Allowing Third Parties to Use Church Property: What Churches Need to Know

Churches that offer the use of their space to non-church groups (sometimes referred to in this article as “third parties”) for meetings or events have lots to consider, from the ecclesiastical—  must outside groups share our beliefs to use our space?— to the mundane— do we allow food and drink and who is responsible for cleaning up?   Welcoming recovery groups, weddings, and other community groups may further your church’s mission, and may even help to offset some of the costs of operating your church.  Good stewards of church assets will consider the legal and financial risks associated with a third party’s use of the church property when establishing or revising the church’s facilities use policy.

This article focuses on one-time, occasional, or short-term use of church property by third parties.  If you are looking for information on leasing church property to tenants on a more permanent or long-term basis, please see Leasing Church Property to a Tenant:  What Churches Need to Know.

Can we charge a fee to others using our church’s property?  And is that taxable income to the church?

In general, a United Church of Christ Local Church may make its facilities available, for a fee or not, to tax-exempt groups that align with its mission and ministry without jeopardizing its tax-exempt status.  A Local Church can also make its space available for activities that further its religious, charitable, and educational purpose, such as weddings.  If a Local Church is charging a fee for the rental of the space, be aware that the income received for the use of the space may be taxable income to the church if the church has any outstanding debts related to the property in which the space is located, depending on the percentage of the church’s property that is devoted to an exempt purpose.  The income received may be considered Unrelated Business Income (UBI) under the IRS rules.  If your rental fee includes personal property of the church— like chairs and tables for a wedding reception, for example— the UBI rules may also apply regardless of whether the church has debt related to the property, depending on the rental value of the property and the overall fee charged.  Consult with a CPA for more information on Unrelated Business Income Tax and whether your church will need to file a Form 990-T.

Some churches may call the fee a donation, a maintenance fee, a set-up fee, or something other than rent or a facilities fee.  But if the fee is being charged in exchange for the use of the space, the IRS will likely treat it as income to the church that must be analyzed under the UBIT rules.

A church that has a substantial business of renting out its property to others for profit may jeopardize its tax-exempt status— consult a local attorney if this is a concern for your church.

What’s the difference between a lease and facilities use agreement?

A church that makes its facilities available to third parties should consider using a facilities use agreement to protect itself and to set forth mutual expectations with the third party about the services and the access the church is providing.

A facilities use agreement is not the same as a lease.  A lease agreement is a legally binding contract that creates a property interest that belongs to the tenant, in exchange for the regular payment of rent.  This property interest gives the tenant some of the rights of ownership of the property, as stated in the lease.  For example, the tenant usually has the ability to exclude people, including the landlord, from the property that it is leasing.  A lease gives the tenant the right to control the property that it is leasing, and may even give the tenant the right to transfer the property interest, or a part of it, to another tenant (this is called subletting).  Generally, if the tenant is complying with the obligations of a lease, the lease cannot be revoked by the landlord and will terminate only on the lease termination date.  Tenants have more legal rights under a lease than a facilities use agreement.

A facilities use agreement, sometimes called a license agreement, is a legally binding contract that gives the other party permission to take some action on the owner’s property— to hold a wedding or a meeting, for example.  It does not give the other party any ownership rights or control over the property, and is generally not transferrable.

Your church should consult a local attorney for advice on which agreement should be used under specific circumstances.  In general, a lease agreement may be more appropriate when a tenant is occupying a portion of the church property for a longer term and has the need to exclude others to effectively carry on business.  For example, some churches lease otherwise-unused education wings to daycares or schools.  Some churches lease unused office space to other organizations.    

A facilities use, or license, agreement is likely more appropriate for a community group that is meeting on a weekly basis in a church conference room that is also used for other purposes, or for a one-time use of specific church facilities for a wedding reception or other event.  

The terms of the agreement between the parties will control whether the agreement is a lease or a license, regardless of what the agreement may be titled or called by the parties.  A court, for example, may find that an agreement called a license is actually a lease agreement if it includes terms like the regular payment of rent and the ability to exclude others from the property.  That’s why it is important to get legal advice when drafting a lease or a license agreement.

If our church doesn’t charge a fee, do we still need a written agreement?

Yes.  While oral agreements can be legally binding, they are difficult to prove and generally will not be specific enough to provide much protection to the church.  It may seem onerous or non-covenantal to ask a group to enter into a written contract, but such an agreement is the best way to protect both parties by establishing mutual expectations for each party’s responsibilities:  it will be clear what the church must do, and it will be clear what the group’s responsibilities are.  Remember that church council members have fiduciary duties to act in the church’s best interests, and requiring written agreements for the stewardship of church property is consistent with those duties.  The church council should adopt a policy requiring written facilities use agreements, and approve a standard agreement.

What should a facilities use agreement include?

Each United Church of Christ Local Church operates in a way that is unique to that church, and so some considerations for what goes into a facilities use agreement will be individual to the church and to the areas of the property that the church is making available.  The following provisions, however, should be included in any standard facilities use agreement to protect the church:

• Non-Assignable License to Use the Property:  the agreement should be clear that it is a license to use the property for the specific purpose, that it grants no rights in the property, and that the church will not supervise or control the area of the property where the group is conducting its activity while it is doing so; further, the agreement should provide that it is not assignable to other parties.
• Insurance:  the church should require that the third party have sufficient insurance to cover claims arising out of the group’s use of the church’s property.  The group should have the church named as an additional insured on the group’s policy, and provide a certificate of insurance to the church evidencing that this has been done.  You can check with your church’s insurer as to the appropriate amount of insurance that a third party should have to use your church’s space, and whether additional provisions should be included based on the group’s particular activity.  The group’s policy should also be reviewed to ensure that it does not exclude relevant coverage like sexual abuse claims.
• Release of Claims:  the third party should release the church and its administrators, employees, board members, members, and volunteers from liability, claims, and losses in connection with the group’s use of the property and the church, and covenant not to sue the releasees for the same.
• Indemnification:  the group should agree to indemnify, defend, and hold the church harmless if a claim is brought against the church arising out of the group’s use of the church’s property.
• Compliance with Copyright Laws:  the group should represent that it is compliance with and has the appropriate copyright licenses for the activity that it is carrying on at the church.  This should be part of the standard agreement, and is especially important in the event that a group is showing a film or otherwise broadcasting copyrighted material, or playing or performing music.  (If you have questions about copyright compliance for Local Churches, please see Copyright Compliance for Local Churches.)

Local Churches may consider a number of other provisions that may be included, such as whether the group must be theologically aligned with the church, whether alcohol/tobacco use is permitted on the premises (and liabilities that may arise from such use); whether any state or local accommodations laws apply to the use of the church’s property by the group; set-up and clean-up responsibilities, and any applicable fees.

A small group wants to use our space and doesn’t have insurance.  Should we refuse to license the space?

Requiring a group to have insurance is the best way to protect the church, and there are low-cost options for smaller groups and one-time events.  One option is the Insurance Board’s Tenants and Users Liability Insurance Program (TULIP).  

Will letting a non-church group use our space affect our property tax exemption?

Property tax exemptions for churches vary among jurisdictions.  In some jurisdictions, renting out part of the church for profit may impact your church’s property tax exemption.  Check with a local attorney for more information.

For further information on third-party liability, please see the Insurance Board’s publication, Protecting Your Church:  Liability Exposure from Third Parties.

The information provided in this article is not legal advice.  If you need legal advice, please consult with an attorney.