Charity property disputes

Disposals of land by charities—how is the new land disposal regime shaping up?

Andrew Small, Partner in the Russell-Cooke Solicitors, charity law non profit team.
Andrew Small
6 min Read

In the ever-evolving landscape of charity land disposals, Russell-Cooke partner, Andrew Small, delves into the latest changes enacted by the Charities Act 2022 and the focus on compliance with sections 117-121 Charities Act 2011. This article uncovers what these changes mean and how they impact the sector.

After many years of reports, consultations, parliamentary (in)activity and a somewhat delayed commencement, most of the changes to the rules governing the disposals of land by charities enacted by the Charities Act 2022 have finally come into force. Whilst the changes have been extensively trailed, now they are in place it is creating a new focus on what compliance with ss117-121 Charities Act 2011 actually now means. 

My own initial view, based on conversations with clients and other professional advisers, is that it is going to be important for trustees and advisers to focus on the underlying principles that have not changed, as well as the mechanics to ensure that mistakes are not made when charities undertake potentially high value and risky property transactions.”
Andrew Small, Partner in the Russell-Cooke Solicitors, charity law non profit team.
Andrew Small • Partner

Why change the law on charity land disposal?

The law in this area has been unchanged for 30 years, having previously been set out in section 36 of the Charities Act 1993 and accompanying statutory instrument. The system, generally referred to as ‘the QSR regime’, required charities undertaking disposals of land to obtain advice from a RICS qualified surveyor prior to legally committing to the disposal. The regulations stipulated that the report had to be in a comprehensive and prescriptive format.  A lot of detail was required to be collected about the property(not all of which would be relevant) with also a strong emphasis on marketing. While this last point was important in arm’s length sales and leases, where obtaining the best price is the key rationale, in the context of transactions such as ‘surrenders of leases’ and the ‘grant of leases’ of electricity substations, it made very little sense. 

The pathway to reform began in 2012 with Lord Hodgson’s review of the Charities Act 2006. Whilst that act did not change the then s36, the system was analysed by Hodgson. He heard a lot of evidence from charities with large property portfolios and the surveyors advising them. They were both of the view that the QSR regime added significant costs and admin time to the property disposal process without providing worthwhile protection to charity assets. Hodgson seemed to find this evidence highly persuasive, and recommended that the QSR regime be substantively dismantled, and replaced with non-binding guidance from the Charity Commission. 

Whilst never feeling that the QSR regime was perfect, my own view at the time was that Hodgson’s recommendations went much too far. I have had a number of charity clients over the years who were undertaking a property transaction for the first time and who were not really sure how to proceed. It has also not been an uncommon occurrence to find third parties (for a variety of motives…) seeking to persuade charities to approach their property transaction in an inappropriate way. In both those situations it has been a useful tool to be able to say “no, you must follow these steps first”.

I was therefore pleased when the Law Commission in 2017 took a different view from Hodgson, and recommended retaining a modified version of the QSR regime, whilst seeking to make it more flexible and user friendly. Those recommendations were substantially accepted by the government and incorporated into the Charities Act 2022. Most of the land provisions were then brought into force in June 2023.

What is the current law on the disposal of land by charities?

The law is still set out in ss117-121 Charities Act 2011, but as modified by the 2022 Act. There is now a new set of regulations to sit alongside the amended Act (The Charities (Dispositions of Land: Designated Advisers and Reports) Regulations 2023). There is also new accompanying Charity Commission guidance. 

The key changes now in force are an expansion to the categories of adviser who can give the report, and a much less prescriptive form of advice. Advisers are now referred to as ‘designated advisers’, so we probably need to start calling this system the DAR regime. As well as RICS qualified surveyors, designated advisers can be fellows of the Central Association of Agricultural Valuers, or members of NAEA Propertymark at fellow grade. The act also specifies that trustees and employees can now give the advice. 

A Designated Adviser’s report must now address the following points:

  1. the value of the relevant land;
  2. any steps which could be taken to enhance that value;
  3. whether and, if so, how the relevant land should be marketed;
  4. anything else which could be done to ensure that the terms on which the disposition is made are the best that can reasonably be obtained for the charity; and
  5. any other matters which the adviser believes should be drawn to the attention of the charity trustees.

The report must also contain statements that:

  1. the adviser has ability in, and experience of, the valuation of land of the particular kind, and in the particular area, in question; and
  2. the adviser has no interest which conflicts, or would appear to conflict, with that of the charity.

Connected parties provision 

One other change that has been introduced is to the connected parties’ provision. Whilst that part of the system, where disposals to connected parties need Charity Commission consent, has been substantively retained, short residential tenancies to employees now no longer need Commission consent, which should be a useful lessening of the compliance burden for charities with large numbers of on-site staff. 

Changes to the land regime still to be introduced

Some of the changes to the land regime were not enacted in June, and we expect those to be brought into force together with the remaining provisions at the end of the year. 

These are:

  • the changes to section 117(3)(c), the provisions regarding transfer of land between charities at an undervalue. When these changes are introduced a transfer of land between charities will need a Designated Advisers Report unless it is for nil value. (It will be interesting to see what effect this change has on charity collaborations and mergers, as this is certainly not how practitioners have interpreted those provisions previously)
  • the changes to the statements and certificates to appear in contracts and transfers for the sale of charity land. This will be a potentially useful change when enacted, particularly as the intent is for the saving provisions in the act (i.e. protecting purchasers from the consequences of non-compliance) to now apply from exchange rather than just completion. 

What happens now? 

It has also been important not to view the QSR regime in isolation as an abstract box-ticking exercise, and it will remain important to have the same view of the DAR regime as it beds in. The key for trustees has always been ensuring that they comply with their fundamental legal duties of care and prudence, which in the context of a substantive property transaction will generally mean ensuring that best value is obtained. Advertising will remain a key way of ensuring this even if the emphasis on it in the DAR regime is much less. 

I have had a conversation with an experienced charity surveyor in the context of an upcoming client transaction, and he confirmed that without market testing the property in question there was no way he would be able to reach a firm conclusion as to its value.
Andrew Small, Partner in the Russell-Cooke Solicitors, charity law non profit team.
Andrew Small • Partner

The key provision to making the DAR regime work will be to ensure that both charities and advisers keep a real focus on making sure that the advisers have ability in, and experience of, the valuation of land of the particular kind, and in the particular area, in question. 

A client contemplating quite a bespoke transaction said to me recently when I suggested suitable surveyors “I thought I could just go to a local estate agent for this now”, where it seemed incredibly unlikely they would have the requisite experience and skills. The key determinant of whether a transaction goes smoothly in the current market is picking the right buyer/tenant, and for trustees to have robust, experienced advisers is more critical than ever.

Making the land disposal regime for charities more flexible and easier to administer is a useful objective, and after many years we finally have a new system that is intended to achieve that. However trustees must not perceive the new system as giving them scope for cutting corners and not going through the necessary processes to ensure they have complied with their fundamental legal duties. Every few years, the Charity Commission publishes report of an investigation to a charity that badly mishandled a property transaction; a lot of care from trustees, executives and advisers will be needed to ensure that the transition to the DAR regime does not generate a flurry of them. 

Andrew Small is in the charities and not for profit team, advising charities and other third sector bodies on their property issues and requirements, including sales, leases, management issues and developments. He has particular experience on property issues arising from charity mergers and incorporations, as well as being an expert on property issues for schools.

Charity bulletin-November 2023

Charity bulletin—November 2023

Welcome to the third edition of Russell-Cooke's charity bulletin, where our expert charity team showcases a collection of recent articles and developments in the charity sector. 

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Briefings Charities disposals of land by charities charity land disposals The Charities Act 2022 sections 117-121 Charities Act 2011 The Charities Act 2011 The Charities Act 1993 QSR regime RICS qualified surveyor surrenderers of leases grant of leases Lord Hodgson’s review of the Charities Act 2006 the Law Commission in 2017 charity land provisions Central Association of Agricultural Valuers DAR regime NAEA Propertymark Connected parties provision Charity Commission Charity Commission consent the changes to the land regime charity surveyor land disposal regime