Charity Land Transactions

Over the last few decades, charity trustees have been given more and more freedom to manage their charities as they see fit. They now have broad powers of investment, they can pass resolutions to amend most parts of their governing documents without having to seek permission from the Charity Commission, and they can even be paid for providing services to their charity. The Commission no longer exercises direct control over how trustees perform most of their duties and focusses instead on helping them to manage their charities safely and effectively, intervening only where things have gone wrong or in increasingly rare instances where it retains strict control.

How charities deal with land remains one area where there are still extensive formal controls and procedures that trustees have to follow. It used to be the case that an order of the Commission had to be obtained before a charity could sell, lease or mortgage land that either formed part of its permanent endowment or had at some point been used for the charity’s purposes. The Commission would only make an order once it had satisfied itself that the trustees had a power to enter into the transaction, had obtained professional advice on it and were acting in accordance with that advice. The rationale for this control was, at least in part, that land owned by a charity is often by far and away its most valuable asset and safeguards are needed to ensure that trustees do not dispose of it on terms that do not reflect its true value. In contrast to listed investments that a charity might own, which would have a readily ascertainable market price, it was easy for the market value of land to remain hidden and arguable therefore possible for purchasers to be able to snap up property at bargain prices from trustees.

Following Sir Philip Woodfield’s 1987 report on the supervision of charities, legislation was passed which gave trustees the ability to deal with charity land, in most cases without having to involve the Commission at all, provided they are able to certify that they have obtained appropriate advice on the transaction.

The current rules – a self-certification procedure

Part 7 of the Charities Act 2011 provides that charity land may only be sold or otherwise disposed of on the authority of an order made by the Charity Commission or by the court, but that this restriction does not apply if the disposal is to a party that is not connected with the charity (see below) and the trustees can follow a “self-certification” procedure which requires them to:

(b) obtain advice from a qualified surveyor (who must be acting exclusively for the charity and whose report must cover a list of matters prescribed in regulations); and

(c) advertise the sale in accordance with the surveyor’s advice (unless he or she has said that advertising is not necessary); and

(d) satisfy themselves that the terms of the sale are the best that can reasonably be obtained for the charity.

“Qualified surveyor” means a fellow or professional associate of the Royal Institution of Chartered Surveyors who the trustees believe has “ability in, and experience of, the valuation of land of the particular kind, and in the particular area, in question”.

In the case of a short lease of less than seven years where no premium is paid on the grant, there is a slightly more relaxed requirement in that the advice can be obtained from someone the trustees believe has the ability and practical experience to advise them.

What is a “disposal”

As well as sales and leases, the controls apply when any interest in land is disposed of and so the following can be caught:

• granting easements and wayleaves
• surrendering a lease
• granting fishing rights or similar

It does not include the grant of a purely contractual licence to occupy land. Nor does it apply, strictly speaking, where a charity grants someone a right of pre-emption or an option to buy land. However, as the grant of such rights can then result in the charity being contractually obliged to proceed with a disposal, the trustees would need to comply (as far as they can) with the usual disposal procedures just as they would before exchanging contracts for a sale or, if that is not possible they would need to request an order from the Commission before proceeding with the disposal.

Designated land

There are additional controls where a charity holds land on terms that require it to be used for a particular purpose. This might be the case where a charity has been set up to preserve a historic building, or where it owns a recreational facility for use by the residents of a particular area. In these situations, the charity trustees may still dispose of the land if they are replacing it with another property that will be held on the same terms, but if they are not replacing it, they will need to advertise the proposed disposal and invite people to make representations about the disposal, and must then take those representations into account before proceeding with the transaction.

When do the trustees need to get advice?

Most land transactions follow a familiar sequence of events:

1. the trustees decide to dispose of the land;
2. they seek advice on marketing and what sort of price they might get;
3. the property is marketed;
4. offers are received and the trustees seek advice on which offer to accept;
5. lawyers are instructed to prepare a contract for the transaction and once this contract has been exchanged, the parties are legally bound to complete the deal;
6. the deal is completed, meaning that the property finally changes hands; and
7. the change of ownership is then registered at the Land Registry.

The way the Charities Act is worded clearly envisages charity trustees seeking advice from a qualified surveyor after step 1 above, in that the law requires the trustees to have advertised the disposal in accordance with the surveyor’s advice. In practice, however, the cost of the surveyor’s report means that trustees will often delay seeking the advice until offers have been received, so that the surveyor’s report can also advise them which offer to accept and confirm that the terms of the disposal are the best that are reasonably obtainable. This can lead to a situation where the surveyor has to confirm, rather after the event, that the marketing that has been carried out is what he or she considers appropriate.

Whether or not the trustees seek the formal surveyor’s report before marketing, it is essential that the advice is obtained before contracts are exchanged as the charity is then obliged to proceed – trustees will not want to find themselves unable to back out of a contract if the surveyor’s report reveals that they could have got a much higher price by marketing more widely.

Transactions that fall outside Part 7

None of these restrictions apply to:

• land held by exempt charities (such as universities or academy trusts in England);
• land that one charity is making available, for less than its full market value, to another charity as a way of furthering its charitable purposes;
• land outside England and Wales;
• land that is being leased to a beneficiary of the charity in furtherance of the charity’s purposes; or
• any transaction for which there is specific authority under some other legislation, such as a compulsory purchase.

Mortgages and charges

There are similar restrictions when a charity wishes to grant a legal charge over land it owns, for example as security for borrowing or as security for the charity’s compliance with conditions of any grant it make have received. Instead of getting advice on the transaction from a surveyor, the trustees need to seek advice from someone who they believe has relevant expertise in financial matters. The advice has to cover the following matters:

(a) whether the loan or grant is necessary to enable the trustees to pursue the project for which they want to use the loan or grant;

(b) whether the terms of the loan or grant are reasonable;

(c) whether the charity will be able to repay the loan or grant.

Connected persons

As mentioned above, trustees can only use the self-certification route if the disposal is not to a connected person. If it is to a connected person, an application must be made to the Commission for an order to authorise the disposal. “Connected person” is defined at length in section 118 and there is no real way of summarising this definition – it includes:

(a) a charity trustee or someone else who holds assets on trust for the charity,

(b) a person who is the donor of any land to the charity (whether the gift was made on or after the establishment of the charity),

(c) a child, parent, grandchild, grandparent, brother or sister of any such trustee or donor,

(d) an officer, agent or employee of the charity,

(e) the spouse or civil partner of any person falling within any of paragraphs (a) to (d),

(f) a person carrying on business in partnership with any person falling within any of paragraphs (a) to (e),

(g) an institution which is controlled (meaning that a person is able to secure that its affairs are conducted in accordance with his or her wishes):

(i) by any person falling within any of paragraphs (a) to (f), or

(ii) by two or more such persons taken together, or

(h) a body corporate in which—

(i) any connected person falling within any of paragraphs (a) to (g) has a substantial interest (i.e. more than 20% of the shares or voting rights), or

(ii) two or more such persons, taken together, have a substantial interest.

Any changes in the pipeline?

The statutory controls came under scrutiny again when Lord Hodgson’s report on the operation of the Charities Act 2006 was published. In that report, he criticised Part 7:

“In short, the scheme for regulating disposals of land does not appear fit for purpose and so should be removed. Trustees are already under a legal duty to act in the best interests of their charity, which includes seeking advice when appropriate, and this applies to disposal of land as much as any other aspect of their work.”

When the Law Commission carried out its study of “Technical Issues in Charity Law” a couple of years ago, one of the ideas being debated was whether there was still any justification for keeping this control over charity land transactions, given that trustees were already subject to a general duty of care (including a duty to take advice when considering matters in which they do not have relevant expertise or qualifications).

However, the final proposals for legislation in the draft Charities Bill that accompanied the Law Commission’s report are limited to fairly minor modifications, and of course the likelihood of Parliamentary time being found for this legislation is not looking very high at the moment.

It is proposed that:

• the matters on which the trustees’ adviser must report should be:
  • what sum the trustees should expect to receive;
  • whether the value of the land can be enhanced before disposal (for example by obtaining planning consent);
  • Marketing of the land (or if an offer has already been made, any further marketing that would be desirable);
  • Anything else that can be done to ensure the terms are the best that can reasonably be obtained for the charity;
• the range of people who may provide this advice should be extended to include fellows of the National Association of Estate Agents and fellows of the Central Association of Agricultural Valuers and also qualified trustees, officers and employees;
• advisers should be required to certify that they hold appropriate experience and expertise and are not subject to any conflict of interest in relation to the transaction;
• the requirement to advertise the disposal in accordance with the adviser’s report should be removed;
• certificates in contracts should include the same certificates as are required in the final transaction documentation to the effect that the trustees have complied with the Charities Act 2011 requirements;
• the requirements should not apply where land has been left in a will to more than one charity and is therefore held by the executors on trust for more than one charity;
• the public notice requirements for designated land should be abolished;
• short residential tenancies to employees and disposals to wholly owned subsidiaries should not be caught by the “connected persons” rules, but that disposals to wholly owned subsidiaries of charities should be notified to the Charity Commission; and
• disposals by liquidators, provisional liquidators, administrators, receivers and mortgagees should be taken out of the scope of the Part 7 restrictions.

For further information please contact our charity law solicitors on 01895 207862 or email charities@ibblaw.co.uk.