Charity land transactions – an update

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In our Spring newsletter, we provided a reminder of the special rules that apply to charities when they dispose of land.  These rules specify what advice charity trustees need to obtain, as well as the statements and certificates that need to be included in transaction documents.

Little did we know, when we wrote that summary of the rules, that the High Court was about to issue a judgment that not only provides a very clear outline of the requirements under Part 7 of the Charities Act 2011 (and highlights some of the ways in which these requirements are difficult to apply to the many twists and turns that a large property transaction might take) but also showed that, in the particular circumstances put before the Court, a failure to follow the letter of the law will not necessarily mean that the deal in question should become null and void.

The David Roberts Art Foundation Limited v Nicole Marlene Riedweg [2019] EWHC 1358 (Ch) is, for fans of charity property law, a long-awaited sequel to Perkins v Women’s Total Abstinence Educational Union Limited [2004] Ch. 46 (also known as Bayoumi, that being the name of the claimant in that case who had taken an assignment from Mr Perkins of a contract for the sale of the charity’s property in Notting Hill).

The Foundation (a registered charity) owned the freehold of a property in Camden High Street and entered into a contract for the sale of this property to the defendant on 5 May 2017.  The sale price was to be £8,010,000 and the defendant paid a deposit of £410,000. Completion was originally due to happen on 31 October 2017, but this did not happen and the parties subsequently made some minor changes to the deal and agreed a revised completion date of 15 December 2017. Completion did not take place on that date either.

Following service of notices to complete, on 23 February 2018 the Foundation gave notice of rescission, as provided for in the standard conditions that formed part of the contract.  On that same day, the Foundation sold the property to another party for £5,500,000.

The Foundation’s claim was for a declaration by the Court that the contract had been validly rescinded and that it was entitled to retain the deposit and recover damages. The defendant argued that the contract was not enforceable because the Foundation’s failure to comply with the requirements of Part 7 the Charities Act 2011 meant that it was invalid, void or ultra vires (i.e. outside the legal powers of the charity) and the Foundation was therefore not entitled to retain her deposit or claim damages.

The Foundation’s application was refused, principally on the basis that the it had provided insufficient evidence about how the disposal had been handled and how its trustees had reached their decision to sell the property to the defendant. This means that the whole dispute is likely to run for some time yet.   However, it is worth having a look at what this judgment tells us.

Both cases relate to compliance with the requirements on the part of a charity:

  1. under what is now section 119(1) of the Charities Act 2011 to obtain a written report on the proposed disposition from a qualified surveyor, then to advertise it (unless the surveyor advises otherwise), and then for the charity trustees to decide (having considered the report ) that the terms are the best that can be reasonably obtained for the charity;
  2. under section 122(2) to ensure that the contract for sale includes a statement about the seller’s status as a charity and thus the fact that the disposal is subject to the Act’s procedural rules

But the two cases are in fact very different from each other:

  • In Bayoumi, the charity had apparently made no effort to comply with the rules by getting a surveyor’s report, advertising the sale and getting the prescribed trustees’ decision, even though the contract contained the statement required under what is now section 122(2) that it had in fact complied with the rules. Significantly, it appeared that the sale price that the charity had agreed with Mr Perkins was less than the market value of the property, so there was a sound reason for the Court to hold that the contract was not enforceable.
  • In this latest case, in contrast, the charity did get advice from a qualified surveyor, although it was queried whether the advice complied with the strict requirements of under the Charities Act (or was even accurate in all respects) and the judgment is very clear in stating that “the trustees failed to advertise the property for sale on the basis of advice obtained from the surveyor or, alternatively, failed to obtain advice enabling them to dispense with this requirement” and also queried whether the trustees had given serious consideration to that advice before proceeding. Furthermore, the sale price of £8,010,000 that was agreed in May 2017 also far exceeded the eventual sale price, in February 2018, of £5,500,000 so it can probably be assumed that the contract in question was not for a sale at an undervalue.

From this latest case we can learn the following points:

  1. The statement required to be included in the contract under section 122(2) does not have to be in a particular form and simply has to convey the necessary information in a way can be understood on a careful reading. In this instance, the information was included by virtue of some rather hybridised wording being included in the draft transfer that was annexed to the contract.
  2. Even if the statement had been completely omitted, it could not have been Parliament’s intention that this would result in the contract being invalid – there is an important distinction between:
    1. the section 122(2) statement, which plays a relatively minor role in alerting the purchaser to the fact that the seller is a charity and therefore subject to special procedural rules; and
    2. the s122(3) certificate that has to be included in the eventual disposition, which provides a purchaser in good faith with protection in the event that the trustees selling the property have not complied with the requirements of section 119(1).
  3. Many property deals are struck and negotiated in ways that are not adequately catered for in the Charities Act rules. Section 119 sets out a fairly clear set of steps that charity trustees should take once they have decided to dispose of a property. However, it will not always be possible to make the deal fit those rules and questions about compliance with section 119 should be considered in the wider context of the real substance of the section, namely that trustees should reach a position, with the benefit of professional advice, where they are satisfied that the disposal is on the best terms that the charity can reasonably obtain.