Guarantees – a word of caution!
The provision of guarantees by parent charities is a complex area and should be approached with caution.
Charitable housing associations should not be inadvertently handing out, or be pressurised into giving, a guarantee without first considering whether it has the necessary powers to be so "generous" with its support. Giving guarantees can be risky for charities and getting it wrong can have significant consequences.
Since the onset of the Covid-19 pandemic, and particularly with year-end accounts being prepared, we have seen an increase in the number of charitable parents being asked by auditors and others to provide guarantees. Often guarantees are disguised with softer terms such as a "letter of comfort" or "letter of support" meaning charitable parents may unconsciously enter into a guarantee. It is important to consider the effect of what is being asked for rather than what it is called. Is the housing association effectively agreeing to make charity assets available e.g. to agreeing to make funds available, cover payments, liabilities etc, in the event that the subsidiary needs support?
Many people forget the stringent rules around charities giving guarantees and it should be remembered the initial stance ought to be that a charity will not provide guarantees. Of course, the commercial reality is that sometimes a guarantee may be important to the success of a subsidiary's business and third parties will not contract with the subsidiary without one. However, a charitable parent must consider the conditions very carefully before moving away from this "no-guarantee" starting position. The circumstances where it may be considered acceptable are limited. For example, the parent should check whether it actually has the power to give guarantees and whether it has an express or simply implied power. Further, is the guarantee being given to support charitable activities that the subsidiary is carrying out for the parent's benefit or will the guarantee cover non-charitable or commercial activities that the subsidiary is undertaking? This flows from the general principle that charitable funds should not be applied to non-charitable purposes. As a result of this, it can be tricky for charitable parents to provide a guarantee to its commercial subsidiaries. In such cases it may, if absolutely necessary, be possible for the charitable parent to provide some form of discretionary comfort or support or the parent can look to agree an alternative arrangement, but these things need very careful crafting. If a payment is made pursuant to a guarantee (whatever the guarantee is called) and is given in the wrong circumstances then the guarantee could be potentially unenforceable, result in tax implications for the housing association or, theoretically, give rise to personal liability for the trustees.
Charitable housing associations should therefore, carefully contemplate any form of obligation to provide financial or other support or, cover the liabilities or obligations of another entity and seek legal advice before making any commitment.