New school term, new leasing opportunity

September marks the start of the new school year, and as teachers and pupils return to the classroom so will asset finance funders and brokers, as changes to accounting rules look set to give leasing options in the education sector a major boost.

From 1st September Academy trusts and maintained schools will no longer be required to seek consent from the Secretary of State for Education for any borrowing, following the introduction of the accounting standard IRFS 16 leases on 1 April, which changes the way that local authorities recognise leases entered into by their schools in their accounts.

IFRS 16 ends the distinction between operating and finance leases for accounting purposes. Under the Education Act 2002, all leases will be classed as borrowing and will require the Secretary of State for Education’s consent.

Asset list

However, governing bodies do not need to make a specific request for consent where a lease falls under the general consent granted by the Secretary of State for Education – see list below. 

For several years the educational sector has largely opted for operating leases. Now, with a pre-approved list of assets available, it becomes much more attractive to look at finance leases (independent schools have always been able to do so as they are not bound by local authority funding rules).

But brokers specialising in the sector are highlighting a number of critical issues.  The first is the nature of the list, which excludes some technology which would now be seen as mainstream.  While IT equipment is named, software is not, for example, and LED provision is subject to meeting the Department for Education’s energy framework which only has five suppliers.

Roger Sanford, sales operations manager at Asset Funder, says that while some of the assets not currently on the list might be viewed as falling into the “other category” cited in the different asset classes, there is a lack of clarity.

“Playground furniture such as slides or climbing frames is an example, and that’s a real shame as a lot of schools would be interested in leasing this kind of equipment as part of initiatives to keep children fit and healthy. They may not have the capital to do that, particularly if they are tackling old infrastructure like a failing boiler, but leasing could be a good option.

Both Sanford and McKee, members of the recently launched Guild of Business Finance Professionals, would like to see the Department for Education working with trade associations to develop a less generic list which reflects the reality of what schools are looking to finance and offers clarity.

“We need the industry to help come up with a definitive list, and that includes asking schools, the Finance and Leasing Association (FLA) and brokers,” McKee argued.

Lesson learned?

The second area of concern is around whether funders have learnt the lessons of past experiences in the education sector, which experienced serious problems some years ago, when schools signed up for leases without full knowledge of the terms and conditions, with high fees and punitive clauses.

Sanford points out that in the past, few brokers were active in the education sector where it was viewed as “complicated, and difficult to earn a decent crust”.  Those who have made it speciality, however, have developed an understanding of the market and a commitment, as he put it, “to do the right thing, looking after schools and giving them a good experience.”

The fear now is that as the education market opens up, new entrants may be less conscious of the need to protect the public purse.

“As members of the Guild, we are committed to not charging sky high fees, but we also think funders need to put caps in place. The risk is that if funders come in offering brokers the ability to earn15% commission in their rates, then schools can’t afford that on their budgets and will be put off leasing. We saw last time around what could go wrong, and we don’t want to be seen to be behaving like that as an industry,” McKee said.

Whose responsibility?

Finally, along with concerns around pricing, there are also issues about who in a school can sign a leasing deal. While some funders want a head teacher to sign, others ask for the business manager, or a co-signature by a school governor, or require the decision to be recorded in governors’ minutes.

The result was a slew of legal challenges, one recent example being a case involving a maintained school on the Isle of Wight which entered into a 15-year leasing deal for a new sixth form college at an annual rent of nearly £700,000.

When the college became unable to pay, the equipment supplier and finance companies took both the school and the local council to court, but the judge ruled against their claim for breach of contract on the basis that the contract was ‘ultra vires’, having been taken out as a finance lease without the permission then required from the Secretary of State.

Bassett pointed out that the current generation of bursars, treasurers and governors may not be fully aware of some of the difficulties experienced in the past, while those writing business in this market need to appreciate that neither government nor local authorities can necessarily be held to guaranteeing contracts in the event of a school defaulting or closing.

“Ultimately though it’s how the finance is handled that matters.  We need to put in standards to make sure schools are given all the information they need, are treated fairly and are not seen as an easy target for big commissions.  As brokers specialising in the area, and as Guild members, we have worked hard to build trust, and maintaining that level of integrity starts with the funders,” McKee declared.