Sarah Outram, a legal director for law firm, VWV, outlines key considerations when refinancing schools’ property portfolios

Refinancing a property portfolio is a strategic financial exercise that can bring substantial benefits to schools.

We have seen an increase in schools refinancing their portfolios over the past 12 months and, in some cases, making significant savings on repayments.

While interest rates are lower, refinancing can help with improved cash flow, and enhanced funding for capital projects.

However, they require careful analysis and planning to navigate the complexities involved.

This article explores the key issues schools should consider when contemplating the refinancing of their property portfolios alongside the Charities Act 2011 requirements for schools that are charitable in nature.

Legal considerations

Refinancing involves various legal and regulatory aspects.

Schools must ensure compliance with relevant procedures (and Charities Act requirements if applicable). This includes understanding tax implications and any restrictions related to the use of the property.

Given the complexity of refinancing projects, schools should consider engaging other professional advisors at an early stage.

Financial consultants and advisors can provide invaluable assistance in evaluating options, negotiating terms, and ensuring compliance with all legal and regulatory requirements.

Engaging early with solicitors, too, can help navigate these complexities and ensure all legal requirements are met.

Timescales

Depending on how complex the school site is, a charge can take some months to finalise. It is therefore important to plan ahead, particularly if there is a current legal charge with a maturity date.

Having conversations with an existing bank six to 12 months ahead of the proposed completion date is prudent.

Due diligence

The bank will want to conduct due diligence as thoroughly as if it were purchasing the property. This means that it will require an independent survey of the school site and will want to undertake the usual searches including local authority and environmental and it will also require lengthy replies to Commercial Property Standard Enquiries (CPSE) to be provided.

The law firm acting for the school may be also instructed to act for the bank. However, the bank may have its own lawyers it wishes to use. In this case the school will be responsible for paying for the bank’s legal fees.

One of the key early steps is to check whether all of the school’s property is registered at the Land Registry and to note whether any of the freehold titles contain additional restrictions which would need to be considered on completion of a refinancing exercise. This could include consent required from a third party, or add complexity if the school site was held as permanent endowment or specie land.

The more titles a school has, the more complex the process can be and early conversations with the bank regarding the area over which the charge will be required can be helpful.

Looking at the title early also gives the legal advisors the opportunity to make any applications to the Land Registry that may be required to tidy up the registered titles.

At an early stage, it is sensible to start to pull together the regulatory and other paperwork which would need to be disclosed (for instance asbestos reports; planning documentation; fire safety; and details of any construction projects over the past 10 years, along with copies of consents and guarantees which are still valid).

This can be quite time consuming and starting to gather the information at the outset can be helpful to manage workloads of the bursar and estates team through the process.

If a bank has separate lawyers, there are often several sets of additional due diligence questions once the initial disclosures have been made. These aim to assist the lawyers in understanding the site so they are able to confirm that the bank would be able to obtain ‘good and marketable title’ if the school defaulted and the bank needed to repossess the property.

The additional enquiries often relate to third party occupiers, building work or compliance with the statutory regulations (fire safety for example).

Bank documentation

Usually the bank will require a legal charge (or several if there are separate title numbers), a debenture, and may also require guarantees depending on the structure of the school company.

The bank will have its own precedent documentation which cannot be amended save to reflect the corporate entity of the borrower. We typically need to make amendments to add Charities Act clauses.

Following completion of the loan, the bank will require a restriction to be put on the registered title to the property. This means that without the bank’s written consent you are unable to mortgage, sell, licence, lease, or share possession of the property.

The loan will also typically include a number of other requirements on the school including:

• Keeping the property in good repair and condition
• Not making any material alterations or applying for planning consent without the consent of the bank
• Keeping the property insured

Charities Act 2011

When granting security over land, a school, being a charity, must follow the procedures set out in section 124 of the Charities Act 2011 (restrictions on mortgages) in order to avoid the need for Charity Commission consent to the grant of the security.

The charity trustees are required to obtain and consider advice in writing on the following points before entering into a legal mortgage:

1. Whether the new facility is necessary for the purpose for which it is sought
2. Whether the terms of the proposed new facility are reasonable
3. Whether the school is able to repay the loan on the terms proposed

This advice must be from someone reasonably believed by the charity trustees to be qualified by his or her ability in, and practical experience of, financial matters, who has no financial interest in the legal mortgage or any other transaction in connection with it.

If a report is not obtained, the school would need to obtain an order from the Charity Commission to be able to complete the refinancing.

The trustees will need to hold a meeting to consider the report and then agree the terms of the loan, pass the section 124 resolutions, and agree to enter into the various bank documents following which completion of the refinancing can take place.

Conclusion

Refinancing a property portfolio can provide schools with significant financial benefits, but it requires a significant investment in time and gathering information for the bank.

The process can be lengthy, but an early due diligence exercise can speed up the process.