Article by Donna Davis
A year-round after-school enrichment program. A months-long summer camp. A 10-day movie-production project. An annual chess tournament in the cafeteria, occasional wedding in the chapel or quarterly community meeting in the gym. Whatever the type or duration, third-party facility rentals represent an increasingly important source of revenue for independent schools. They can position a school as a good member of the community, a desirable option for neighboring families and a financially responsible steward of the land.
Facility rentals can also bring headaches, along with steep financial and legal liabilities. Property can be damaged, injuries or assaults can occur, contracts can be breached. Christopher M. Fallon, an independent school attorney with Liebert Cassidy Whitmore, fields many questions about facilities rental agreements. The most common is, “How can I protect my school?” His answer: a good contract.
“Most of the schools I work with are happy to help members of the community use facilities for their needs,” Fallon said. “But as with anything, you want to make sure you don’t get left holding the bag if something goes wrong and your goodwill turns into problem. While there is no such thing as a fool-proof guarantee, a well-drafted contract puts a school in the strongest position to defend against a claim.”
Fallon spoke about this topic at the 2016 NBOA Annual Meeting.
Contract Must-Haves
The basic elements of a good facility use agreement are simple: It must clearly spell out the duties and responsibilities of all parties. “The key is if you read the agreement, you understand the agreement,” Fallon said. “You,” by the way, can include everyone from a seasoned contract attorney to a parent association president who has never seen a facility rental contract before.
In all cases, the goal is to be protected in worst-case scenarios. Important details to clarify:
Liability insurance: Require that the lessee has and provides proof of liability insurance naming the school as an additional insured. Such a provision covers your school under the third party’s insurance for the activities taking placing during the rental. One way to ensure this is to offer the lessee insurance through a tenant-user liability insurance policy, or TULIP program. Through TULIP, third parties can purchase general liability insurance for the duration of their event or activity. Fees are based on the event’s risk level, duration and number of people expected to attend, as well as factors such as whether alcohol will be allowed.
Property damage: How much insurance is required to cover potential damage to school property or property that the renter brings to campus? Unless the school is negligent or demonstrates willful misconduct, the lessee should assume all risk for property or equipment.
Personal injury: The agreement should include a provision waiving and releasing the school from all personal injury claims arising from the event—absent gross negligence or willful misconduct by the school—whether it’s a catastrophic injury or a stubbed toe.
Fees: List these specifically. In some cases, a school might elect to charge by the hour (for instance, for a conference room); in others, it might set a single rate for a performing arts center, ice rink or even hiking trails. Some schools allow certain third parties, such as other nonprofit groups, to rent free or at a discount. Whatever the specifics, schools typically request 50 percent of the fee upon signing with the rest due a set time before the event, Fallon said. Many contracts make the initial deposit non-refundable or refundable only if the school can find another party to rent the facility.
Security and supervision: Who provides these services, the school or the third-party user? Specify responsibility and include an explanation of whether the school will have a representative present during the event. If the school provides security, consider including this cost in the lease.
Limits on access: Specify which areas the lessee can use and which are off-limits, including parking areas, restrooms or other parts of the campus. Prevent accusations such as “you never told us….” Keeping folks from wandering can be a good reason for a school to require security or the presence of a school representative, Fallon added.
By the same token, consider who may use the facility. NBOA’s By the Numbers and Beyond book recommends stipulating that the renter will not allow any other organization to participate in the use of the facility without the school’s written consent. You may also want to require the lessee to have hiring and background check procedures that protect the school from potential liability.
Equipment: Specify what the school will provide—for instance, video equipment, public address system, cleaning supplies, even air conditioning. Be as specific as possible to avoid disputes.
Maintenance: Require the lessee to return property to the school in the condition in which it was received. Leave no trace. Specifications might include hauling away trash and returning tables and chairs to their original locations.
Licensing: Major performance-rights organizations such as ASCAP, BMI and SESAC may be eligible to collect licensing fees for use of their music. For concerts and performances, the onus is on the performer or the entity renting the facility to obtain licenses as needed. Include language ensuring that the performer or other entity will indemnify and defend the school against any infringement or related claims.
Rules and policies: Besides requiring that renters comply with local, state and federal laws, it’s also wise to include a clause in which the lessee agrees to abide by the school’s policies and rules. “The school has a rule that there is no smoking on campus anywhere—if that’s the policy, then the lessee is agreeing to make sure no one is smoking,” Fallon said. The same is true if the school bans alcoholic beverages.
Cancellation terms: Contracts generally contain specifications on how much notice and what, if any, monies will be refunded if either party cancels the agreement. Many contracts also contain a clause that allows the school to cancel up to the last moment—even after the event or program has started. “It’s to make sure that your school is protected and can get out of a bad situation,” Fallon said. “If you check on an event and things are out of control—say the lessee has lost control of their guests—you want to make sure you can shut it down and not have a breach of contract dispute.”
Dispute resolution: Although a well-crafted contract will help prevent disagreements over facilities rental agreements, a dispute may arise nonetheless. For this reason, some schools elect to add an arbitration provision. Arbitration can be expensive, however, so Fallon recommends that schools check whether their insurance policy will cover the process.
Is UBIT an Issue?
Looking ahead, if facility rentals become a substantial source of revenue for your tax-exempt school, be aware of potential tax consequences, specifically unrelated business income tax (UBIT). According to the IRS, “Unrelated business income is the income from a trade or business regularly conducted by an exempt organization and not substantially related to the performance by the organization of its exempt purpose or function, except that the organization uses the profits derived from this activity.”
Independent schools are wise to pay attention to UBIT issues. In 2013, the IRS issued a work plan that listed “continued scrutiny” of organizations with income potentially subject to UBIT. The sharpened focus came after the IRS collected more than a quarter-million dollars in taxes following compliance checks on 400 colleges and universities that had reported taxable unrelated business income on their Forms 990 but failed to file Forms 990-T. Learn more about UBIT in this IRS document or the tax chapter of NBOA's book, By the Numbers and Beyond: Independent School Business Operations.
As always, schools are also advised to consult with their tax and legal advisers.
