22nd June 2014
A community arts charity has found itself facing intense scrutiny from the local community over its decision to sell the charity’s main asset, a Grade II listed building which the charity has used as a theatre and arts centre for almost three decades.
Although the trustees of the charity were aware that the community viewed the building and its activities as symbolic and important to the town, the building had undeniably become a liability and a hindrance on delivering any benefit to pursue the charity’s purposes, which, incidentally, did not require them to own the building.
With the charity facing insolvency due to the high maintenance costs of the listed building, significant health and safety concerns, a large VAT bill, the withdrawal of a local authority grant and increased local competition, the trustees felt the building had become a major hindrance rather than the asset it should have been.
In the absence of a hefty injection of capital to make the building and charity viable again, the trustees decided to minimise losses to the charity by closing the building with a view to selling it. Indeed, the Charity Commission itself recognised that the building had become a prison for the charity and confirmed that the trustees were free to dispose of the building and use the funds in other ways for the objects of the charity.
Before making the decision to sell the building, the trustees considered other less drastic alternatives.
Keeping the building open and operating as before or developing the facilities was clearly the community’s preferred way forward, however to do so, the trustees would require funding to address the building’s immediate safety issues and to develop the facilities. With insufficient income from activities and membership, the only other avenues for funding were grants, commercial borrowing or social investment. The trustees explored all of these options to no avail:
- Grants: only significant capital funding was likely to improve the facility into a viable and attractive venue: such grants were not apparent.
- Commercial borrowing: convincing lenders to back the charity as a viable business was a considerable if not insurmountable challenge.
- Social investment: no major philanthropic investors were known to the trustees. The trustees were, in principle, in favour of a community investment but were very wary of the time this would take with no guarantee of success whilst liabilities continued to mount.
Bearing in mind their duty to safeguard the assets and interests of the charity, the trustees decided the only viable option was to mitigate the loss by selling the building for the best terms reasonably available.
Charity Commission Involvement
Understandably, the Charity Commission wanted the trustees to address the public’s concerns about the governance of the charity and the closure of the building, especially given the high volume of complaints it had received. The Commission’s overriding aim was for the trustees to achieve an outcome that was in the best interests of the charity and its beneficiaries. As the Commission’s case officer was spending much time responding to calls and emails from the interested parties and fact-checking with the trustees, he asked to meet the trustees at the charity’s building, in an effort to save time and cost. The trustees welcomed the opportunity to address the Commission’s concerns directly and show the extent of the problems with the building, which, on a cold and wet winter’s evening, were even more apparent: leaks were obvious and coats were needed throughout the meeting!
The Commission recognised the charity’s poor financial health, and in particular, the burdens and risks associated with owning a Grade II listed building in poor condition. The Commission agreed that it was the trustees’ responsibility to decide on the future of the charity, and that its authority was not needed and it had no outstanding regulatory concerns that would justify an intervention by the Commission.
With the green light given by the Commission, the trustees then turned their attention to mending their relationship with the local community.
Some members of the local community joined together to oppose the decision to close and sell the building, and initiated a campaign against the trustees’ actions. Using social media to its fullest extent (on occasion, somewhat threateningly), including the use of Facebook, Twitter and change.org, and by trying to enlist the Town Council’s support, the campaigners attracted significant support from the community, although those involved were not wholly representative of the potential beneficiaries.
The campaign against the trustees acquired considerable momentum and they were accused of not being open and transparent. However the trustees, with encouragement from the Commission, had agreed to an open public meeting to air and respond to concerns. Members of the community were also invited to share their proposals for the future of the building and the charity. The trustees hoped this would address the community’s concerns and provide a positive channel for their energy. Disappointingly, criticisms outnumbered constructive proposals and no viable plans or suggestions were offered, at least not in sufficient detail to merit investigation.
What became apparent from the meeting was the community’s unwillingness to accept the charity had the power to sell the building without at least the Charity Commission being able to stop it this. The attendees expressed a strong feeling that the building was symbolic to the town and should continue to be used as a theatre and arts centre. Although sympathetic to the community’s views, the trustees had no choice but to fulfil their duties as trustees and choose the option which was in the charity’s best interests. Charity law, and the Commission, is clear that it is the trustees who are to make decisions about the charity and its assets, and they are under a duty to act in the best interests of the charity and to safeguard its assets and future.
Charities Act Requirements for Sale
Following the closure of the building, concerns grew in the community that the building would be put up for sale without any requirement that the new owner continue to operate it as a community facility. There were also concerns the trustees would benefit personally from the sale, in spite of very clear explanations they were not able nor intending to do this.
As disappointing as this may have been to the community, the only requirement of the sale was that the trustees ensure they adhere to sections 117 – 121 of the Charities Act 2011.The trustees thus obtained a qualified surveyor’s report and considered this, before placing the building in auction (with a reserve taking on board the surveyor’s advice) as well as pursuing one or two separate purchasers’ enquiries.
Asset of Community Value
In what was seen as a triumph for the community, the trustees were forced to postpone the building’s sale by auction. Following the procedure set out in the Localism Act 2011, members of the community successfully applied to the local authority to have the building listed as an asset of community value. Land or buildings will have ‘community value’ if, in the local authority’s opinion, their current or recent principal use “furthers the social wellbeing or social interests of the local community” and it is realistic to think that this kind of use can be continued or resumed.
Entry on the list creates a moratorium on certain types of transaction (including sales) which prohibits these transactions unless the owner complies with certain conditions.
The length of the moratorium period depends on whether a community interest group (namely a parish council, charity, guarantee company, industrial and provident society or community interest company) notifies the local authority that it wishes to be treated as a potential bidder. If, within six weeks of the owner’s notice that it wishes to sell, no community interest groups express interest, the owner can sell to whomever it chooses. If any community interest groups do express an interest in bidding, then the moratorium period is extended to six months. The owner can continue to market the building and negotiate sales, but cannot exchange contracts, other than to a community interest group, always bearing in mind the trustees’ duty to obtain the best terms reasonably available. If the owner does not sell the land to a community interest group within the full moratorium period, it is then free to dispose of the land to whomever it wishes.
The registration as an asset of community value arguably has little effect in this situation other than delay, which is unlikely to be in anyone’s interests. The rights under the Localism Act protect buildings which are at risk of being lost to the community. However, as a charity, this owner already has restrictions on the circumstances of sale which ensure the value is not lost even if it is realised as cash because that cash then has to be applied towards the charity’s purposes. Delay ensures this value is locked up while the building at the centre of the dispute remains unused. If a community interest group is intending to purchase a building, the Act can give them time to sort out their purchase. However, as at the date of writing, no community interest groups have so far come forward.
The trustees now await news from the local authority as to whether any potential bidders are interested in the building. They are in the uncomfortable position of watching the charity incur more and more debt as they wait for the right offer to come through, with the risk that if no such offers materialise the charity is likely to become insolvent. They continue to explore sales to other community groups and also for ways for the charity to continue with its aims, whether through an injection of capital into the building to transform it into an attractive and viable venue, or through other avenues, such as using the proceeds of the prospective sale to fulfil its objects in other ways.
Despite the public pressure put on them, the trustees have remained consistent in understanding their responsibility has always been to the charity, its purposes and its beneficiaries. The public’s hopes for the building, although admirable, were not achievable in the short timescale the trustees had. Conscious not to perpetuate problems of the past, the trustees made the bold decision to make a significant change to the charity, in the hope of benefiting the charity’s beneficiaries to the fullest extent in ways other than through the building. They would have been negligent not to do so.
This article was first featured in New Law Journal N.L.J. (2014) Vol.164 No.7611 Supp Charities Appeals Pages 2-3