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03rd May 2017

Charity Disposals (A lesson in how not to)

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Trustees have an overriding obligation to act in the best interests of their charity. How they address that is often for them to decide save for: the need to show how decisions were reached; that due diligence was properly carried out (with expert reports and advice where necessary); and that conflicts of interest were considered and addressed.
When it comes to selling, leasing or transferring property however, there is a statutory process which applies, set out in the Charities Act 2011. Trustees must be able to show they have addressed the “whys” and “hows”. The compliance process usually involves consideration of a surveyor’s report on the sale, or establishing a match with one of the exceptions listed in the Act, and sometimes a Charity Commission order Advice from experienced lawyers and surveyors is usually essential. The statutory aim is to ensure disposals are properly managed and that Trustees obtain the best terms reasonably available in the circumstances.

The need for sound advice and for clear thinking Trustees were very strong themes in the recent Charity Commission Inquiry regarding the disposal of property by The Spiritualist Association of Great Britain Limited. (30 March 2017)

Here, the Charity held a lease of property with over 30 years unexpired but subject to an unusual restriction requiring the property to be used either as an embassy or the headquarters of a non-profit or other similar organisation. The cost of upkeep to the property was substantial and the Charity did not have sufficient funds.

The lease was sold for £6 million to an offshore company which immediately sold it on to another offshore company for over £21 million. It was a complex and difficult transaction for which the Trustees did not seek appropriate advice. No due diligence was done regarding the offshore company purchaser nor others behind the arrangement. No overage was imposed to ensure that the Charity benefitted from any redevelopment or on-sale.

The original solicitors were not charity specialists, but they did express concerns that the Trustees were not meeting their statutory obligations. As a result the Trustees appointed other solicitors who (without following up on the concerns expressed by the original advisors) were happy to recommend proceeding. The original surveyor instructed did not meet the statutory qualification criteria (not a Member or Fellow of the Royal Institution of Chartered Surveyors). However, a report obtained after the event did support the Trustees’ decision.

The Inquiry was remarkably sympathetic to the Trustees’ position, accepting the difficult and restrictive market for a property that the Charity really could not afford, despite the Trustees appearing to seek support for a decision already made, rather than taking an interrogatory approach. The Commission found no bad faith or unauthorised private benefit for the Trustees or anyone else. This helped to persuade the Commission to refrain from further involvement and regulatory action.

The Commission disagreed with the second surveyor’s opinion that overage would have been difficult to impose and secure. It particularly highlighted the lack of analysis and “probing” of the unknown buyer and a complex deal, in accepting the offer as though these were the only terms or offer likely to be available.

Essentially the Trustees failed to demonstrate that their decision making process complied with the statutory regime and thus whether the sale terms were in the best interests of the Charity. The Trustees were also found to have failed to carry out proper due diligence, which was another breach of duty. The Inquiry found that the Charity Trustees’ lack of compliance with their obligations under the Act did not represent “minor or technical breaches” but amounted to fundamental and serious mismanagement.

The lessons for the sector are that compliance with the charity property regime is fundamental to risk management and good governance concerning what is often a very substantial asset for a charity. In some circumstances, a breach in this area will lead to serious enforcement action by the Commission.

For further information please contact Denise Wilkinson on 01223 561155 or click here to email Denise.