The Law Commission looked at technical issues in charity law in 2017 and their suggestions now form part of the Charities Act 2022, the provisions of which are gradually coming into force and which amend the Charities Act 2011.
In this article we consider some of the changes that will affect charities from a property perspective, most of which are not yet in force but are due to come into effect in the ‘Spring’ of this year.
Requirements relating to disposals
Background
Currently, under the existing legislation, when making a ‘disposition’ of land (sale, lease, surrender of lease, etc - for ease, we’ll call it a ‘disposal’ in this article) charity trustees must (save in respect of leases of less than 7 years, where a lighter touch regime applies, disposals to connected persons, where an order of the Charity Commission is required, and some exemption situations where the requirements do not apply):
- obtain and consider a written report on the proposed disposal (containing the information, and dealing with all the matters required by the Charities (Qualified Surveyors' Reports) Regulations 1992) from a fellow or professional associate of the Royal Institution of Chartered Surveyors instructed by the trustees and acting exclusively for the charity,
- advertise the proposed disposal for such period and in such manner as is advised in the surveyor's report (unless the surveyor advises that it would not be in the best interests of the charity to advertise the proposed disposal), and
- decide that they are satisfied, having considered the surveyor's report, that the terms on which the disposal is proposed to be made are the best that can reasonably be obtained for the charity.
Increased flexibility re: choice of adviser
Once the new provisions come into force there will be greater flexibility for charities to choose who to instruct when preparing the above report.
Section 119 of the Charities Act has previously only allowed qualified surveyors who were members of the Royal Institution of Chartered Surveyors to prepare the report, but reference to ‘qualified surveyor’ will be replaced with ‘designated adviser’ and it appears that further regulations will in due course specify that ‘designated advisers’ will now include fellows of the National Association of Estate Agents and the Central Association of Agricultural Valuers in addition to RICS qualified surveyors.
Trustees, officers and employees of the charity, if they meet the above qualifications/professional memberships, will also be able to provide the advice, even if that advice is given in the course of that person’s employment.
Nonetheless, and depending on the complexity of the disposal, our advice will often be to continue to appoint RICS qualified surveyors to prepare the report on a risk management basis. Trustees are also reminded that they will have a continuing obligation to select persons reasonably believed to have adequate experience and ability in providing such advice.
Increased flexibility re: advertising
Charity trustees will also no longer need to advertise the relevant disposal in the manner advised in the report.
If a designated adviser recommends advertising the disposal, our advice will be to follow such instructions – but this will no longer be a strict obligation for the charity trustees.
Increased flexibility re: nature of report
At present the report has to ‘contain such information’ as is in the Charities (Qualified Surveyors' Reports) Regulations 1992. Those regulations comprise a very detailed set of requirements including measurements of rooms etc which are finicky to comply with and often not necessary for most transactions. The ‘contain such information’ Charities Act wording also suggests that every one of these has to be included before the report will be valid.
When the amendments come into force, the requirement will just be that the report ‘deal[s] with such matters’ as may be prescribed by the regulations, and it is anticipated that the regulations themselves will be replaced with new ones which set out broad valuation principles namely advice concerning:
a) what sum to expect (or, if an offer has already been made, whether the offer represents the market value of the land);
b) whether (and, if so, how) the value of the land could be enhanced;
c) marketing the land (or, if an offer has already been made, any further marketing that would be desirable); and
d) anything else which could be done to ensure that the terms of the transaction are the best that can reasonably be obtained for the charity
together with a self-certification by the adviser that they:
a) have the appropriate expertise and experience to provide the advice that is required; and
b) do not have any interest that conflicts, or would appear to conflict, with that of the charity.
Which should be less time-consuming to comply with than the detailed stipulations in the current regime.
Reformulation of the exception relating to charity disposals
Under the existing legislation there are various exceptions to having to go through the procedures relating to disposals set out above. One of them is where a charity is disposing of land to another charity otherwise than for the best price reasonably obtainable, and that disposal is authorised to be so made by the trusts of the disposing charity. This basically allowed charities to avoid the hassle of complying with the requirements when they were disposing of land to another charity at less than best value, provided this furthered their charitable objectives.
Frustratingly, the Law Commission was of the view that charities should only be allowed to dispense with the requirements where the disposal was not ‘in any way financially motivated’, and that if the transaction had any financial motivation at all (including the kinds of transactions that are defined under the Act as ‘social investments’, namely a disposal that both furthers the charity’s purposes and achieves a financial return for the charity), the charity would have to comply with the valuation requirements.
Therefore whilst under the current regime a charity can dispose to another charity and make some charge (albeit at ‘otherwise than for best price’) for that disposal, without having to jump through the valuation hoops, now it looks as though if a charity is proposing to charge a fellow charity anything at all for a disposal it will need to obtain valuation advice, which is an additional hoop that did not exist before.
At least, as per the above, those valuation requirements themselves will now be easier to comply with than they were previously.
Connected Persons
Employees will no longer be considered a ‘connected person’ to a charity where the disposal is a fixed term lease of one year or less and is intended to be used as the employee’s home, which bypasses the previous requirement to obtain Commission consent.
This exception may be useful to charities who wish to allow employees to live at property held by the charity but where a service occupancy licence may not be appropriate, for example if living on site is not essential to the performance of their job. In these cases charities will be able to grant an assured shorthold tenancy (for one year or less) in the same way they would let out charity land to unconnected persons living on site.
Amendments to other parts of the Act
Charity Commission will have new powers to confirm the appointment or election of trustees and vest land in them
There will be a new power under s.184B for the Commission, with the consent of the relevant person, to order that any defect in a person’s appointment or election is to be ignored and a valid election or appointment is to be treated as having been made, together with a power to vest property in that person.
This may be very useful for unincorporated charities, where there are often issues hampering those charities from dealing with their property relating to uncertainty as to whether trustees have been validly appointed or who the trustees of property are, particularly when the Land Registry title has not been updated for some time. Whether the Commission will actually be willing to use this power, especially where there is any hint of a dispute, remains to be seen. It also won’t solve another common issue for charities, namely how to remove uncooperative trustees. However there are various existing mechanisms under the Act for dealing with this, which we are experienced in using.
Any corporate charity, not just a CIO, will be a Trust Corporation without the need for a Charity Commission scheme
Where charities hold designated land (i.e. land that must be specifically used to directly fulfil the charity’s objectives) or permanent endowment land (i.e. land that must be retained as capital with only the (e.g. rental) income being spent on the charity’s objectives), that designated land/permanent endowment is technically considered to be held on a separate trust, rather than outright by the charity in question.
This had presented problems for incorporated charities, because although one of the benefits of incorporation is that the charity gains its own legal personality and can act through its corporate vehicle, rather than via individual trustees, it meant with respect to the separate trust of the designated land/permanent endowment it was a single trustee of that trust, and for various practical and legal reasons trust property cannot be held by a sole trustee, unless that sole trustee has Trust Corporation status.
Previously the main ways to gain Trust Corporation status were either:
- automatically, by being a charitable incorporated organisation (CIO); or
- by being appointed trustee of those trusts via a Charity Commission Scheme, if you were any other kind of corporate charitable body (e.g. a charitable company limited by guarantee or a royal charter body).
Now (as from 31 October 2022, when this part of the Charities Act 2022 came into effect) all corporate forms of charity, and not just CIOs, automatically gain Trust Corporation status by being the trustee of a separate charitable trust (including if they were a trustee before 31 October 2022), without the need for a Charity Commission scheme.
Leasehold CIO loophole will go
Another area where CIOs will lose their edge is with respect to transfers of leased property between organisations.
The new changes, once effected, will completely remove s.267-268 of the Charities Act, which appeared to allow charities with any level of assets, where transferring those assets to a CIO and following certain prescribed procedures (and provided that they did not hold ‘designated land’ (described above)), to avoid having to seek landlord’s consent to the transfer of their lease as part of that process and therefore to avoid paying their own and the landlord’s associated fees for that consent process.
s.267 has been removed wholesale with some other provisions on the basis that an increased new right for unincorporated charities to change their trusts compensates for their removal, but the unwelcome side effect is the removal of this useful leasehold loophole for charities. The Law Commission was generally of the view that the legislative provisions should not disproportionately interfere with the rights of third parties (i.e., in this case, landlords), and they have restated other parts of the Act to make clear they will not allow the transfer of a lease without the consent of the landlord, but this is disappointing for charities.
Conclusion
The Charities Act 2022 makes wide-ranging changes to the Charities Act 2011, which are gradually coming into force and the long term implications of which are not yet fully apparent.
It will be interesting, once they are all in force, to see what their practical effects will be and what new complications and loopholes will arise from the new legislation, and the ways in which we can use the new legislative provisions imaginatively to achieve the best results for our clients.
You may be interested to watch our recent webinar on charities disposing of land - what is going to change? where we discuss some of the Charities Act 2022 changes.
22.03.2022
Charities disposing of land - what is going to change?
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