The Law Commission’s Latest Proposals for Changes to Charity Law: Report by Paul Ridout and Jelena Serbic
The Law Commission’s Latest Proposals for Changes to Charity Law: Report by Paul Ridout and Jelena Serbic
In August 2017 the Law Commission published its report Technical Issues in Charity Law, incorporating a draft Charities Bill. The Commission’s proposals form part of its charity law reform project and also pick up issues identified in Lord Hodgson’s 2012 review of the Charities Act 2006.
By way of a reminder, the Law Commission operates independently of government and for over 50 years has been pursuing programmes of legislative reform aimed at ensuring that the law is fair, modern, simple and cost-effective. As a non-political body, it does not propose major policy changes, but selects areas of law for review and reform by identifying, with the benefit of public consultation, areas where the law is unsatisfactory and where reform would deliver benefits.
The Law Commission included selected issues in charity law as one of 14 projects in its Eleventh Programme of Law Reform announced in 2011, recognising that Lord Hodgson’s report had made around 100 recommendations for change, many of which were picked up by the Commission. The original plan had been to start work on the charity law project in late 2012 and issue a consultation document in late 2013. As things worked out, the first consultation was issued in April 2014 and focused on the power of charities to engage in social investment, leading to the inclusion of an express power in what became the Charities (Protection and Social Investment) Act 2016. The remainder of the technical issues were then the subject of a major consultation in spring 2015, with a supplemental consultation on changing charitable purposes and trust corporation status following in autumn 2016.
The 350-page report proposed the removal of red tape while balancing that against the need for proper protections for charities and for the public. It says current laws affecting charities are bureaucratic, discourage volunteering and force charities to pay for unnecessary professional advice.
In particular, the Law Commission makes 43 recommendations for reform which it believes will save charities time and money. The Law Commission’s recommendations will now have to be considered by the government. If the draft Bill is enacted, the changes to charity law should deliver considerable benefits to the sector, although there will be many trustees and charity lawyers who will feel that the reforms do not go as far as they might have done.
In general, the changes proposed are technical but important, with real practical consequences for charities, including the removal of some of the inconsistencies and complexity that can make charity law difficult to apply and regulate.
Lord Hodgson has welcomed the Law Commission’s report, saying that his earlier review of the operation of the Charities Act 2006 had shown that:
“.. charities faced a number of historic obstacles under the current law. These unnecessary burdens on trustees act like barnacles on a boat, causing a drag when all should be plain sailing”.
The recommendations in the Law Commission’s report are so numerous and, in many cases, so bound up in detailed legal and historical background that this article cannot really do justice to all of them. We have therefore selected what we consider to be the key changes that charity practitioners should know about, and we heartily recommend reading the whole report for a fuller picture.
Part 7 of the Charities Act 2011 imposes certain controls on charities when they sell, let or mortgage land; those constraints are aimed at ensuring that charities get the best price or other terms when disposing of land, and only mortgage land when it is in the charity’s interests to do so. Complying with these restrictions results in charities incurring costs for professional advice. The current arrangements are based on a default prohibition: land may not be disposed of or charged without an order of the Charity Commission, but this does not apply if the charity has complied with some procedural safeguards including obtaining professional advice on the transaction, which would include the marketing in respect of any proposed disposal.
If the sale or lease is of ‘designated land’ (ie land that is held on trusts that require it to be used for a particular charitable purpose) and there is no intention to acquire replacement land, a public notice must be given of the proposed sale or lease. If the disposal is to a connected person (a trustee or a person or company connected with a trustee, including a subsidiary of the charity) it is necessary to obtain the consent of the Charity Commission.
The report comments pithily that ‘[t]he Part 7 regime is loved by some and loathed by others’, and identifies a number of ways in which it has appeared to get in the way of transactions or, in some cases, be overlooked until too late in the disposal process for it to be effective. In discussions leading up to the Commission’s spring 2015 consultation, practitioners had commented that it was no longer appropriate to treat land differently from other classes of assets, and the Commission had provisionally proposed that:
- the default prohibition on the disposal of land should be removed;
- trustees should be required, before disposing of land, to obtain and consider advice in respect of the disposition from a person who they reasonably believe has the ability and experience to provide them with that advice; but
- the requirement for advice should not apply if the trustees reasonably believe that it is unnecessary.
However, responses to the consultation made it clear that Part 7 is regarded by many as an essential safeguard against selling land at an undervalue, and one which frequently enables trustees to strike a better deal when disposing of land.
The Law Commission, therefore, recommends that the controls in Part 7 should be retained for most land transactions, but that:
- the categories of professionals who may provide the advice needed under Part 7 should be expanded to include fellows of the National Association of Estate Agents and fellows of the Central Association of Agricultural Valuers;
- charity trustees, officers and employees who are suitably qualified should be able to give advice under Part 7;
- the Charities (Qualified Surveyors’ Reports) Regulations 1992 should be replaced with regulations that offer more flexibility to suit the charity’s circumstances;
- trustees should no longer be obliged to advertise the disposal in accordance with the surveyor’s report;
- Part 7 should not apply where the charity is one of a number of owners of the land in question – for example, where land has been bequeathed to a number of beneficiaries including one or more charities – and transactions in relation to such land should be governed by general trust law principles; and
- the definition of connected persons(to whom a disposal can only be made with the authority of a Charity Commission order) should exclude employees in cases where a short residential tenancy is being granted, and should also exclude wholly-owned subsidiaries.
The Commission also makes specific recommendations for closing what it refers to as ‘the Bayoumi gap’ (named after Bayoumi v Women’s Total Abstinence Educational Union Ltd ). The quirk of Part 7 means that, if the statutory requirements have not been complied with when contracts are exchanged, the buyer will not be able to enforce the contract because the requirement for a certificate in the disposition itself (which does protect a purchaser in good faith from the effect of noncompliance by the charity) does not apply to a contract for the disposition. This has led to buyers having to check whether the Part 7 requirements have been complied with whenever they are buying or leasing from a charity, adding delay and expense to the transaction.
The proposals aim to give charities more flexibility to obtain tailored advice when selling land and removing and simplifying some of the administrative procedures that need to be followed when dealing with land. The changes will be seen by some as too small, but others will welcome the continuing protection that Part 7 provides for charities when dealing with land.
Changing governing documents
The Law Commission proposes to simplify and harmonise the procedures that need to be followed by charities wishing to amend their governing documents, where possible removing discrepancies that arise from the different legal forms that charities take.
All charities have a governing document which sets out the charity’s purpose, how it is to be governed and powers and duties of the trustees. Charities can take on various legal forms ranging from incorporated organisations (charitable companies, charities incorporated by Royal Charter, charitable incorporated organisations (CIOs)) to unincorporated charities (unincorporated associations and charitable trusts). The procedure for a charity to amend its governing document depends on the legal form of the charity. The Law Commission wants to introduce greater alignment between corporate and unincorporated charities with the aim of providing simplicity and consistency.
Recommendations include extending the powers under s280 of the Charities Act 2011 that enable unincorporated charities to make changes to their governing documents by resolution of the trustees. Some amendments would still require consent from the Charity Commission, specifically:
- amendments that are currently treated as regulated alterations;
- amendments to provisions concerning third-party rights; and
- amendments relating to permanent endowment.
This would bring the amendment provisions into closer alignment with the regime that applied to CIOs and companies. The Law Commission maintains that the requirement of obtaining consent from the Charity Commission for certain changes provides an ‘important safeguard in respect of more significant, and potentially controversial, amendments’.
The Law Commission also recommends harmonisation of the criteria that are applied by the Charity Commission when considering whether to approve an amendment of a charity’s purposes. The draft Bill proposes that:
- when considering whether to consent to a company or CIO changing its purposes under s198 and 226 of the Charities Act 2011 or to consent to an unincorporated charity changing its purposes under the extended amendment power, the Charity Commission should be required to have regard to the following:
- the purposes of the charity when it was established;
- the desirability of securing that the property is applied for charitable purposes which are close to the purposes being altered; and
- the need for the relevant charity to have purposes which are suitable and effective in the light of current social and economic circumstances; and
- the Charity Commission should be given a power to give public notice, or require the charity trustees to give public notice, of any amendment by a charitable company or CIO in respect of which the Commission’s consent is required.
The report also sets out proposals to make it easier for charities established by Royal Charter to amend provisions in their charter, subject to Privy Council approval. This reform would remove many of the cumbersome and opaque requirements that apply to such charities.
Removing barriers to mergers
The Law Commission recognises that there are various problems with the law that governs the merger charities, especially with how the Charities Act deals with transfer of property and gifts by will to merged charities.
Section 268 of the Charities Act, which confers a power for unincorporated charities to transfer their property to another charity, will become redundant because of the recommendations for a new statutory power for unincorporated charities to make changes to their governing document by resolution.
The Law Commission recommends reforms in relation to gifts left to a charity where a merger has been registered with the Charity Commission, which should reduce the need for shell charities to be retained to capture legacies following a merger.
Recommendations are also made in relation to obtaining trust corporation status, which is vital if land is to be held by a corporate trustee. The Law Commission proposes that trust corporation status should be conferred automatically on any corporate charity that holds trust property, avoiding the need to rely on the Charity Commission to make a formal appointment or to make an application to the Lord Chancellor.
Further recommendations are made in relation to vesting declarations, making it clearer as to how they operate in relation to certain types of property, removing uncertainty and confusion.
The Law Commission has proposed a clarification of the definition of permanent endowment in the Charities Act 2011 so that an asset will be deemed to be permanent endowment ‘if it is subject to a restriction on being expended which distinguishes between income and capital’.
It is also proposed that charities should be permitted to draw down on permanent endowment up to a ceiling of 25% of the charity’s permanent endowment. This supplements the existing power of the Charity Commission to authorise expenditure of endowment on terms that require the capital to be recouped out of income over a period.
The existing rules that allow charity trustees to lift the restriction on spending endowment will be simplified so that Charity Commission consent will only be required if the capital value of the endowment is over £25,000.
Simplifying procedures for failed fundraising appeals
The Law Commission proposes simplifying the procedures that need to be followed in relation to a failed fundraising appeal. The Charity Commission has the power to direct funds to be used for other like charitable purposes where more funds have been raised than needed, but there is no mechanism for this to be done if the appeal fails to raise enough to achieve its stated purposes; instead charities have to try to contact donors and offer a refund.
The key recommendations are to alter the rules so that funds raised by an unsuccessful appeal can be applied cy-près if:
- the donation is small, that is, less than £120;
- the trustees have taken reasonable steps, as agreed in advance with the Charity Commission, to contact the donors;
- the funds are raised through a cash collection or from a lottery, competition or other similar activity; or
- the Charity Commission decides that it would be unreasonable to take steps to contact the donors.
Payments to trustees
One area of charity law that results in charities getting in trouble with their regulator is the question of payments to charity trustees. The Law Commission has proposed two particular changes in this area:
- the provisions of the Charities Act 2011 (s185) that allow trustees to be paid for services they provide to their charity should be extended to cover the supply of goods; and
- the power to authorise a trustee to keep money that they have been paid for work done for the charity (the grant of an ‘equitable allowance’) should be exercisable by the Charity Commission as well as by the court.
Ex gratia payments
The Law Commission’s report also offers greater flexibility for making ex gratia payments: payments that the trustees feel morally obliged to make but have no legal power to make, for example where money has been left to the charity under a will, and the testator has instructed their solicitor to draft a fresh will but the new will is not made by the time the testator dies. Recommendations include allowing decisions to be delegated by trustees and permitting payments to be made without the consent of the Charity Commission, below a threshold and on a sliding scale depending on the income of the charity.
Charity Commission powers, the Charity Tribunal and the courts
The Law Commission’s report offers a significant extension of the powers of the Charity Commission. This includes increased powers to prevent charities using misleading names; the ability to confirm if trustees were properly appointed; and increased powers to delay registering a charity and to refer a matter to the Charity Tribunal without the consent of the Attorney General.
The Law Commission also makes recommendations in relation to the Charity Commission and the courts, for example, allowing charities to apply to the courts rather than the Charity Commission for consent to commence proceedings against the Commission and giving advance assurance to trustees that legal costs in a charity tribunal can be honoured from the charity’s funds.
Conclusion for practitioners
The Law Commission’s report covers a broad range of issues in charity law, not all of which can be covered in this article. It is evident from the report that there has been an extensive engagement with charities and their advisers on these issues and that the 43 recommendations have been developed and refined so that they reflect many of the representations made during the 2015 consultation.
If enacted, the draft Bill will resolve many of the frustrations and bureaucratic obstacles faced by charities. But beyond that, the level of analysis contained in the report makes it important reading for anyone who wants, or needs, to have a detailed understanding of the inner workings of charity law.
(This article was first published in Trusts and Estates Law & Tax Journal (December 2017) and is available at lawjournals.co.uk.’)
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