The Dangers of Leasing Your Facilities to Another Church

By Raul Rivera

When a young start-up church called Pastor Will to see if they could rent some space in his new church on Sunday afternoons, he was delighted to let the new church plant use it. He saw it more of a stewardship responsibility for Kingdom purposes than a way for the church to have another income stream.

When he met the Korean pastor of the new church, he knew instantly they were of kindred spirit. Pastor Will all but said yes and told the young pastor he was inclined to say yes, but that he would also meet with his board to see what would be the best way to proceed.

"I had no idea it was this complicated"

At the next board meeting, Pastor Will presented the proposal to the board and asked if anyone would be willing to research the matter to verify if there were any legal repercussions that could occur if they allowed the young church to meet in their facilities. Allen, who had recently retired, decided he would do the research and get back to Pastor Will. He figured it would take a couple of phone calls and an hour or two of time in order to find an answer.

Boy, was he wrong! After several weeks of dedicated research and consultation, Allen came up with 5 major issues; each hosting its own set of concerns.

Below is what he discovered.

1. They could get sued by the members of the other church: 

a.     Allen learned about an organization (Shreveport Progressive Men's Club) that rented its building to a small group for its Christmas party. At the party, one of the attendees slipped and suffered an injury that resulted in her needing a hip replacement. The lady sued the men's club claiming they were responsible for keeping the floor safe. The men's club protested saying that they rented the building to the small group and could not be held responsible. The court ruled that the men's club was responsible for her safety because they exercised control of the facilities while the party was going on.

b.     The men's club said they were not responsible because they rented the facility to the small group. The court disagreed citing that the group had "right of direction and control" over the facilities, and drew "some kind of benefit from it." 

c.      In order to avoid such liability, they needed to make sure that the agreement they entered into was an event use agreement and not a lease.

2. It is best to enter into an event user agreement and not a lease:

a.      There is a difference between a lease and an event use agreement.  A lease is an extended long term agreement and subject to extensive legal proceedings if you have to evict.  An event user agreement is a one time use contract that details how they will use the space and for how many hours.  The agreement should contain the following criteria:

       i.     The renter is in charge and control of the space they are using.

              ii.      No supervision will be provided.

              iii.     The church does not warrant or represent that the space is safe or suitable for the event, and that the renter is responsible to ensure that all measures necessary be taken to ensure public safety that is consistent for their intended purpose.

              iv.     If the renters will use your instruments on stage (or other appliances), no warranties should be provided but rather that they are provided on an "as is" basis.

              v.     You do not setup or tear down.

             vi.     They clean after they are done.

             vii.     The agreement should contain an indemnification clause. This is a clause that releases your church from liability resulting from the renter's use of the space. If you would like an indemnification clause call our number at 877-494-4655 and we will gladly email you one.

b.     Require the renter to provide you a binder for a $1,000,000.00 insurance liability policy that covers the renting church's pastor, officers, board members and their regular church members even in the case of sexual misconduct, and also your church as an additional insured.

c.      Require the renters to have a children's policy for their volunteer workers, which includes background checks and sufficient supervision of children.

       d.     Make sure that a clause is included to require them to honor copyright laws and that they will not use any of the audio or video equipment in a way that violates them or infringes on any copyrighted materials.

       e.     Consider including a prohibited activities clause: It is important that your bylaws contains such a clause. In essence, this clause requires that the renting church not engage in any activity that is in direct opposition to your church's written doctrines.

(Recommended reading: "5 Things Your Church Needs to Know About Leases")

3. Property tax liability: 

In some states such as those in the Northeast, many city and county governments aggressively look for ways to render your property tax exemption void. You should consider how your local county officials view such activity. A recent New Hampshire Supreme Court case ruled that the government was allowed to go room-by-room and determine which parts of the church facilities were tax exempt and which were not, based on how each room was being used. 

(Recommended reading: "Tax Forms You Must Know About")

4. Sales taxes: 

Most states have laws requiring your church to collect sales tax on a lease or user agreement. If you are one of the few states that do not require it, we envy you. The best way to find out is to contact your state's department of revenue and ask one of their representatives if sales tax is required to be collected. If you find out for your state, please reply with a comment and share your findings.

(Recommended reading: "Approved by IRS, Revoked by State")

5. Unrelated business income tax: 

The rent you charge for someone to use your facilities is subject to unrelated business income tax unless you own your building free and clear of any mortgages. If your church collects $1,000.00 or more in rent for the year, then you must file Form 990-T and report the income and pay taxes on those profits.

When it comes to unrelated business income tax, we always strive to steer a church away from activities that require the church to file a 990T tax return.  We recommend that the church consider forming a new for profit corporation to handle this. We call it a “For Profit Arm.” In Section 502, the IRS calls it a “Feeder Corporation,” and describes it as a business operated for the primary purpose of carrying on a trade or business for profit even if the profits are distributed to your church tax-free.

(Recommended reading: "Can Our Church Own a Business?")

What is the price for peace of mind?

Pastor Will had no idea that the tax and legal matters regarding another church wanting to use his church's sanctuary could be so complicated. He was glad that Allen did his research and reported back. The church did move ahead to allow their wonderful Korean brothers to use the space.  Having great peace of mind, Pastor Will on occasion attended their services. Though he did not understand a single word being spoken, he soaked in the Lord's presence and worshipped with his brothers and sisters in the faith.

Handpicked articles for you:

• "Love Offerings Directly to Pastor Spell IRS Trouble"
• "What To Do When It's Time to Reclassify Your Ministry"
• "Two Clauses in Your Bylaws That Can Save You and Your Ministry"

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