Remember: Almost all property matters are governed by state law. An attorney familiar with your state’s property law should be used.

• The Presbyterian Church (U.S.A.) and Its Property
• Presbyterian Church (U.S.A.) Property Trust Clause (G-8.0201)
• Absence of Trust Clause
• Property Used Contrary to the Constitution, Church in Schism, Church Dissolved
• Resources
  • Church Property Cases in Your State or Jurisdiction
  • Funds and Assistance for Church Property Litigation
  • Selling, Encumbering, and Leasing Church Property
• Information About Property Generally and Church Property
• Special Issues with the Leasing of Church Property
• Conveyances of Property
  • Items of Concern When Property Is Being Conveyed
  • Contracts for Sale
    • Purchase of Real Property
    • Zoning
    • Option Agreements
  • Deeds
    • Adverse Possession
    • Recording
    • Ensuring Good Title
    • Mortgages and Deeds of Trust
    • Releases
    • Mechanic's Liens
    • Surveys
  • Property Used by Two Denominations
  • Historic Landmarking of Church Property
• Loan Programs Offered by General Assembly Office
  • Church Loan Program
  • Presbyterian Church (U.S.A.) Investment and Loan Program, Inc.
• Property of a Dissolved or Extinct Church
• Sample Form for the Property of a Dissolved Church
• Advisory Opinion Note #11: Church Property

The leasing of a portion of church property should not create any problems with the Internal Revenue Code 501(c)(3) (federal income tax exemption). Unless rental activities not related to the organization’s exempt purpose (religion) become substantial, the federal tax exemption is not affected. Although rentals of church property do give rise to unrelated business income (UBI), Internal Revenue Code Section 513 specifically exempts most rental income from being taxable UBI. See Hammar’s Tax Guide for additional information.

A more likely area of complication arises at the state and local tax exemption level. One area of concern relates to local real estate property tax exemptions for charitable and religious use property. Check state and local laws and regulations to make sure there is no question of jeopardizing the exemption by engaging in a nonreligious use. Many states, counties, or municipalities have statutes that mandate "exclusive religious use" in order to maintain tax-exempt status for property. Governmental bodies also require periodic reporting and reaffirmation of the tax-exempt use of the property. Failure to report in time can lead to loss of the exemption. Churches are strongly advised to confer with legal counsel familiar with local property tax law regarding these pitfalls. Be sure to open and respond to mail from the county assessor’s office as exemptions have been lost for failure to respond in a timely fashion. See the Taxation section of this manual for more information about state property tax exemptions.

Some churches may be in areas where there are zoning restrictions that would prohibit rental of the property. For example, a church in a residential area may not be properly zoned to be used as a school or child-care facility. Before entering any significant lease negotiations, the zoning restrictions should be checked and, where desired, variances or zoning modifications may be considered. Some churches have also successfully challenged zoning restrictions under the free exercise of religion. These challenges, however, involve lawsuits, are uncertain, and may take many years for a final decision.

In addition to the above concerns, there are other points that churches should consider when renting property. They are as follows:

1. Obtaining presbytery’s approval. See G-8.0502.
2. The renting/leasing group (tenant) should, if possible, be a not-for-profit organization.
3. The tenant should further the cultural, civic, spiritual, or educational goals of the church and/or community.
4. The tenant’s activities should not supersede or interfere with the programs of the church.
5. The tenant should submit a properly completed application form including an explanation of the structure of the tenant’s organization and of the general uses that it intends for the rental including hours, access desired, and any special needs.
6. The tenant should sign a lease spelling out the rights and liabilities of the parties. As part of that lease, there should be an indemnification and a hold harmless agreement in favor of the church. The church should carefully draft the lease in conjunction with its legal counsel so that the church requirements and needs become lease obligations of the tenant.
7. As part of its duties under the lease, the tenant should be required, prior to occupancy, to submit a current certificate of insurance from the tenant’s liability insurer naming the church as an additional insured under that policy. A copy of this certificate should be sent to the church’s insurance agent. If the lease is a multi-year agreement, a new certificate should be submitted each year. The certificate of insurance should show General Liability and Property coverage. If the tenant is conducting a business such as a day care, the certificate should show Worker’s Compensation Insurance for the employees. It should also show property insurance for the tenant’s contents.
8. All legal documents should be reviewed and approved by a local attorney.
9. The church should review the state and local laws relating to zoning and property tax exemptions prior to executing a lease.
10. There should be an inquiry made in writing to the current church’s liability insurer to make sure the insurance company provides coverage for any liability resulting from the proposed rental and that there will be no premium increase or any exclusion due to the proposed rental. Any increase that may be incurred can be offset by adjusting the terms of the lease or requiring the tenant to pay for the increase. The church also may wish to review the adequacy of its own insurance policy limits in light of the new activity. If supplemental or specialized coverages are needed, they should be obtained prior to lease execution and property occupancy. Ask the agent to send you a binder or endorsement showing coverage is in effect for the new occupancy. The lease should not be signed until you receive written confirmation. If any insurance claim or lawsuit should arise, give immediate written notice to your agent and the insurance company.
11. You may wish to consider adding a lease provision to protect the church in the event of a dispute and litigation. Such a provision may provide that in the event of a lawsuit, the prevailing party shall be entitled to attorney fees and costs.
12. The lease should obligate the tenant to pay for any damage or disrepair to the property and/or its contents.
13. Beware of any new obligations to comply with state or federal disability statutes because of this rental.
14. The lease should be as simple and clear as possible. The church should make best efforts to determine the appropriate rent for the uses of the property involved. Issues such as increased utility bills, maintenance costs, and other new expenses such as possible property taxes, should be considered when setting the rent or terms of the lease. The lease should spell out specifically the space covered by the lease and the uses that are permitted and the time the occupancy is allowed. The tenant should not be allowed to make changes in the building or improvements without the prior written consent of the church. Special zoning, safety, and licensing requirements may involve additional costs. The lease should cover the duty of the tenant to comply with zoning, make safety inspections, and obtain licenses and permits. The party required to pay for any improvements to the building should be spelled out in the lease. There should be a clear statement that such improvements become property of the church.
15. When evaluating a potential tenant, the church should make sure that it is a legitimate organization that can fulfill its obligations under the lease. Special consideration should be given to security when outside individuals are to be given keys and access to the building. The responsibility for locking the building should be fully understood. Alternatively, the church may designate trustees or other persons to open and close the building.
16. Typically, the lease terms should be short enough to allow periodic evaluation of the rental amount and other terms. There should also be provision for cancellation of the lease and for prior notifications of intent to terminate the lease.

Through rental of church property, churches can generate additional income and increase their outreach into their communities. Persons involved with the renting organization may become interested enough in the church to become members. If all of the ramifications, legal and practical, are carefully considered and dealt with in advance, leases can be mutually beneficial.

Conveyancing is basically a two-step process. First, a contract for the conveyance is prepared and executed by the parties. This contract should include any particular provisions that either party desires to be part of the agreement. The contract will guide the parties through the conveyancing process. Preprinted form contracts are often used by buyers or sellers of real property, but remember that the terms in such contracts are negotiable. Local counsel should be consulted before executing a contract of purchase or sale rather than afterward because it is easier to negotiate for particular terms prior to execution of the contract. Indeed, some matters may prove to be nonnegotiable after the contract is executed.

The second step of the conveyancing process is the actual delivery of the conveyancing instrument (usually a deed) by the grantor and delivery by the grantee to the grantor of the consideration stated in the contract for the conveyance. The buyer must determine the capability and competence of the seller to transfer the property involved prior to paying over the consideration. A complete and thorough examination of the seller’s title must be made. A title summary (abstract) may be prepared and examined either by the counsel for the buyer or by an abstract company specializing in title searches and title insurance. Local law may determine whether an attorney or title company must be used. Title insurance should be considered and used in most cases. Title insurance protects the buyer against losses due to defects in the seller’s title.

1. Names and addresses of the parties.
2. An address and complete legal description of the property to be conveyed.
3. Delivery by the grantor of title documentation. The documentation may take the form of abstracts and title insurance binders containing the agreement of a title insurance company to insure the buyer’s interest against seller’s defective title, or an attorney’s title opinion letter prepared after her research into the state of the title.
4. The time allowed the buyer to examine the seller’s title and the date for the "closing," that is, final conveyance of the deed, and the date of possession.
5. The type of deed to be delivered.
6. Apportionment of charges—specific clauses relating to the liability of the vendor and buyer to pay the costs incurred for title insurance, surveys, deed preparation, taxes, recording and filing of deed, surtaxes, mortgage costs, and attorney fees. These are often referred to as closing costs.

1. Free of encumbrances — mortgages, liens, easements, and so on.
2. Free of defects in the chain of conveyances by which the grantor took title, for example, grants of all or part of the property to two different grantees by a previous owner, creating more than one claim of title, which the buyer might have to litigate in order to establish as the rightful claim. All title should be in fee simple.

The corporation of the particular church will adopt resolutions that direct and authorize the corporation’s board of directors to execute the necessary papers, that is, contracts of sale, deeds, leases, bills of sale, mortgages, and so on. The corporation’s board of directors also must adopt any resolutions as necessary or required by local law and the corporation’s bylaws. Any written instruments, that is, contracts, deeds, bills of sale, mortgages, and so on, necessary to carry out the action as authorized are to be executed in the name of the corporation by its authorized officers. Upon execution, these instruments are binding and effective as the action of the corporation.

Remember: The congregation must approve the purchase of real estate. G-7.0304. Also, the presbytery must approve if the property is subject to an encumbrance or condition. G-8.0501.

1. A "General Warranty Deed" contains a covenant of warranty under which the grantor is obligated to protect the property interest granted against lawful claims of ownership from any person whatsoever. This is the deed presbyteries and churches should obtain.
2. A "Special Warranty Deed" is more limited in that the grantor warrants against defects of the title arising subsequent to his ownership, but does not warrant the grantee against claims of persons who acquired their title prior to the grantor’s ownership.
3. A "Quitclaim Deed" is a deed in which the grantor warrants nothing. This deed passes any title, interest, or claim that the grantor may have in the premises but does not profess that the title is valid and does not warrant the grantee against claims of others to the same property.

1. Names of Parties — The grantee must be identified with reasonable certainty or the deed is void. Where bona fide buyers or mortgagees are involved, the person to whom the deed is delivered may have express or implied authority to fill in the name of the grantee. Omission of grantor’s name will not void the deed where grantor has signed and delivered the deed.
2. Consideration — The law does not require consideration for a valid deed and thus a grantor may be bound by a gift of land once a deed has been properly executed and delivered. However, it is the custom to specify at least nominal consideration (ten dollars and other good and valuable considerations) to protect the grantee from claims he or she is under a trust obligation to the grantor and to protect the grantee from adverse actions that allege that the grantee is not a bona fide buyer for value. No matter what consideration is recited, documentary stamps required by taxing authorities on the face of the deed are based on the actual consideration paid.
3. Words of Conveyance — Certain operative words of conveyance are often used in deeds. Phrases such as "convey and warrant," "grant, bargain, and sell," and "warrant and defend the title" are common phrases in warranty deeds. "Conveys and quitclaims" and "quitclaims all interest" are normally used in quitclaim deeds. Any words that substantially indicate the intent of the grantor to transfer his or her estate to the grantee are usually deemed sufficient.
4. Description of Land Conveyed — The primary requirement of such a description is that it be legally sufficient to permit identification of the property to be conveyed. A current survey (within six months) should be required of the seller by the buyer.
5. Exceptions or Reservations — In essence, a description of the property conveyed describes the grant: exceptions or reservations to grants immediately follow this description. Reservations imply retention of such rights as mineral rights in the grantor, or their assignment to the grantor’s heirs and assigns.
6. Quantity of Estate Conveyed — This clause defines the nature of the estate conveyed and the extent of the grantee’s ownership of the estate, for example, "To have and to hold Blackacre (grantor’s property) in fee simple absolute." By obtaining title in fee simple absolute, buyers gain total control over the property for an unlimited period with unconditional powers to dispose of the property during buyer's’s lifetime. Although zoning requirements and easements may restrict use of the property in some ways, obtaining title in fee simple gives the buyer maximum latitude in use of the property. Churches should obtain title in fee simple absolute wherever possible.
7. Covenants of Title — These are the promises of the grantor about or her title in the land that guarantee the grantee undisturbed possession and the subsequent transferability of the property without adverse claims of right by third parties. These covenants indemnify the grantee in the event that the covenants are breached.
8. Execution — The signature of the grantor and a seal of acknowledgment before a notary public generally conclude the execution of a deed. The significance of the seal has been diluted in some jurisdictions and has been replaced by the word “seal” or the initials “L.S.” However, an acknowledgment is usually a prerequisite to recording a deed; in its absence a deed may not be effective against third parties. Local statutes cover the specific form of acknowledgment or notarization necessary.

All conveyancing instruments should be recorded immediately upon delivery to the grantee. Recording will avoid the potential problems described above. It is the buyer's’s responsibility to make sure that the instrument is properly recorded in the recorder’s office. The cost of recording is generally the obligation of the grantee (buyer). Recording systems vary from state to state. Recording statutes enable the owner to give constructive notice of her ownership to all other potential buyers of the estates or interest disclosed in the instrument recorded. Recording prevents a subsequent buyer or mortgagee of the same piece of real property from qualifying as a bona fide buyer without notice. Some state recording statutes protect the bona fide buyer and cut off the interest of another grantee with an unrecorded instrument whether the bona fide buyer recorded first or not. These are known as Notice Statutes. In other states, the first grantee to record the instrument in the recorder’s office is protected, whether she had notice of the other grantee’s existence or not. These statutes are known as Race Statutes because the person who wins the race to the courthouse to record her deed gets the property. A third type of recording statute is the Race-Notice Statute. In this system, a bona fide buyer is protected if she records before a prior grantee. As with the Race system, there is a premium on the race to the recorder’s office between bona fide buyers of the property without notice. However, if the first to record in a Race-Notice state has actual notice of a prior grantee, she is not considered a bona fide buyer without notice and the first grantee will take the property. A fourth type of state statute is the Period of Grace Statute, which gives the prior grantee a period of grace in which to record and protect her interest against subsequent grantees. In these states, the bona fide buyer is protected if the prior grantee does not record in the time allowed to her or him by the statute.

Mechanic’s Liens

In most states, the law gives laborers or subcontractors who provide services connected with the construction, repair, or remodeling of a building a lien on the property, buildings, and improvements in order to secure their claims for payment for the materials and labor provided. Note that subcontractors who have not been paid by a general contractor may establish a mechanic’s lien on the property although the general contractor has been paid in full. Lien waivers or releases must be obtained from contractors and subcontractors prior to payment for the work ordered. Once a mechanic’s lien has been perfected, suit may be brought to collect the amount of the lien against property owner.

Upon completion of a church building or remodeling project, releases or lien waivers should be obtained from the contractor and subcontractors on the job. Title would be clouded by the possibility of an outstanding mechanic’s lien unless the releases are obtained. It may be advisable to use the services of a third party (such as a title company) to ensure that all the necessary waivers and releases have been obtained.

1. Description by reference to monuments and courses — Monuments may be either man-made reference points specifically placed for purposes of boundary identification, such as iron rods or concrete emplacements, or natural objects such as rocks or trees. Courses, on the other hand, are boundary lines sighted by direction in terms of the compass: such lines may be described as running a certain distance or between boundaries. In the case of a conflict between monuments and courses about the determination of a boundary line, monuments prevail in view of their permanency, as opposed to the personal judgment used to determine courses.
   
2. The Rectangular Survey System — Most states in the continental United States west of the Allegheny Mountains employ this system. The beginning points of this survey are lines that run parallel to longitudinal and latitudinal bases. Lines conforming to a parallel of latitude are called base lines. A series of lines running due north and south at right angles to the base lines are Principal Meridians. Township lines are those lines running at six-mile intervals on either side of the base line. Range lines are drawn at six-mile intervals parallel to the Principal Meridians. The six-mile strips in each case are numbered consecutively. Six-mile squares formed by the intersection of these lines are called townships, which are further divided into one-mile squares, called sections. Sections may be subdivided successively into 160-acre quarters and 40-acre tracts.
   
3. Reference to a recorded plat — This method involves the description of property in a deed by referencing a survey of a larger tract that includes the conveyed parcel. Great care needs to be exercised in the deed language to designate accurately property identified by this method of survey. In all property transactions, a registered land surveyor should be employed to establish the physical location of buildings, to place appropriate markers, and to determine any encroachments. The survey is needed to ensure the buyer's’s awareness of the extent and location of the property.

In exchange for such limitations on the use of property, governmental bodies may compensate the property owner for such reduction in property value and limitations on development and use by allowing federal and state income tax credits against actual expenditures made for future rehabilitation work done to the property. Such income tax credits are, however, worthless to a church because a church does not pay such taxes.

In its seminal 1988 policy statement God Alone Is Lord of the Conscience, the General Assembly adopted the following statement about landmarking of church property:

The government may not require a congregation to maintain a church structure because of its historical significance or subject it to proceedings in eminent domain in order to preserve a church structure. The church should make every effort to cooperate with efforts to preserve esthetic and architectural character but must finally itself be the judge of what religious life and mission require concerning property and its use.

As this section reflects, landmarking can impose substantial limitations on church property. If it is decided to oppose landmarking status, the church should do so at every administrative and judicial level so that the church does not accidentally waive any of its rights.