Disposals of Land by Charities
Disposals of Land by Charities
Many charities have valuable property assets, the disposal of which can generate very significant amounts of money which can be used to further the charity’s purpose. However, a recent report by the Charity Commission (March 2017 ) is a timely reminder of the importance of understanding a trustee’s basic duties in relation to disposals of charity land no matter how simple or complex the transaction.
The Commission opened an inquiry into the disposal of a property in Belgrave Square by the Spiritualist Association of Great Britain in 2010. This followed media reports (2013) that the property was sold on for £21 million by its new owners, shortly after the charity had disposed of it for £6 million in December 2010. The Commission ultimately concluded that this was basic and serious mismanagement on the part of the charity trustees.
The inquiry sought to determine whether, with regard to the disposal whether:
- The charity trustees sought, received and acted upon appropriate professional advice;
- The charity trustees discharged their legal duties; and
- The charity trustees or other persons associated with the charity derived an unauthorised private benefit.
Whether the charity trustees sought, received and acted upon appropriate professional advice
The inquiry found that the charity had:
a. Obtained, but not acted on, professional advice.
Specifically, they did not obtain a formal valuation and advice on the disposal of property from a surveyor. They also entered into a lock out agreement with the purchaser without the benefit of independent advice.
b. Acted on advice not in compliance with the statutory requirement.
While the Charity did engage a surveyor, neither they, nor their firm met the statutory qualification criteria and their reports did not comply with the Charities (Qualified Surveyors’ Reports) Regulations. In particular, the reports made no recommendation about, nor did not properly address how the property should be marketed.
c. Disregarded/failed to take proper account of valid concerns raised by its Professional Advisers.
The solicitor initially engaged by the charity expressed serious concerns about the transaction which was echoed by their consultant. The charity ceased to instruct this first solicitor and instead instructed a second solicitor who did not undertake any investigation into the first solicitor’s concerns.
d. Obtained retrospective advice on the value of the property.
The Commission was concerned that the charity was not properly advised in relation to securing a purchase price that reflected the potential value of the property to the purchaser.
While a retrospective valuation of the property obtained by the charity, did consider an increase in the value of the property by way of a change of use, it concluded that any resulting overage would likely be reserved by the landlord and that, in any event, the payment of overage monies to the charity post-sale would be too difficult to enforce. The Commission disagreed with this conclusion.
Whether the charity trustees discharged their legal duties
The inquiry found that the charity failed to:
a. Conduct proper due diligence;
The Commission was particularly critical of the charity’s failure to conduct due diligence on the potential purchaser (a shell company with no assets). The charity trustees should have taken practical steps so as to be satisfied that the offer for the property was sound and that the charity would not be unnecessarily exposed to risk by contracting with the purchaser.
b. Obtain independent specialist advice
The charity trustees should have obtained specialist and independent advice about how to achieve maximum return on a property disposal where the post-disposal value would be likely to appreciate significantly.
However, despite the Commission’s findings of serious mismanagement on the part of the charity trustees, there was no evidence of the charity trustees or persons connected to them having derived an unauthorised private benefit in relation to the disposal of the property. Having assessed the facts and circumstances, the Commission concluded it was not possible or proportionate to take any further regulatory action in this matter.
Lessons to be learned
When it comes to selling, leasing or transferring a charity’s land, the law sets out clear requirements to ensure that these important transactions are properly managed in the charity’s interests and that the charity trustees obtain the best price reasonable in the circumstances. (Part 7 Charities Act 2011)
Charity Trustees should consider the following steps at a minimum when considering the disposal of most interests in charity land:
- Instruct a Qualified SurveyorCharity trustees must ensure that the surveyor that they intend to appoint is appropriately qualified (as per s119 (3) Charities Act) and ensure that the surveyor they propose to appoint is able to act exclusively for, and in the interests of, their charity.
- Obtain a written reportFor most disposals of charity land the law requires that charity trustees obtain and consider a written report from a qualified surveyor which complies with the Charities (Qualified Surveyors’ Reports) Regulations 1992.
- AdvertiseFollow advice from the surveyor on how to market the disposal (or not, if that is the advice).
- Due DiligenceTake practical steps to ensure that any offers by third party companies are sound and, if not, the potential consequences for the charity. In the absence of such action or where such assurance cannot be obtained, there must be serious doubt as to whether the charity trustees should proceed.
- Decide Trustees must decide whether they are satisfied that the proposed terms of any disposal are the best that can reasonably be obtained in the circumstances.
…and in the longer term?
As part of its extensive review of charity law (please see link: http://www.lawcom.gov.uk/wp-content/uploads/2015/06/cp220_charities_technical.pdf), the Law Commission has been exploring the case for changing the rules about disposals of land by charities. In particular, it has proposed that the current restrictions should be replaced by a duty to obtain and consider advice from a person who they reasonably believe has the ability and experience to provide them with that advice, unless the trustees reasonably believe that it is unnecessary to do so. In essence, this would enable trustees to deal with land in the same way that they do other assets, such as stocks and shares.
As the Law Commission states in its consultation paper, this change would “avoid the straightjacket, and unnecessary costs, of the current regime, whilst acknowledging that the law should defer to trustees’ good judgement”.
It had been anticipated that a draft Bill might be published this Summer to include these changes; however, with a General Election now looming, it remains to be seen whether this is likely to happen.
Understanding how to extract the best value out of such assets is a complex and specialist area, so choosing the right professional advisers with the necessary expertise and qualifications to provide pertinent high-quality advice in such circumstances is a vital element of a trustee’s role.
If you would like to learn more about disposals of charity land please contact our charity law solicitors on 01895 207862 or email firstname.lastname@example.org.