Many charities occupy space without paying a full rent for it. A council lets a building for a nominal sum, a corporate landlord offers a floor of an office at half price, or a community group takes on a building through an asset transfer. Under Charities SORP 2026, how that arrangement is classified decides what appears in the accounts.
On 8 October 2026, the Charities SORP-making body published a three-part helpsheet on lease accounting for lessees, with worked examples. This article covers the parts that matter most to charities paying less than a market rent. For the wider changes, including the three-tier framework and revised thresholds, see our guide to Charity SORP 2026 tiers and thresholds, published on 30 July.
Why this matters now
SORP 2026 applies to accounting periods beginning on or after 1 January 2026, so charities with a 31 December year end are the first affected. Most leases will now appear on the balance sheet as a right-of-use asset alongside a lease liability. Short-term leases and leases of low-value assets are exempt, and their payments are simply expensed.
Arrangements at below-market rent need more thought, because there are two separate routes.
Nominal or peppercorn rent
Where a charity pays nothing or a token amount, the helpsheet says the arrangement may not meet the definition of a lease, because the payments lack economic substance. The payments are treated as an expense. The charity then considers what it is actually receiving, usually the donation of a facility, and recognises that as income at its value to the charity, with an equivalent expense.
The helpsheet’s example is a shop unit with a market rent of £1,000 a month. The charity pays £10, and would have been prepared to pay £500 for a similar unit. It recognises roughly £490 a month of donated facility income, matched by expenditure.
Discounted rent: the social donation lease
Where the rent is significantly below market but more than nominal, because the landlord has chosen to charge less for philanthropic reasons, the arrangement is a social donation lease. It goes on the balance sheet like any other lease, and the discount is a separate non-exchange element.
In the helpsheet’s example, a charity pays £60,000 a year for a floor with a market rent of £120,000, and would otherwise have paid £72,000 elsewhere. The benefit is £12,000 a year. Over a three-year term, discounted at 6%, that comes to £32,076. With no performance conditions attached, it is recognised as donation income and added to the cost of the right-of-use asset, which is then depreciated. These are the helpsheet’s illustrative figures, and the timing of income recognition can differ depending on the terms of the arrangement.
One distinction matters here. If the rent is lower because the property is in poor condition, for example with a damp problem, that is not a donation. The charity has to decide whether the discount reflects its charitable status or the state of the premises.
Community asset transfers
Community asset transfers can take the form of a freehold transfer, a licence, a short lease or a long lease. The helpsheet suggests a few questions. If ownership passes on day one, a lease is unlikely. If it passes later or never, a lease is possible. The arrangement must also have the six features of a lease, and it must not be a nominal arrangement. It recommends professional advice for these transactions, and charities in Liverpool and Manchester that occupy council-owned buildings should be among the first to look.
Is there a lease at all?
Every charity with a lease-like arrangement needs to test it against the FRS 102 definition, where six features must all be present. The legal form doesn’t settle the answer. In one of the helpsheet’s examples, a charity occupies a shop unit but the landlord can move it to a different unit at any time. That substitution right means there is no identified asset, and so no lease.
There is also a transition practical expedient. For arrangements that exist at the date of initial application, a charity can choose not to reassess whether they contain a lease. It must apply that choice to all its arrangements and disclose it.
What to do before year end
- List every arrangement, including informal ones and free use of a donor’s property.
- Collect the terms: duration, break clauses, substitution rights and what is actually paid.
- Test each one against the lease definition, and note any exemptions or use of the practical expedient.
- Classify those below market rent as nominal or discounted.
- Estimate the value to the charity, meaning what equivalent space would cost elsewhere.
- Ask why the rent is reduced: charitable status or the condition of the property.
- Brief trustees, as reported income can change even though no extra cash arrives.
- Speak to your auditor or independent examiner early.
The helpsheet doesn’t form part of the SORP, hasn’t been reviewed by the Financial Reporting Council and shouldn’t be treated as a definitive statement of the requirements. Charities remain responsible for their own treatment and should take advice on significant judgements.
For help with SORP 2026 lease accounting, contact Taylor Rogers as below, or complete our contact form here.