May Ozga

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Dealings with real estate held by a charity

Education / 26 May 2021

Many schools and colleges are charities; and their real estate assets are held by them as either an exempt or non-exempt charity.  Accordingly, in dispositions with their real estate they must comply with the relevant provisions contained in sections 117-129 of the Charities Act 2011 (“the Charities Act”) before they dispose of any real property belonging to or held in trust for the charity.

Charity trustees have a duty to manage property transactions in the best interests of the charity.  In many instances the Charities Act enables trustees to dispose of charity land without the approval or an order of the High Court or the Charity Commission provided the circumstances of the transaction fall within the relevant provisions of the Charities Act and the trustees have complied with the sections of the Charities Act which apply to their transaction.  Trustees must also check that they have the relevant powers in their charity’s governing document to dispose of the property and they must then exercise such powers in accordance with their governing document.

Under section 117(1) of the Charities Act a charity must obtain an order of the High Court or approval from the Charity Commission before proceeding with a disposal to a connected person or where it does not or cannot comply with the requirements of the rest of section 117 of the Charities Act before entering an agreement to dispose of the property.

Connected persons include:

  • the trustees themselves
  • a donor of land to the charity
  • close relatives of either of these
  • employees or officers of the charity
  • the spouse or civil partner of any of the above persons
  • institutions or companies controlled by such people or in which such people have a substantial interest

The full list of who is a connected person for the purposes of a disposal is set out in section 118 of the Charities Act.

The Charity Commission’s approval or High Court order will need to be sought if a charity does not or cannot comply with the requirements of section 117 – 120 where for example the cost of obtaining a surveyor’s report would be out of all proportion to the value of the transaction and the commission can be reasonably certain that the value of the transaction is genuinely low; or the land is in a remote area where it may be difficult to find a qualified surveyor with sufficient knowledge of local land values; or the disposition is proposed for undervalue that is not outside the scope of section 117 by exemption under s117(3).

Exempt charities do not need authorisation from the Charity Commission to dispose of land or obtain a mortgage, but they may have to obtain the authorisation from their principal regulating body or authority before making any disposals (e.g Secretary of State for Education). Whilst exempt charities are largely exempt from the jurisdiction of the Charity Commission they remain subject to that of the High Court.

But trustees of all exempt charities must fulfil their general trustee duties when dealing with land disposals and mortgages and include the statements required by the Charities Act in disposal and mortgage documents. Trustees should seek legal advice on these matters

Some of the key compliance issues (even when Charity Commission approval might not  be required) for major dispositions are very briefly as follows:

Disposals

The trustees must have obtained and considered a written report from a qualified surveyor (for example, a Member or Fellow of the Royal Institution of Chartered Surveyors (RICS)and the person must be someone the trustees reasonably believe to have the ability in, and experience of, valuing land of the particular kind and in the particular area in question) and the written report must comply with the Charities (Qualified Surveyors’ Reports) Regulations 1992.  Having obtained such a surveyor’s report, the trustees must then advertise and market the disposal in accordance with the surveyor’s advice.

In accepting a buyer’s offer the trustees must have considered their surveyor’s report and be satisfied that:

  • the proposed terms of disposal to the buyer are the best that can reasonably be obtained in the circumstances;
  • the sale will further the purposes of and be beneficial to the charity and, where relevant, that they intend to replace the sold property using the proceeds of sale (if it is designated or endowment property);
  • approval and authority for the disposal is given by all relevant trustees at a properly constituted meeting in accordance with the charity’s governing document and that it is minuted; and
  • the relevant resolutions are passed and that any steps stipulated by the charity’s governing document have been adhered to.

Generally, a charity does not need to follow the above requirements in relation to :

  • disposals given authority under an Act of Parliament or other statutory provision or scheme;
  • a disposal for less than best price to another charity whose objects come within those of the disposing charity;
  • a lease to a beneficiary of the charity for less than best price;
  • disposal of land by way of a mortgage or grant or other security; these have their own regime;
  • an advowson;
  • an option;
  • the release of a rentcharge
  • a disposal of land not in England or Wales even if the charity is based there

When executing the sale documents, the trustees must ensure that the documents contain the necessary statements and certifications required by the Charities Act including certifying compliance with the Charities Act and that the signing trustees are signing in compliance with Section 333 of the Charities Act 2011; and that their fellow trustees have conferred upon the signing trustees a general authority to execute in the names and on behalf of the charity trustees all documents for giving effect to the transaction.

Disposals of Designated or Permanent Endowment Property

If the property is “designated” or “permanent endowment” property and is required by the charity’s governing document to be used for a particular purpose of the charity then, even if Charity Commission approval or scheme is not required in the particular circumstances of a transaction because the proceeds of sale will be used to acquire replacement property for the charity, there is still the additional requirement to give at least one month’s public notice of the proposed sale.  The notice invites representations to be made to them within a specific time period (such time period to be not less than one month after the date of the notice) and take into consideration the representations made.  However, this public notice will not be necessary if the sale is to be effected with a view to using the proceeds of sale to acquire replacement property for the charity.

The approval or an order from the Charity Commission will be needed if you are selling designated land and you do not intend to, or cannot replace it.  Charity trustees can sell designated land if there is a power of sale, or where the land is being replaced (as long as replacing the land furthers the purposes of the charity and will be beneficial to the charity) but if there is no power of sale, and or the designated land will not be replaced, the trustees must apply to the commission for a scheme to provide a power of sale and or give new purposes for the charity.

Acquisitions

Before acquiring property the charity trustees must check that they have the necessary power or authority to purchase the land and need to consider if the property is suitable for its intended use; ensure that any necessary planning permission is obtained; ascertain that the price or rent to be paid is a fair one compared with similar properties on the market and that the charity can actually afford the purchase (and if the property is being purchased with a mortgage the charity trustees must ensure the mortgage can be financed out of the resources of the charity which are available for the purpose).

If a charity is acquiring a lease, the charity trustees must ensure that they  understand their obligations as tenant under the lease and that the terms of the lease are fair and reasonable.

In either the acquisition of a freehold property or a lease the charity trustees would be well advised to obtain the opinion and report of a qualified surveyor acting solely for the charity before proceeding with making any offer and the transaction.

A charity will need to obtain the approval or an order from the Charity Commission for an acquisition if the charity is proposing to use money which represents permanent endowment to acquire land other than freehold land ; is buying land from one of its trustees (or a connected party) or it is buying land when it has no power to do so.

Mortgaging

Usually Charity Commission approval is not required but before entering into a mortgage but a charity’s trustees must, in compliance with S124 of the Charities Act 2011,  obtain and consider proper advice given to it in writing from its professional financial advisers and or accountants.

Such written advice must confirm:

  1. whether the loan/credit facility secured by the mortgage is necessary for the charity to pursue the course of action it wants to in connection with the loan/credit facility;
  2. whether the terms of the loan/credit facility and mortgage are reasonable having regard to the status of the charity as the prospective recipient of the loan/credit facility;
  3. the ability of the charity to repay on those terms the sum proposed to be paid by way of loan/credit facility In more detail To ensure a proper audit trail;
  4. that the charity has had all the relevant papers and settled documentation in connection with the transaction;
  5. the charity trustees have seen a copy of the opinion from the charity’s financial adviser/accountant to the respective lender confirming the ability of the charity to enter in the arrangements;
  6. the charity trustees have a certificate from the charity’s accountant, financial adviser or other appropriate person:
  7. i) which shows that the charity trustees have obtained and considered proper advice on:

whether it is reasonable for them to enter into the loan or grant agreement on the terms proposed

  1. ii) the ability of the charity to discharge any obligation, making any payments, which may be imposed upon it as a result of entry into the agreement on those terms, having regard in particular to any existing borrowing and other liabilities of the charity.

 

Always get help and clarification of your position by seeking legal advice.

 

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This update is for general purposes and guidance only and does not constitute legal or professional advice. You should seek legal advice before relying on its content. This update relates to the prevailing circumstances at the date of its original publication and may not have been updated to reflect subsequent developments. If you have general queries about our updates, please email: mailinglists@greenwoodsgrm.co.uk

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