but the duty imposed by trust law to secure the best terms reasonably obtainable for the charity still applies.

Section 117(3) (which also applies to sales, leases and other disposals of land) provides that any mortgage for which general or special authority is expressly given in:

  • in an Act of Parliament
  • a statutory instrument
  • a legally established Scheme

is not subject to the requirements of section 124 unless the authority is subject to the making of an Order of the Court.

This means that where trustees rely on an authority within the provisions of section 117(3), which is also subject to an Order of the Court (see below), section 124 will apply to the grant of any charge.

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E3.2 Exercising powers under sections 124(1) and (2)  

Section 124(1) of the Act provides that subject to section 124(2) no mortgage of land held by or in trust for a charity shall be granted without an Order of the court or of the Commission.

Section 124(2) allows that section 124(1) shall not apply to a mortgage of any such land where the trustees have, before executing the mortgage:

  • obtained and considered proper advice, given to them in writing
    • on the matters referred to in section 124(3) - in the case of a loan or grant
    • on the matters referred to in section 124(4) - in the case of any other obligation

If the trustees do not or cannot comply with these requirements then an Order will be needed or, depending on circumstances, an alternative solution allowing them to act - see section B3.1.

For us to be able to make an Order to authorise borrowing we would need to consider the same information that is required of the trustees under section 124.

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E3.3 Matters on which advice is needed

Proper advice as required under section 124(2) includes the matters mentioned in section 124(3) where the mortgage is to secure repayment of a proposed loan or a grant. These are whether:

  • the loan or grant is necessary thereby enabling the trustees to carry out the action for which they are seeking the loan or grant - section 124(3)(a)
  • the terms of the proposed loan or grant are reasonable having regard to the charity's status as the prospective recipient of the loan or grant - section 124(3)(b)
  • the charity can repay the proposed loan or grant on the proposed terms - section 124(3)(c)

The "status of the charity as the prospective recipient of the loan or grant" refers to the charity's creditworthiness and the risk that the charity may present to the lender or grant giver. Where appropriate, favourable terms should be obtained usually where the charity represents a low risk to the lender or grant giver. We would expect this to be considered as part of the proper advice given. The charity should be able to make repayments without prejudicing its other activities.

Where the mortgage is to secure the discharge of any other proposed obligation, the advice required is set out in section 124(4) and is whether:

  • it is reasonable for the charity trustees to undertake to discharge the obligation having regard to the charity's purposes

In effect it means whether it would be a fitting use of charity funds.

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E3.4 The meaning of "proper advice"  and credentials of the adviser

"Proper advice" is defined in section 124(8) of the Act as the advice of a person:

  • whom the trustees reasonably believe to be qualified by his or her ability in, and practical experience of, financial matters
  • who has no financial interest in relation to the loan, grant or other transaction in connection with which his or her advice is given

This section specifically permits a suitably qualified employee of the charity to give proper advice.  

In deciding whether a particular person has the ability and experience to advise them under section 124(8)(a), the trustees must consider the nature and complexity of the transaction for which advice is being sought. We cannot consider the credentials of individual advisers on behalf of the trustees. This is a matter falling within the trustees' discretion. If called upon to justify their choice, they must be able to demonstrate proper consideration of their choice.

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E3.5 Person giving advice having a financial interest in the loan

For the purposes of section 124(8)(b) a person providing advice may be said to have a financial interest in relation to a loan, grant or other transaction, where:

  • there is a possibility that he or she will enjoy a material financial gain as a direct consequence of the charity taking or incurring (or not taking or incurring) the loan, grant or other obligation


  • there is a possibility that he or she avoids making a material financial loss as a direct consequence of the charity taking or incurring (or not taking or incurring) the loan, grant or other obligation

It will not therefore be appropriate for the trustees to take advice from someone who has a personal interest in the proposed transaction. See our web guidance on Conflicts of Interest.

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E3.6 Acting on advice and taking decisions 

Trustees will fail to fulfil the requirements of section 124(8) if they decide to accept the terms of a proposed mortgage without having considered proper advice. They are unlikely to be regarded as having acted properly if they act against or ignore the advice of someone more experienced  without good reason. They may also find themselves subject to regulatory scrutiny if their actions result in losses to the charity.

Guidance for trustees "It's your decision: charity trustees", is available on our website. It sets out the standards required for decision making expected of charity trustees and includes advice on recording decisions. 

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F1 Must we give permission to charities to take out a loan?

In most cases we do not give authority for loans, at times we will give authority for amendments to governing documents, which in turn will allow trustees to undertake borrowing. Section B3.1 looks at different circumstances and the approach we take.

F2 From where do charities get their power to borrow?

Power to borrow comes from the law and a charity's governing document. Section B1 highlights which law applies to which type of charity and what we might expect a governing document to state on borrowing powers.

F3 What does section 124 of the Charities Act 2011 do?

This section of the Act sets out what charity trustees must do when using charity property to secure borrowing on the charity's behalf. It provides protection for the charity trustees and the property that is used as security - See section B2.1, and Sections E3.2 to E3.6.

F4 What information do we need to give authority to the charging of charity property under section 124 of the Act?

Our requirements are set out at section B3.2

F4 What does borrowing by a charity look like?

The types of borrowing a charity might engage in are set out at Section B2.2, they range from simple repayment mortgages to complex arrangements involving development projects.

F5 Is there a risk for charities that borrow money?

The majority of charities and their trustees borrow money appropriately, taking sound decisions and following proper legal procedures, such transactions would not usually represent a high risk. Those that do not follow proper legal procedures create greater risks to charitable assets. This is reflected in the Chart C1.

F6 How do we know if borrowing has gone wrong?

We will not always know about borrowing in advance and are usually alerted by complaints or monitoring of accounts and annual reports. The table at section B4.1 sets out a number of issues and circumstances that may give rise to regulatory concerns for us.