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(Law Com No 375)

Technical Issues in Charity Law

Presented to Parliament pursuant to section 3(2) of the Law Commissions Act 1965

Ordered by the House of Commons to be printed on 13 September 2017

HC 304


 

© Crown copyright 2017

This publication is licensed under the terms of the Open Government Licence v3.0 except where otherwise stated. To view this licence, visit nationalarchives.gov.uk/doc/open-government-licence/version/3 or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or email: psi@nationalarchives.gsi.gov.uk.

Where we have identified any third party copyright information you will need to obtain permission from the copyright holders concerned.

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ISBN 978-1-5286-0029-3

CCS0917968854        09/17

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Printed in the UK by the APS Group on behalf of the Controller of
Her Majesty’s Stationery Office


The Law Commission

The Law Commission was set up by the Law Commissions Act 1965 for the purpose of promoting the reform of the law.

The Law Commissioners are:

The Right Honourable Lord Justice Bean, Chairman

Professor Nick Hopkins

Stephen Lewis

Professor David Ormerod QC

Nicholas Paines QC

The Chief Executive of the Law Commission is Phil Golding.

The Law Commission is located at 1st Floor, Tower, 52 Queen Anne's Gate, London SW1H 9AG.

The terms of this report were agreed on 26 July 2017.

The text of this report is available on the Law Commission's website at http://www.lawcom.gov.uk.

 

 

 


Contents

                                                                                                                                            Page

Glossary of terms used in this report   1

Chapter 1: Introduction   4

Introduction  4

What is a charity?  4

The size of the charity sector 4

Trustees, staff and volunteers  5

Public donations to charities  5

Public trust and confidence  5

Charities in the public eye  6

Background to the project 7

Social investment by charities  7

Technical issues in charity law   7

The aims of reform   8

Consultation  9

Consultation events  10

Consultation responses  11

Our recommendations for reform   11

The structure of this report 11

Acknowledgements  13

The team working on the project 13

Chapter 2: The different types of charity   14

Introduction  14

The different legal forms of charities  14

The statutory definition of a charity  14

Incorporated charities  14

Unincorporated charities  15

Different categories of charity under the Charities Act 2011  16

Registered charities  16

Exempt charities  16

Excepted charities  17

Other unregistered charities  17

Terminology  18

Charities  18

Trustees  18

Governing documents  18

Chapter 3: Financial thresholds   19

Introduction  19

Arbitrary results from thresholds  19

Adjusting the thresholds to reflect inflation  20

Chapter 4: Changing purposes and amending governing documents   23

Introduction  23

Figure 1: examples of circumstances in which a charity may need to amend its governing document 23

Charitable companies and CIOs  24

The current law   24

The general framework  26

Differences between companies and CIOs  26

Definition of regulated alterations  27

Schemes in respect of charitable companies and CIOs  29

Unincorporated charities  30

The current law   30

Figure 2: amendments that can be made under section 280  32

Figure 3: the section 62 cy-près occasions – gateways to a cy-près scheme  33

Figure 4: the section 67 similarity considerations  35

The Consultation Paper 36

Consultation responses  37

Discussion and options for reform   40

The Supplementary Consultation Paper 40

A new amendment power for unincorporated charities  42

Figure 5: majorities for trustees’ and members’ resolutions in charity law   53

The continued role of section 275  54

The Charity Commission’s discretion to consent to a change of purposes  58

Continuing role of schemes and the law of cy-près  63

Effect of our reforms  65

Chapter 5: Charities governed by statute or Royal Charter:
changing purposes and amending governing documents   67

Introduction  67

The current law   68

Statutory charities  68

Figure 6: statutory charities – the section 73 procedure  69

Royal Charter charities  71

Figure 7: Royal Charter charities – the express power procedure  72

Figure 8: Royal Charter charities – the supplemental Charter procedure  73

Criticisms of the current law   76

(1) Unnecessary complexity, delay and costs  76

(2) Disproportionality  78

(3) Lack of transparency in the amendment process  79

(4) Inconsistencies  80

Conclusion  80

Our provisional proposals  80

Discussion and recommendations for reform   81

Royal Charter charities: improving the supplemental Charter procedure  81

Statutory and Royal Charter charities: power to make minor amendments and guidance  88

Other improvements to the amendment process  98

Higher education institutions  101

Constitutional change: the current law   101

Re-allocation of provisions  102

The Consultation Paper 103

English HEIs: BIS 2015 Green Paper 104

Our conclusions following consultation  105

English HEIs: the Higher Education and Research Act 2017  106

Welsh HEIs  107

HEIs with individual Acts of Parliament 108

Chapter 6: Cy-près schemes and the proceeds of fundraising
appeals   109

Introduction  109

The current law   109

General charitable intention  109

Surplus funds  109

Failed appeals  110

Figure 9: requirements for advertisements in the 2008 Regulations  112

Figure 10: form of disclaimer under the 2008 Regulations  113

Figure 11: notification to be given to donors who have made a Declaration  114

National Health Service charities  115

Avoiding the difficulties of failed appeals and surplus funds  115

Analysis  117

The issues  117

Issue (A): failed appeals – the requirement for a general charitable intention  117

Issue (B): failed appeals – the procedures in Cases (1) to (5) 122

Failed appeals: summary  126

Issue (C): failed appeals and surplus funds – Charity Commission involvement 126

Chapter 7: Acquisitions, disposals and mortgages of charity land   129

Introduction  129

Structure and summary of this chapter 129

Powers and restrictions  130

The historical background  130

The current regime: limitations on disposals and mortgages  132

Transactions to which the regime applies  132

The default rule: no transaction without the consent of the court or the Charity Commission  133

(A) Dispositions other than mortgages  134

Figure 12: the Charities (Qualified Surveyors’ Reports) Regulations 1992  136

(B) Mortgages  139

Formalities and land registration  140

Evaluation of the current law   143

Criticisms of the Part 7 regime  143

Support for the Part 7 regime  148

Conclusion  149

Our Proposals for reform of the advice requirement 149

Restrictions on the register 151

What should the advice requirements be?  152

Options for reform of the advice requirements  155

Discussion  164

Mortgages and leases of up to seven years  165

Legacy cases  168

Recommendations for reform of the advice requirements  172

Multiple beneficiaries  173

Policy underlying Part 7  173

Clarifying the definition of “charity land” 173

Connected persons  175

Should the provisions concerning connected persons be retained?  175

The definition of connected persons  177

Delegation  182

Obligations on the charity trustees  182

The Part 7 certificate  183

Part 7 certificates  184

The “Bayoumi gap” 184

Designated land  185

Acquisition of land  186

Existing Exceptions to the advice requirements in Part 7  188

Exempt charities  188

Church of England land  189

Sales by liquidators, administrators, receivers and mortgagees  190

Disposals to other charities  191

Leases to beneficiaries  192

The Universities and College Estates Acts  193

Historical background to the Universities and College Estates Acts 1925 and 1964  193

Application of Part 7 of the Charities Act 2011  195

The Consultation Paper 195

Consultation responses  196

Discussion  196

Chapter 8: Permanent endowment   198

Introduction  198

Figure 13: terminology in this chapter 200

What is permanent endowment?  201

Statutory definition  201

Figure 14: examples of permanent endowment 202

The nature of permanent endowment 202

Effect on the current law and on our recommendations  206

Reformulating the definition of permanent endowment 207

Spending permanent endowment 209

Figure 15: why might charities want to spend their permanent endowment?  210

The current law   210

The Consultation Paper and our earlier work on social investment 214

Releasing the restrictions on spending permanent endowment 216

Sections 281 and 282 of the Charities Act 2011  216

Figure 16: problems with the income and capital thresholds  218

Figure 17: problems with the income and capital thresholds  219

Sections 288 and 289 of the Charities Act 2011  224

Releasing the restrictions on permanent endowment: recommendations for reform   225

Total return investment 225

A new form of permanent endowment 226

Problems with the current law   226

Appetite for a new regime  228

Discussion  230

Social investments with an expected negative financial return  230

Figure 18: permanent endowment and social investments with a negative
financial return – the current law   231

Recommendations for reform   233

(1) A power to borrow from permanent endowment 233

(2) A power to engage in portfolio offsetting  236

Distinction between the two recommended powers  238

Chapter 9: Remuneration for the supply of goods and the power
to award equitable allowances   240

Introduction  240

Remuneration for the supply of goods  242

Equitable allowances  244

When is an equitable allowance awarded?  244

A power for the Charity Commission to award equitable allowances  245

The criteria to be used for awarding equitable allowances  247

Challenging decisions to award, or not to award, an equitable allowance  249

Chapter 10: Ex gratia payments out of charity funds   252

Introduction  252

Figure 19: situations in which trustees might wish to make ex gratia payments  252

A power to make small ex gratia payments  253

Should trustees be given a power to make small ex gratia payments without
Charity Commission consent?  253

The threshold for making ex gratia payments without Charity Commission consent 255

Reporting of ex gratia payments  259

The ability to exclude the power to make small ex gratia payments  259

Delegation of the decision to make ex gratia payments  260

The test for making an ex gratia payment 260

Should it be possible to delegate the decision to make ex gratia payments?  260

Potential limitations on delegation  262

Statutory charities  264

Further reform suggested at consultation  266

Parallel reform of section 105 of the Charities Act 2011  266

Appeal from a decision made under section 106 of the Charities Act 2011  266

Chapter 11: Incorporations, mergers and trust corporation status   268

Introduction  268

Structure and summary of this chapter 268

The current law   269

Incorporation  269

Merger 269

Transferring operations  269

The register of mergers  270

Powers to merge  271

Mechanisms to effect a merger 274

Permanent endowment and special trust property  277

Recommendations for reform   278

Powers to merge  278

Mechanisms to merge: section 310 vesting declarations  279

Avoiding ongoing costs following merger 286

The problem with shell charities  286

Bequests to a charity that has merged  286

Other reasons for retaining shell charities  290

Trust corporation status  291

The current law   291

Criticisms of the current law   293

Wider issues with trust corporation status  293

Options for reform   294

Which corporate bodies should obtain trust corporation status?  295

How should charitable corporations obtain trust corporation status?  296

For what purposes should trust corporation status be conferred?  297

Regulation 61 of the CIO (General) Regulations 2012  298

Chapter 12: Charity and trustee insolvency   299

Introduction  299

Figure 20: terminology in this chapter 300

The current law   301

Bankruptcy and liquidation on insolvency  301

Insolvency in charities  302

Availability of trust property to creditors  303

Insolvency of a trustee of a charitable trust 303

Uncertainties and misunderstandings  305

Permanent endowment, special trusts and restricted funds  305

Individual and corporate trustees  306

Figure 21: permanent endowment as a distinct charity  307

Charity Commission guidance  308

Is the law satisfactory?  310

Further points raised by consultees  311

Applying the law to the facts of individual cases  311

Chapter 13: Charity names   313

Introduction  313

Requiring a charity to change its name  314

Section 42 of the Charities Act 2011  314

Figure 22: section 42 grounds  315

Charitable companies  316

Delaying or refusing registration when section 42 issues arise  317

When will the Charity Commission issue a section 42 direction?  317

Working names  318

Recommendations for reform   319

The scope of section 42 directions  319

Power to refuse or delay registration  323

Chapter 14: The identity of a charity’s trustees   327

Introduction  327

Determining the identity of a charity’s members  327

Determining the identity of a charity’s trustees  328

Existing ways to deal with uncertainties about the identity of trustees  328

Consultation responses  329

Circumstances in which a new power would be used  329

Conclusions  330

Chapter 15: The Charity Tribunal and the courts   334

Introduction  334

The work of the Charity Tribunal 335

Figure 23: cases heard by the Charity Tribunal 335

A permission filter for court and tribunal proceedings  336

Court proceedings  336

Figure 24: the definition of “charity proceedings” 336

Tribunal proceedings  340

Expenditure on proceedings before the courts and the tribunal 341

Charity Tribunal proceedings  342

Suspending the effects of a Charity Commission scheme or decision pending the determination of a case  347

References to the Charity Tribunal 350

Procedure for references by the Charity Commission to the Charity Tribunal 350

The powers exercisable by the Charity Tribunal when considering references  353

Chapter 16: Recommendations   355

Appendix 1: Selected Issues in Charity Law - Terms of Reference   371

Appendix 2: List of consultees   374

Appendix 3: Draft Charities Bill  379

Appendix 4: Explanatory Notes on the draft Charities Bill  422

What these notes do  422

Overview of the draft Bill 422

Policy background  423

Legal background  423

Territorial extent and application  424

Commentary on provisions of the Bill 424

Appendix 5: Draft regulations relating to Chapter 7  456

Appendix 6: Draft regulations relating to Chapter 8  461

Appendix 7: Means of challenging Charity Commission decisions   462

Appendix 8: Worked examples of distribution of assets
on insolvency   463



Glossary of terms used in this report

Appropriation

Appropriation is “the process whereby [the person responsible for administering the estate] uses a specific asset to meet in full or in part the pecuniary entitlement of a beneficiary”.[1] When land is appropriated to a beneficiary, the beneficiary acquires the beneficial interest in the property.

Assent

An assent is the transfer of ownership of an asset to a person entitled to that asset pursuant to the administration of a deceased’s estate. It is “an acknowledgement by a personal representative that an asset is no longer required for the payment of the debts, funeral expenses or general pecuniary legacies”.[2]

Beddoe orders

In court proceedings, charity trustees can seek a Beddoe order which provides them with advance assurance that the proceedings are in the interests of the charity and that the costs incurred by the trustees can properly be paid from the charity’s funds.

CAAV

Central Association of Agricultural Valuers

CLA

Charity Law Association

Charity

An institution falling within section 1 of the Charities Act 2011; see para 2.3.

Charity Commission Guidance

Guidance published by the Charity Commission and available on its website. The guidance comes in two series: the “CC” series which is intended for external use, and Operation Guidance (the “OG” series) which is intended for internal use but which provides further detail on the Commission’s approach to many issues.

Charity trustees

Defined in section 177 of the Charities Act 2011 as “those responsible for the control and management of the charity”. It includes the directors of a charitable company and the management committee of an unincorporated association.

CIO

Charitable incorporated organisation: a form of corporate charity that was introduced by the Charities Act 2006 as an alternative to the limited company. It provides the benefits of incorporation without requiring dual registration with both the Charity Commission and with Companies House.

Consultation Paper

The Law Commission’s principal consultation paper on Technical Issues in Charity Law.[3]

Cy-près

Cy-près means “as near as possible”. When a charitable purpose cannot be carried out, the Charity Commission can direct under a scheme that the funds should be used for other similar charitable purposes.

Designated land

Land held on trusts stipulating that it must be used for the purposes of the charity: Charities Act 2011, section 275(1).

Diocesan glebe land

Land vested under the Endowments and Glebe Measure 1976 in the diocesan board of finance of the Church of England. It is used for investment purposes to generate income for the Diocesan Stipend Fund: Endowments and Glebe Measure 1976, section 15.

Disponee

A person to whom an interest or estate in land is granted or conveyed. For example, a buyer of a freehold or leasehold estate, a tenant under a lease, a chargee, or a person who is granted an easement.

Expendable endowment

Property which is subject to a restriction on being spent, unless and until the trustees decide to spend it; the trustees have a discretion to spend the capital.

Functional permanent endowment

Permanent endowment that generally does not produce an income but is used by the charity to pursue its purposes, for example a village hall or a recreational ground. The charity might be able to sell the property and purchase other property that performs the same function, but it cannot spend the proceeds of any sale on its day-to-day activities.

Governing document

The document setting out a charity’s purposes, the powers and duties of those responsible for its management and administration, and the procedures to be followed in exercising those powers. “Governing document” is used as a generic term, regardless of a charity’s legal form. The Charities Act 2011 uses the term “trusts” to refer to a charity’s governing document, regardless of whether or not it is in fact a trust.

Investment permanent endowment

A fund of assets, such as shares, that produce an income to fund the charity’s activities. The charity can sell an investment in the fund to purchase another, but it cannot sell an investment and spend the proceeds to further its purposes.

NAEA

National Association of Estate Agents

Permanent endowment

Property that is held by, or on behalf of, a charity subject to a restriction on being spent: section 353(3) of the Charities Act 2011.

Residuary gift

The “residue” of an estate is all that is left after the payment of (i) the deceased’s debts, (ii) the expenses of the administration of the estate, and (iii) the payment of legacies. When a testator leaves the residue of the estate to a named person, it is a “residuary gift”.

RICS

Royal Institution of Chartered Surveyors

Royal Charter charities

A charity that is incorporated or regulated by a Royal Charter.

Specific devise

A gift by will of particular land to a named beneficiary.

Statutory charities

A charity that is incorporated or regulated by an Act of Parliament.

Supplementary Consultation Paper

The Law Commission’s supplementary consultation paper on Technical Issues in Charity Law.[4]

 

Technical Issues in Charity Law

To the Right Honourable David Lidington MP, Lord Chancellor and Secretary of State for Justice

Chapter 1: Introduction

Introduction

1.1        This report analyses various issues in charity law and makes recommendations that the law should be reformed.

What is a charity?

1.2        Charities occupy a special place in society and in law. They exist for the benefit of the public.[5] Each has a purpose, ranging from the relief of poverty to the promotion of the arts to the advancement of environmental protection.[6] Charities come in all shapes and sizes, and their aims range from focusing on local issues to a nationwide or global sphere of interest.

1.3        It is a fundamental principle that, for an institution to be a charity, its purposes must be exclusively charitable.[7] A charity must exist for the benefit of the public generally, not for the benefit of private individuals or entities.

1.4        The Charity Commission for England and Wales registers and regulates charities, though many charities are not required to be registered. Of those unregistered charities, some are nevertheless regulated by the Charity Commission; others are not. We explain these different categories of charity in Chapter 2.

The size of the charity sector

1.5        There are approximately 167,000 charities in England and Wales registered with the Charity Commission,[8] with a combined annual income of over £74 billion.[9] In 2012, it was estimated that there were a further 191,000 unregistered charities with a combined income of £57.7 billion.[10] Charities hold significant assets; registered charities alone have total assets worth over £259 billion.[11]

Trustees, staff and volunteers

1.6        Charities depend on people. Charities are overseen and controlled by their trustees, who are generally unpaid. Trustees range significantly from local residents who are passionate about a local cause through to professionals whose skills and experience can assist in the oversight of a large charity’s operations. Small charities often rely solely on the trustees and other volunteers to carry out their activities; others have sufficient resources to employ (sometimes numerous) staff. Charity law therefore applies to and affects a wide range of people, many of whom will not have access to legal advice on its application.

1.7        There are more than 951,000 trustees of registered charities, and registered charities employ over 1.5 million people and are supported by over 3.5 million volunteers.[12] These figures would increase significantly if the trustees, staff and volunteers of unregistered charities were included (but about whom there are no data).

Public donations to charities

1.8        The importance of charities is reflected by the significant donations made to them each year; charitable giving by individuals in the United Kingdom in 2016 was estimated to be £9.7 billion.[13] According to a 2016 survey conducted by the Cabinet Office, in an average four-week period, around three-quarters of the 3,000 people interviewed gave to a charity, donating an average of £22.[14]

Public trust and confidence

1.9        The Charity Commission’s first statutory objective is to increase public trust and confidence in charities.[15] Research published by the Charity Commission in 2016 showed that public trust and confidence in charities had reached its lowest level since 2005.[16] This fall is thought to have been a result of negative media coverage about charities in 2015/16 and a distrust as to how donations were being spent, in particular the proportion of donations which were reaching the end cause.[17] However, research published by nfpSynergy later in 2016 indicated that public trust in charities is returning, rising from 48% in autumn 2015 to 60% in autumn 2016.[18] The most recent research published by the Charity Commission explains that the level of public trust in the charity sector is comparable with that in schooling and childcare and the food and drink industry, and significantly higher than that in other industries such as financial services and affordable housing.[19]

Charities in the public eye

1.10     During the course of our project, there has been significant media coverage relating to charities, principally concerning fundraising practices and the collapse of Kids Company. Fundraising was an issue addressed by a cross-party review in 2015,[20] measures were included in the Charities (Protection and Social Investment) Act 2016,[21] and the new Fundraising Regulator is already operational.[22] Fundraising does not form part of our terms of reference.

1.11     The charity Kids Company closed in August 2015 amid allegations of financial mismanagement and governance problems.[23] The Charity Commission opened a statutory inquiry into the charity soon after, in line with its duty to promote public trust and confidence in charities. Various other inquiries have been conducted into the collapse of the charity, including by the Public Accounts Committee and the Public Administration and Constitutional Affairs Committee.[24] These inquiries have focussed on issues surrounding public money granted to the charity without sufficient competitive tendering and assessment of the way in which the charity was run. The Insolvency Service has recently stated its intention to bring proceedings against the former directors of the charity which could disqualify them from acting as company directors.[25] While the concerns raised by the inquiries to date are relevant to the need, in our recommendations, to balance deregulation against proper protection of charity assets, none of them relate directly to the terms of reference for this project. We therefore do not directly address these issues in this report.

Background to the project

1.12     Our project on selected issues in charity law originated from our Eleventh Programme of Law Reform.[26] The Charity Commission had suggested a review of certain issues affecting charities established by statute and by Royal Charter. We were also mindful of the statutory review[27] of the Charities Act 2006 that was about to be conducted by Lord Hodgson of Astley Abbotts, which we thought might raise further legal issues that were ripe for reform. Lord Hodgson’s report, published in 2012, made over 100 recommendations.[28] Amongst those recommendations, he highlighted various technical legal problems faced by charities and suggested that they be given further consideration by the Law Commission. We agreed to include many of those issues within our project, which started in 2013. Our terms of reference are set out in Appendix 1.

1.13     We divided the project into two parts. The first part concerned social investment by charities; the second the remaining issues in our terms of reference.

Social investment by charities

1.14     We published a Consultation Paper on social investment by charities in April 2014[29] and a paper setting out our recommendations in September 2014 (“the Social Investment Report”).[30] We then drafted a Bill to give effect to our principal recommendations (a) for the creation of a statutory power for charities to make social investments, and (b) to set out the duties that should apply when charity trustees make social investments. Our draft Bill has since been implemented as part of the Charities (Protection and Social Investment) Act 2016, subject to one modification.[31]

Technical issues in charity law

1.15     This report concludes the second part of our project covering all the remaining issues in our terms of reference. We also added one issue that arose from our work on social investment, namely a review of the law relating to the use of permanent endowment.

1.16     Our project is not a full review of charity law. Our terms of reference relate to selected technical issues. Those issues do not include controversial matters, such as the law of public benefit and the charitable status of independent schools. Lord Hodgson made recommendations in respect of some of the issues within our terms of reference; others he simply highlighted as creating difficulties and worthy of more detailed consideration by the Law Commission. In formulating our recommendations for reform, we have carefully considered Lord Hodgson’s comments and (when he made them) his recommendations. Our review has not, however, been limited to an assessment of his recommendations. Rather, we have looked afresh at the various issues in our terms of reference including their wider context.

The aims of reform

1.17     Our project concerns various technical legal issues in charity law. Whilst technical, they are important and have very practical consequences for charities. Lord Hodgson has likened regulatory burdens on charities to the barnacles that slow down a ship.[32] Uncertainties in the law and unnecessary regulation can delay or prevent charities’ activities, discourage people from volunteering to become trustees, and force charities to obtain expensive legal advice. And whilst some (particularly large) charities have ready access to legal advice, it is beyond the reach of others.

1.18     Charities have an important role and the law should both protect and properly regulate them. Our project is intended to further these objectives by removing unnecessary or inefficient regulation while safeguarding the public interest in ensuring that charities are properly run.[33] Charities must be carefully regulated, but not every regulatory requirement is indispensable. For example, in Chapter 7 we recommend relaxing, but not removing, the regulation of land transactions by charities; rather than requiring charities to obtain advice from members of the Royal Institution of Chartered Surveyors (“RICS”), we recommend that charities should also be able to satisfy the regulatory requirements by obtaining advice from certain other property professionals.

1.19     Our recommendations aim to support and equip the charity sector by ensuring that the legal framework in which it operates is fair, modern, simple and cost effective. More specifically the recommendations aim to fulfil the following objectives.

(1)        To remove unnecessary regulation and bureaucracy in order to maximise the efficient use of charitable funds. The aim is to prevent the disproportionate diversion of charitable assets and trustee time on compliance with regulation from which little or no benefit is derived.

(2)        To increase the flexibility of trustees to make decisions in the best interests of their charities, in particular to give trustees wider or additional powers to make decisions without having to obtain authorisation where appropriate.

(3)        To confer wider or additional powers on the Charity Commission in order to increase its effectiveness. This includes enabling the Commission to carry out its current functions more efficiently and to take action where it ought to be able to but cannot currently (for example to regulate or assist charities).

(4)        To ensure adequate protection of charity property in order to enhance donor confidence and public trust, in particular supporting confidence in the use of donations currently and in the future.

(5)        To remove inconsistencies and complexities in the law making it clearer for charity trustees, staff, volunteers and professional advisers seeking to apply it and comply with it as well as reducing legal and other professional costs. This includes seeking to reduce the potential for unintentional mistakes and the associated costs of addressing them.

1.20     There is a link between good regulation and public trust and confidence in charities. Speaking at the Charity Commission’s Annual Public Meeting in 2017, the Chair of the Charity Commission, William Shawcross, said that the Commission wished to add to its focus on compliance “a renewed emphasis on enablement.” He argued that “enabling trustees to run their charities better is key to public confidence in charity and to the effective use of charitable resources.”

Consultation

1.21     In March 2015 we published our consultation paper, Technical Issues in Charity Law (“the Consultation Paper”)[34] which made proposals to:

(1)        give charities wider or additional powers and flexibility;[35]

(2)        reduce the regulation of certain transactions by charities;[36]

(3)        confer wider or additional powers on the Charity Commission;[37] and

(4)        rationalise the law and remove inconsistencies.[38]

1.22     Two issues arose from the consultation on which we did not expressly invite consultees’ views: first, a particular point relating to changing a charity’s purposes; and second, trust corporation status. We wanted to hear more about these issues before deciding on our final recommendations. We therefore published a supplementary consultation paper (“the Supplementary Consultation Paper”)[39] in September 2016 focussing on those two issues.

1.23     Consultees were supportive of our project and keen to engage in the detail of our proposals. There was a clear sense that the issues in our project, although technical and difficult, are nevertheless important for charities and that reform has the potential to improve the legal framework within which charities operate.

1.24     Many consultees commented on the need for a balance between various competing interests in devising recommendations for reform.

(1)        Charities should be given flexibility and autonomy in how they are run.

(2)        “Inefficient and unduly complex legal provisions that impose unnecessary administrative and financial burdens on charities” should be removed.[40]

(3)        Proper oversight and accountability of charities is important to maintain public trust and confidence in the sector.

(4)        Regulation should be proportionate; “a regulatory regime whose administrative costs swallow up a large part of the benefit is inappropriate”.[41]

(5)        Deregulation can be beneficial for all charities; small charities, in particular, might benefit from reduced compliance costs. Conversely, however, “good regulation can be helpful for smaller charities, providing a proper structure within which to operate”.[42]

(6)        Third party rights should be respected, but should not unduly hamper the administration of a charity or prevent change.

1.25     There is often a tension between these aims, and we agree with consultees’ general comments about the need for a balance. The difficulty is in deciding how to reach the balance between those competing aims.

Consultation events

1.26     During the consultation period, we attended various consultation events:

(1)        a public consultation event in Bristol, hosted by Veale Wasbrough Vizards LLP;

(2)        a consultation event for charity professionals, practitioners and academics, organised and hosted by the University of Liverpool Charity Law and Policy Unit, at the University’s London campus; and

(3)        meetings with the Association of University Legal Practitioners, the Association of Charitable Foundations, the National Council for Voluntary Organisations, the Charities’ Property Association, the Churches’ Legislation Advisory Service, and officials from the Privy Council Office, Attorney General’s Office, Department for Business, Innovation and Skills (as it then was), and the Welsh Government.

1.27     The Consultation Paper also featured in the sector press.[43]

Consultation responses

1.28     We had an enthusiastic response to our consultations. We received written responses to our initial consultation from 91 consultees and an additional 26 written responses to our supplementary consultation, many of which were very detailed. The consultees who responded are listed in Appendix 2. All of the main stakeholders in the charity sector were represented.[44]

1.29     The Charity Law Association (“CLA”) formed a working group of 23 charity lawyers to respond to the Consultation Paper, and two further working groups to respond to the Supplementary Consultation Paper. Those responses have been particularly helpful in devising our recommendations for reform. The views of the working group do not necessarily represent the opinions of the CLA membership, nor the organisations that each lawyer represents. For brevity, however, we refer to the responses of the CLA working groups as the response of “the CLA”.

1.30     We have held follow-up meetings with members of the CLA working group, the Charity Commission, the Charities’ Property Association and the institutions governed by the Universities and College Estates Act 1925 to discuss aspects of their responses and our recommendations for reform.

Our recommendations for reform

1.31     Consultation revealed general consensus on some issues and a range of views on others. Not everyone will agree with all of our recommendations for reform, but consultation has successfully elicited the different viewpoints which has been helpful to us in formulating our recommendations. On many issues, we follow our provisional proposals in the Consultation Paper, but in some areas we have departed from them following comments from our consultees. The input of consultees has been vital to the preparation of all of our final recommendations for reform.

The structure of this report

1.32     In Chapter 2, we explain the different legal forms of charities and the categorisation of different charities under the Charities Act 2011. In Chapter 3, we comment on a general point raised by some consultees about financial thresholds in the Charities Act 2011.

1.33     In Chapters 4 and 5, we discuss the amendment of charities’ purposes and other provisions in their governing documents. Chapter 4 concerns the most common legal forms of charities, and we make recommendations to align more closely the amendment powers of corporate and unincorporated charities. Chapter 5 concerns charities that are governed by statute or by Royal Charter and we make recommendations to improve the procedures by which they can amend their governing documents. In Chapter 6, we examine the rules governing the distribution of the proceeds of failed fundraising appeals.

1.34     In Chapter 7, we discuss the regime that applies to charities when they dispose of land. We then turn to the law governing the use of permanent endowment in Chapter 8; we recommend changes to the procedures by which charities can release the restrictions on spending their permanent endowment and recommend the creation of a new statutory power to borrow from permanent endowment as well as a new power to make certain social investments using permanent endowment.

1.35     Chapter 9 addresses two issues: the payment of trustees for the provision of goods to their charity and empowering the Charity Commission to award an equitable allowance to a trustee who has made an unauthorised profit in breach of his or her fiduciary duties to the charity. In Chapter 10 we recommend changes to the circumstances in which ex gratia payments (payments to third parties who have a moral, but not a legal, claim to the charity’s property) can be made by a charity.

1.36     In Chapter 11, we consider the regime that governs the incorporation and merger of charities, and consider a related issue concerning trust corporation status. We then look at the insolvency treatment of property held on charitable trust, including permanent endowment and special trust property (Chapter 12).

1.37     Chapters 13 and 14 concern two discrete powers of the Charity Commission: the power to require a charity to change its name and to refuse to register a charity unless it changes its name (Chapter 13); and the power to determine the identity of the charity’s trustees and members (Chapter 14). We make recommendations that these powers be expanded.

1.38     In Chapter 15, we discuss particular issues that have arisen since the Charity Tribunal was established by the Charities Act 2006 and make recommendations for reform.

1.39     Chapter 16 gathers together all of our recommendations for reform.

1.40     Appendix 1 sets out the terms of reference for our project. A list of all consultees appears at Appendix 2.

1.41     Appendix 3 contains a draft Bill that would implement our recommendations for reform, and accompanying Explanatory Notes appear at Appendix 4. Appendices 5 and 6 contains draft statutory instruments that would implement those of our recommendations that require secondary legislation. Appendix 7 summarises the means of challenging decisions of the Charity Commission, which is discussed in Chapter 9. Appendix 8 contains some worked examples about the law of insolvency that relate to Chapter 12.

1.42     Alongside this report, we are publishing:

(1)        a summary of this report;

(2)        a marked-up version of the Charities Act 2011, reflecting the amendments that would be made to the Act following implementation of the draft Bill at Appendix 3 to this report;

(3)        an Impact Assessment; and

(4)        an Analysis of Responses to the Consultation Paper and the Supplementary Consultation Paper.

1.43     Each of these documents is available on our website: www.lawcom.gov.uk.

1.44     All websites referred to in this report were last visited and correct on 24 August 2017.

Acknowledgements

1.45     Our thanks go to all those who responded to our two consultation papers (listed in Appendix 2) or who have supported our project in other ways. We are grateful for the work, time and careful thought they have given to the detailed issues covered in this report. We are also grateful to those listed in paragraph 1.26 above who have organised and hosted consultation events which enabled us to engage with a wide range of stakeholders.

1.46     Throughout our project we have been assisted by those consultees listed above who have generously given their time to meet with us and discuss some of the most difficult aspects of this area of law and offer feedback on our recommendations. Particular thanks go to our consultants, Con Alexander, Rachel Tonkin and the members of the charities team at Veale Wasbrough Vizards LLP for sharing their expert views on the issues discussed in this paper and on early drafts of this report and Bill; the CLA Working Party, and its Chair Nicola Evans (of Bircham Dyson Bell LLP), for meeting with us on various occasions, for their comments on an early draft of the Bill and for their input for our Impact Assessment; and to Judge McKenna, Principal Judge of the First-tier Tribunal (Charity) for sharing her expertise on our reforms regarding the Charity Tribunal.

1.47     Finally, we thank the officials from the Department for Digital, Culture, Media and Sport, the Charity Commission, the Attorney General’s Office, the Privy Council Office, the Ministry of Justice, the Tribunal Procedure Committee, the Welsh Government, HM Land Registry, the Department for Education and the Department for Environment, Food and Rural Affairs, who have given detailed feedback on our recommendations and valuable input for our Impact Assessment.

The team working on the project

1.48     The following members of the Property, Family and Trusts team have contributed to this report at various stages: Matthew Jolley (team manager); Daniel Robinson (team lawyer); Elizabeth Drummond (team lawyer); Kimberley Ziya (research assistant); Emma Loizou (research assistant); and James Linney (research assistant).


Chapter 2: The different types of charity

Introduction

2.1        In order to understand our recommendations for reform of charity law, it is important to be familiar with the different legal forms that charities can take as well as the categorisation of charities in the Charities Act 2011.

The different legal forms of charities

2.2        Charities take various different legal forms. Several of the technical issues raised in this report turn on the legal form of the charity, particularly whether it is incorporated (and therefore has a legal personality separate from its trustees or members) or unincorporated (and therefore has no separate legal personality).

The statutory definition of a charity

2.3        Section 1(1) of the Charities Act 2011 defines “charity” as an institution that is established for charitable purposes only, and falls to be subject to the control of the High Court in the exercise of its jurisdiction with respect to charities. This definition does not distinguish between the different legal forms of charities[45] and the Charities Act 2011 applies to all charities regardless of their legal form.[46]

Incorporated charities

Companies

2.4        Charities can be incorporated as companies. They are governed by the Companies Act 2006 and must be registered at Companies House (as well as being registered by the Charity Commission).[47] Charitable companies are usually limited by guarantee, rather than by shares. A charitable company’s governing document is its articles of association. The Charity Commission publishes model articles of association for charitable companies.[48]

Charitable incorporated organisations

2.5        The charitable incorporated organisation (“CIO”) is a new form of incorporated charity that was introduced by the Charities Act 2006 as an alternative to the limited company. It provides the benefits of incorporation without requiring dual registration with both the Charity Commission and with Companies House. The membership of a CIO may be limited to its trustees (the “foundation” model), or it may have members who are not trustees (the “association” model). A CIO’s governing document is called its constitution. The Charity Commission publishes a model constitution for CIOs.[49]

Charities incorporated by Act of Parliament

2.6        A small number of charities have been incorporated by Act of Parliament. The incorporating Act will often contain the provisions regulating the purposes and administration of the charity, but some of these provisions may be found in a later Act or Acts (or indeed in another instrument). We discuss charities incorporated by Act of Parliament, which we refer to as “statutory charities”, in Chapter 5.

Charities incorporated by Royal Charter

2.7        A charity (or the governing body of a charity) may be incorporated by a Royal Charter granted by the Sovereign.[50] Charters are granted on the advice of the Privy Council, which advises on the exercise of the Sovereign’s duties and common law powers. Like other corporate bodies, Royal Charter corporations are legal persons distinct from their individual members.[51] The governing documents of charities (or trustee bodies) incorporated by Royal Charter typically comprise the incorporating Charter (and any supplemental Charters), bye-laws and regulations. We discuss Royal Charter charities in Chapter 5.

Community benefit societies

2.8        Community benefit societies, previously known as industrial and provident societies, can be charities and are governed primarily by the Co-operative and Community Benefit Societies Act 2014.

Other incorporated charities

2.9        Charities have occasionally been incorporated by prescription, by a lost Charter being presumed, and by custom.[52]

Unincorporated charities

2.10     An unincorporated charity will either be a trust or an unincorporated association.

Trusts

2.11     A charitable trust involves one or more trustees holding property on trust for charitable purposes. The charity has no members. The governing document will generally be a trust deed or declaration of trust but it may also be a Charity Commission scheme,[53] a will or other document setting out the terms of the trust.[54] The Charity Commission publishes a model trust deed for charitable trusts.[55]

Unincorporated associations

2.12     An unincorporated association has been described as “an association of persons bound together by identifiable rules and having an identifiable membership”.[56] The rules of the association contain the contractual rights and obligations enforceable by the members against one another. The rules of a charitable unincorporated association usually provide for the management of the affairs of the charity to be the responsibility of a committee elected by the members.[57] The governing document is called a constitution. The Charity Commission publishes a model constitution for unincorporated associations.[58]

Different categories of charity under the Charities Act 2011

2.13     There are four categories of charity under the Charities Act 2011, and the application of the Act to any given charity depends on the category into which it falls. The legal form of a charity (see paragraphs 2.4 to 2.12) has no bearing on its categorisation under the Act.

Registered charities

2.14     Every charity must register with the Charity Commission, unless it is:

(1)        an exempt charity (see paragraph 2.15);

(2)        an excepted charity with an annual income of £100,000 or less (see paragraph 2.16);[59] or

(3)        a charity with an annual income of £5,000 or less (see paragraph 2.18).[60]

Exempt charities

2.15     Certain charities are exempt from the requirement to register with the Charity Commission, and from other (but not all) provisions of the Charities Act 2011.[61] They are usually regulated by another body (the “principal regulator”) whose functions overlap with those of the Commission. Exempt charities are listed in Schedule 3 to the Charities Act 2011.[62] They include:

(1)        most English universities;[63]

(2)        other educational bodies, such as higher and further education corporations, academies, and foundation and voluntary schools;[64] and

(3)        various museums and galleries, such as the Victoria and Albert Museum, the Science Museum and the British Museum.[65]

Excepted charities

2.16     Certain charities are “excepted” from charity registration by an order of the Secretary of State or of the Charity Commission.[66] Unlike exempt charities they are still regulated by the Charity Commission in the same way as regular charities. Excepted charities include:

(1)        some churches and chapels;

(2)        some charities that provide premises for schools;

(3)        Scout and Guide groups; and

(4)        certain armed forces charities.[67]

2.17     However, even if a charity is granted “excepted” status, it is nevertheless required to register with the Charity Commission if its income is over £100,000.

Other unregistered charities

2.18     Charities with an annual income of £5,000 or less are not required to register with the Charity Commission,[68] unless they are CIOs which must register with the Commission regardless of income.

Terminology

2.19     This report discusses various technical legal issues and it is sometimes unavoidable that technical legal or sector specific terms are used. We define these terms in the Glossary at pages 1 to 3 of this report but highlight three key definitions here.

Charities

2.20     References to “charities” in this report are to all institutions falling within section 1 of the Charities Act 2011, unless we expressly refer to a particular legal form of charity.

Trustees

2.21     Section 177 of the Charities Act 2011 defines those responsible for the control and management of charities as “charity trustees”. We refer to them as “charity trustees” or just “trustees”. Not all of those who control and manage charities are trustees as a matter of trust law; for example, charitable companies are run by directors, not trustees. Nevertheless, the terms “charity trustee” and “trustee” are widely accepted as covering all those who run charities, including directors. We use the term “trustee” in that sense, save where we make clear that we are referring specifically to the trustees of a trust.

Governing documents

2.22     A charity’s governing document sets out (amongst other things) its purposes, the powers and duties of those responsible for its management and administration, and the procedures to be followed in exercising those powers. We use this as a generic term for the rulebook of all charities, whatever their legal form. The Charities Act 2011 uses the term “trusts” to refer to a charity’s governing document, regardless of whether or not it is in fact a trust.[69]

 


Chapter 3: Financial thresholds

Introduction

3.1        In the Consultation Paper, we reviewed some of the existing financial thresholds in the Charities Act 2011 and proposed the creation of others. In this chapter, we address the general comments made by some consultees about the difficulties that are created by financial thresholds.

3.2        There are numerous financial thresholds in the Charities Act 2011. For example:

(1)        the statutory requirement to register depends on whether the charity’s annual income exceeds £5,000 and, in the case of an excepted charity, whether its annual income exceeds £100,000;[70]

(2)        registered charities must state that they are registered charities in documentation soliciting money if their annual income exceeds £10,000;[71]

(3)        the reporting and accounting requirements differ depending on the charity’s annual income;[72] and

(4)        the availability of various powers depends on a charity’s income or the value of its capital.[73]

3.3        There is often a power for these financial thresholds to be changed by secondary legislation, although such a power is rarely used.[74] Our project includes consideration of the income thresholds in sub-paragraph (4) above.

Arbitrary results from thresholds

3.4        The CLA said that income thresholds can produce arbitrary results. They do not exclude a charity with “very significant assets which yield little or no income”. They can also be variable in their application, with the same charity falling below the threshold in one year and above the next, or a charity might fall below the threshold fortuitously by shortening its financial year.

3.5        We agree that financial thresholds can produce arbitrary results. Many of the statutory provisions that include financial thresholds fall outside our terms of reference.[75] Where provisions that include financial thresholds fall within our project, our recommendations would remove some of the arbitrariness that they would otherwise produce.[76] Our recommendations do, however, continue to distinguish between large and small charities so it is inevitable that some arbitrary results, as identified by the CLA, will remain. We think that it can be helpful to have different regulatory regimes for different sized charities, and financial thresholds are the best way to create a simple and clear rule to determine whether a charity or a fund is “small”; indeed, there is no obvious alternative. Moreover, income thresholds will continue to exist elsewhere in the Charities Act 2011 (where they are intended to differentiate between different sizes of charity), particularly concerning registration, accounting and reporting.

Adjusting the thresholds to reflect inflation

3.6        Lord Hodgson noted that “wherever the statutes have specific monetary amounts there is the challenge of declining ‘value’. … It would be helpful for an automatic inflation adjuster to be built in to the regulations.” The CLA made similar comments and said that financial thresholds “tend not to be reviewed and updated with any regularity, or at all” so any recommendation to increase, or introduce, any threshold will be “in effect, set in stone”.

3.7        We acknowledge these concerns about financial thresholds in legislation; they do not keep pace with inflation, and (depending on Governmental priorities and resources) they might rarely be reviewed, let alone increased. We note that the financial thresholds in the Charities Act 2006 with which our project is concerned have not been increased in the 10 years since that Act was passed.[77] We can therefore see the advantages of Lord Hodgson’s suggestion.

3.8        We make one recommendation to increase an existing financial threshold which does not, in fact, reflect changes to the value of money caused by inflation, but rather a desire to expand the scope of a power so as to include more charities.[78] But having set that new threshold, and having created others,[79] should they be increased in line with inflation?

3.9        We have considered possible mechanisms to incorporate inflation adjustment into the statutory financial thresholds within the scope of our project. For example, the Inheritance and Trustees’ Powers Act 2014 gives effect to a previous Law Commission recommendation that the statutory legacy of £250,000 for a surviving spouse on intestacy (where the deceased also had children) should be increased every 5 years in line with inflation, rounded up to the nearest £1,000.[80] The Lord Chancellor is required to make an order specifying the amount of the statutory legacy at least every 5 years.[81] It would be possible to provide that the financial thresholds in the Charities Act 2011 should similarly be increased in line with inflation at least every 5 years.

3.10     As noted above, many financial thresholds in the Charities Act 2011 fall outside our terms of reference, so we cannot recommend the incorporation of a statutory inflation adjustment mechanism into them. Some consultees emphasised that the drive should be towards consistency between the thresholds rather than divergence between them. It would be inconsistent to introduce a statutory inflation adjustment mechanism only for those financial thresholds in the Act that fall within our terms of reference.

3.11     However, even if all thresholds fell within our terms of reference, we would be cautious about automatic inflation adjustment. There are numerous financial thresholds in the Charities Act 2011 and they perform various different roles. Unlike the statutory legacy on intestacy, the financial thresholds determine the regulatory obligations of charities and the availability of various powers.

3.12     For financial thresholds that have regulatory implications (as opposed to determining the availability of enabling powers), it is important that any changes are widely publicised. There is also benefit in such a threshold being a simple, round number that does not change regularly to avoid confusion, complexity, and compliance and administration costs. We are not convinced that it would be helpful for these thresholds to change by small amounts on a regular basis. For example, we do not think that charities and their advisers would wish to see the threshold above which excepted charities must register change from £100,000 now to £105,000, and then to £108,000 a few years later, and then to £115,000, and so on. Each time thresholds change, it is necessary for charities and professional advisers to spend time becoming familiar with the changes, and for the Charity Commission and other bodies to issue revised guidance to reflect the changes.

3.13     Similarly, even if automatic inflation adjustment was limited to facilitative powers without regulatory implications, regular changes to the thresholds would still have the potential to cause confusion, complexity, and compliance and administration costs, potentially for little benefit (for example, in times of low inflation).

3.14     We do not therefore think that it would be helpful for there to be an automatic inflation adjustment mechanism built into the Act in relation to all, or particular categories of, financial thresholds. We do however think that it would be helpful for all financial thresholds in the Act to be reviewed periodically with a view to increasing them to reflect inflation. Such a review could be every five or ten years, or more frequently at times of high inflation.

3.15     We think that this approach would enable Government to make a considered decision about whether inflation adjustment is appropriate, rather than it being automatic. It would balance the desirability of keeping the thresholds up to date against the desirability of simplicity in the overall regime, ensuring consistency, and avoiding unnecessary costs caused by a transition to an amended regime. For example, charities with an income over £25,000 must send annual reports and accounts to the Charity Commission. If inflation was low and adjustment after five years would see the threshold go up to only £25,500, it might be a sensible decision to keep the threshold at £25,000 until inflation would see an increase to, say, £30,000. We think that the sector as a whole would favour this discretionary approach over an automatic inflation adjustment.

3.16     Changes to thresholds that were not intended to reflect inflation (such as the recent increase in the audit threshold from £500,000 to £1 million)[82] would still be possible as a separate (though perhaps concurrent) exercise.

Recommendation 1.

3.17     We recommend that Government periodically review all financial thresholds in the Charities Act 2011 with a view to increasing them, by secondary legislation, in line with inflation.

 

Chapter 4: Changing purposes and amending governing documents

Introduction

4.1        Part 2 of the Consultation Paper, and Chapter 2 of the Supplementary Consultation Paper, examined the ways in which charities can change their purposes and amend their governing documents. With the passage of time, new needs will arise and unforeseen eventualities will occur, requiring charities to amend their governing documents to ensure their continuing effectiveness; we give some examples in Figure 1. The Charity Commission encourages charity trustees to keep their governing documents under review and consider whether they need to be amended.[83] Consultation responses revealed general agreement as to the importance of ensuring that changes can be made as quickly and efficiently as possible, whilst retaining safeguards to ensure that proposed amendments are appropriate.

Figure 1: examples of circumstances in which a charity may need to amend its governing document

(1) To change the administrative procedures of the charity.

A charity may wish to change the process by which its trustees are appointed or by which members are admitted. Or a charity may prefer to communicate with its members and arrange general meetings by email to avoid the time and expense involved with postal communications, and may need to amend a provision in its governing document – for example, requiring first class post – in order to do so.

(2) To expand or limit the charity trustees’ powers.

A charity’s governing document may need to be amended to permit the trustees to borrow money, to purchase or lease property, or to employ staff. Conversely, an amendment may be made to restrict the trustees’ powers, such as the default investment power under section 3 of the Trustee Act 2000.

(3) To update the governing document following legislative changes.

For example, a charity’s governing document may need to be amended to reflect changes in equality or employment law.

(4) To remove anachronistic or offensively worded provisions.

Historic governing documents may contain provisions that are now out of date or are offensive.

(5) To change the charity’s name.

Similarly to the provisions of a governing document, a charity’s name may use words that have become out of date or are now offensive, or no longer accurately reflect its purposes.

(6) To change the charity’s purposes.

The Charity Commission gives various examples of circumstances in which a charity may wish to change its purposes.[84] For example, the purposes of a charity established to care for people with disabilities may require the charity to provide institutions in which beneficiaries can be housed. The trustees may consider that its purposes should be amended so the charity can provide support for beneficiaries living in their own homes.

 

4.2        The ability of charities to change their purposes, and amend other provisions in their governing documents, depends on their legal form. We explained the current law in detail in Chapter 3 of the Consultation Paper; we present a summary here.

4.3        We start by considering the most common forms of corporate charities (charitable companies and CIOs) before turning to unincorporated charities (trusts and unincorporated associations). At the end of this chapter is a table summarising the effect of our proposed reforms. In Chapter 5, we look at charities that are incorporated by (or governed by) legislation or by Royal Charter.

Charitable companies and CIOs

The current law

4.4        The articles of association of a company (whether or not it is charitable) and the constitution of a CIO can generally be amended by a resolution of its members at a general meeting.[85] Companies’ articles and CIOs’ constitutions may, however, provide for more restrictive conditions to be satisfied before they can be amended (for example, obtaining the consent of a particular person or the Charity Commission), known as “entrenchment”, but such provision cannot prevent amendment with the unanimous agreement of the charity’s members.[86]

4.5        If the amendment that a charitable company or CIO wishes to make is a “regulated alteration”, then it must obtain the Charity Commission’s prior consent to the change.[87] A “regulated alteration” is:

(1)        an amendment to the charity’s purposes;

(2)        an alteration to the provisions concerning the distribution of the charity’s property in the event of dissolution; or

(3)        any alteration that would authorise a benefit to be obtained by the charity’s directors or members (or connected persons), unless that benefit is authorised by section 185 of the Charities Act 2011.[88]

4.6        We discuss the basis on which the Charity Commission will consent to a change of purposes in paragraphs 4.123 and following.

4.7        Charitable companies must take the following steps after a resolution has been passed to amend its articles.

(1)        The company must give notice of the amendment to the Registrar of Companies and provide a copy of the articles as amended, the resolution giving effect to the amendment, and (in the case of a regulated alteration) a copy of the Charity Commission’s consent, all within 15 days of the resolution taking effect.[89] Where the amendment is to the charity’s purposes, the amendment is not effective until it is recorded on the register at Companies House.[90] A failure to notify Companies House of other amendments can lead to criminal liability on the part of the company and its directors, but does not prevent the amendment from being effective.[91]

(2)        If the charitable company is registered with the Charity Commission, the trustees must also notify the Commission of the amendment so that the particulars of the charity in the register can be updated.[92]

4.8        The procedure for CIOs is in some ways simpler but also more restrictive. Once a resolution has been passed, the CIO must send a copy of the constitution as amended and the members’ resolution to the Charity Commission.[93] An amendment takes effect once it is registered by the Charity Commission, and the Commission will refuse to register an amendment in certain circumstances.[94]

The general framework

4.9        Our provisional view was that the regime governing changes by companies and CIOs was satisfactory.[95] Broadly speaking, the rules were supported by consultees. Such charities were considered to have sufficient flexibility to make most changes without having to obtain the Charity Commission’s consent (subject to express entrenchment and provided they are not “regulated alterations”). It was generally considered appropriate that the Charity Commission should have oversight of changes that were regulated alterations, and no consultee suggested that the definition should be significantly expanded or narrowed. Nevertheless, some technical deficiencies were raised by consultees which we now turn to consider.

Differences between companies and CIOs

4.10     CIOs were introduced by the Charities Act 2006 as an alternative to the charitable company; they are incorporated bodies, and the charity trustees and members benefit from limited liability, but the Registrar of Companies is not involved in their registration or regulation. There should, so far as possible, be consistency between the rules governing charitable companies and CIOs. Various inconsistencies were raised by consultees.[96] Some are justifiable, and some extend beyond our terms of reference.[97] We do, however, make a recommendation in respect of one inconsistency raised by consultees.

4.11     Constitutional amendments for CIOs do not take effect until they are registered by the Charity Commission[98] whereas this limitation only applies to companies if the amendment changes its objects.[99] Having to wait until registration for amendments to take effect was said to be unhelpful, unduly limiting and confusing, particularly as there is no process for CIOs to be notified of the exact date on which changes were registered.[100] We can see the potential benefits of the increased Charity Commission oversight of constitutional amendments by CIOs under the current law. The grounds on which the Charity Commission can refuse to register an amendment might ensure that defective or invalid amendments are spotted at an early stage, and before charities purport to rely on them, which might create consequential problems. We also note that CIOs are a new structure – it has only been possible to create CIOs since January 2013[101] – and they are still therefore “bedding in”.

4.12     However, having discussed this issue further with consultees we think that the arguments in favour of aligning the position for CIOs with that for charitable companies outweigh the arguments in favour of greater oversight. First, when possible, consistency between the two regimes is desirable. Greater alignment leaves less room for confusion between the two and therefore less scope for error; it would avoid potential problems arising from trustees of CIOs thinking that, as for companies, amendments take effect from the date of the resolution. Second, we heard from consultees that an important benefit of amendments taking effect immediately (or on a later date specified in the resolution) is that constitutional change can be planned and implemented in an orderly way. It can, for example, coincide with a year-end date or other significant event, such as a change of control of the charity. Allowing amendments to CIO constitutions to take effect from the date of the resolution (or a later date specified in the resolution) will remove barriers to, and complications arising during, constitutional change.

4.13     We recommend that amendments to a CIO’s constitution should take effect when the resolution containing them is passed, or on a later date specified in the resolution. If the amendment is a “regulated alteration”, the prior written consent of the Charity Commission would still be required; if such consent has not been obtained, the amendment will be ineffective. An amendment changing a CIO’s purposes will both (1) need prior consent from the Charity Commission (as it is a regulated alteration); and (2) not take effect until registered by the Charity Commission. CIOs would still be required to send a copy of any resolution amending their constitution to the Charity Commission within 15 days of it being passed.

Definition of regulated alterations

4.14     Three consultees[102] raised various difficulties with the three categories of “regulated alterations” in section 198 (for companies) and section 226 (for CIOs) of the Charities Act 2011.

(1) The first category: changes to objects

4.15     Section 198(2)(a) refers to amendments “adding, removing or altering a statement of the company's objects” whereas section 226(2)(a) refers to amendments which would make “any alteration of the CIO’s purposes”. By contrast, the second and third categories of regulated alterations use the same wording. We think that it would be desirable for the definition of “regulated alterations”, so far as possible, to be the same for both companies and CIOs and we recommend a new definition below.

4.16     Consultees also commented that section 198 appeared to include (or reported experiences of it being interpreted as including):

(1)        an alteration to the wording of the charity’s objects even if the substance of those purposes remains the same; and

(2)        any change to the powers of a charity referred to in the objects cause, even if the objects themselves were not being changed.

4.17     We agree that such amendments should not be regulated alterations. It was also suggested that an amendment to a governing document which would have the effect of altering the charity’s purposes without altering the wording of the objects clause itself might not fall within the current definition. An example was given of an amendment to a defined term, when that term appeared in the objects clause. Charity Commission guidance, however, suggests that such an amendment does fall within the current definition.[103] We agree, and our recommendation would ensure that the substance and not form of the amendment will determine whether or not an amendment is a regulated alteration, thus removing any potential confusion.[104]

(2) The second category: dissolution

4.18     Section 198(2)(b) provides that an amendment to a provision “directing the application of property of the company on dissolution” is a regulated alteration.[105] There was reported to be uncertainty as to whether an amendment that has the effect of overriding a dissolution clause is caught by this definition. The CLA gave the example of the introduction of a power to merge which allows the charity to merge with another rather than dissolve, and therefore the direction in the articles as to what happens to the company’s property on dissolution does not take effect.

4.19     In our view, the purpose of the second category of regulated alteration is to ensure that property belonging to a charitable company is applied for exclusively charitable purposes on dissolution. It is not intended to prevent the charity from making an amendment that would avert the need for it to dissolve or to protect – say – the right of a third party charity named in a dissolution clause to receive the company’s property on dissolution. The CLA and Bircham Dyson Bell LLP explained that such third party rights could be secured in better ways. Our view is therefore that section 198(2)(b) only applies to an amendment of a company’s dissolution clause, and that other amendments that have the effect of avoiding the need to dissolve are not regulated alterations.

(3) The third category: benefits to trustees, members and connected persons

4.20     Sections 198(2)(c) and 226(2)(c) provide that any alteration that would “provide authorisation for any benefit to be obtained by” the charity’s trustees or members, or connected persons, is a regulated alteration. Consultees suggested that it is unclear whether that definition would include an amendment that narrows the circumstances in which benefits can be authorised; the amendment itself does not authorise benefits to be obtained, but the clause as amended does authorise benefits to be obtained. In our view, such an amendment would not be a regulated alteration under the current law. An alteration is only regulated under these provisions if it is the alteration itself which would provide the authorisation for benefits. So if a benefit is already permitted and all an alteration does is reduce the extent of if, the alteration is not authorising a benefit and is therefore not regulated.

Schemes in respect of charitable companies and CIOs

4.21     In the Consultation Paper, we noted that cases in which the statutory powers of amendment could not be used to change the governing document of a company or CIO would be rare, but that in such cases a scheme could be made to amend the governing document.[106] Schemes are legal arrangements, made by the Charity Commission or the court, that change or supplement the provisions that would otherwise apply in respect of a charity or a gift to charity. We discuss schemes in more detail in paragraph 4.37 below.

4.22     Two consultees said that there was uncertainty as to whether the scheme-making power applied in the case of companies and other corporate charities.[107] We accept that the scheme-making power of the court originally depended on the existence of a trust, whereas a charitable company generally holds its property beneficially. But a scheme was made in Liverpool and District Hospital for Diseases of the Heart v Attorney General[108] despite the absence of a trust, and we see no reason to exclude corporate charities from the scheme-making power of the court and Charity Commission.[109]

Recommendation 2.

4.23     We recommend that:

(1)        an amendment to a CIO’s constitution by resolution of its members should take effect on the date the resolution is passed, or on a later date specified in the resolution; save that

(a)        an amendment that makes a regulated alteration should be ineffective unless the prior consent of the Charity Commission has been obtained; and

(b)        a change of a CIO’s purposes should not take effect until it has been registered by the Charity Commission;

(2)        the description of changes to a charity’s objects as a “regulated alteration” in section 198(2)(a) be amended to reflect the description in section 226(2)(a); and

(3)        the Charities Act 2011 be amended to provide that the court and Charity Commission’s power to make schemes in respect of charities extends to corporate charities.

4.24     Clauses 1, 2 and 8 of the draft Bill would give effect to this recommendation.

4.25     We make a further recommendation below concerning the basis on which the Charity Commission should consent to a charitable company or CIO changing its purposes.

Unincorporated charities

The current law

4.26     The trust deeds of charitable trusts, and the constitutions of unincorporated associations, can be amended in one of four ways.

(1) Express power

4.27     Trust deeds and the constitutions of unincorporated associations often include express powers of amendment.[110] Such powers might require particular conditions to be satisfied, such as obtaining the consent of the Charity Commission or another person, or securing a resolution of a particular majority of the charity’s trustees or members at a general meeting.

(2) Statutory power to change a small unincorporated charity’s purposes

4.28     Under section 275 of the Charities Act 2011, the purposes of certain small unincorporated charities can be changed by a resolution of the charity trustees.[111] The power applies to unincorporated charities that both (a) have an annual income of up to £10,000 and (b) do not hold “designated land”, namely land held on trusts stipulating that it must be used for the purposes of the charity.[112] The power applies whether or not the governing document contains an express power of amendment; charities with an express power can choose instead to exercise the statutory power.

4.29     To exercise the power, the charity trustees must be satisfied (1) that it is expedient in the interests of the charity for the purposes in question to be replaced, and (2) that, so far as is reasonably practicable, the new purposes consist of or include purposes that are similar in character to those that are to be replaced.[113]

4.30     A copy of the resolution, together with the trustees’ reasons for passing it, must be given to the Charity Commission.[114] The Commission can require the trustees to provide further information, or to publicise the resolution.[115] Otherwise, the resolution will take effect 60 days after it is received by the Commission,[116] unless the Commission objects to the resolution.[117]

4.31     A charity with an income of over £10,000 or which has designated land, and whose governing document does not contain an express power of amendment, can only change its objects by obtaining a scheme from the Charity Commission (on which see below).

(3) Statutory power to amend administrative provisions in an unincorporated charity’s governing document

4.32     Under section 280 of the Charities Act 2011, the charity trustees of an unincorporated charity (regardless of its size or of whether it holds designated land) may pass a resolution to modify any provision in its governing document:

(a)        relating to any of the powers exercisable by the charity trustees in the administration of the charity, or

(b)        regulating the procedure to be followed in any respect in connection with its administration.[118]

4.33     Similarly to section 275, the power applies whether or not the governing document contains an express power of amendment; charities with an express power can choose instead to exercise the statutory power.

4.34     If the charity is an unincorporated association with a body of members distinct from the charity trustees, the amendment must be approved by at least two thirds of the members at a general meeting.[119]

4.35     The Charity Commission’s guidance includes various examples of changes that it considers can be made using this statutory provision; see Figure 2.

Figure 2: amendments that can be made under section 280

The Charity Commission’s view is that section 280 permits charities to make changes to (amongst other things):

·          the charity’s name;

·          the method of appointing trustees;

·          the number of trustee meetings each year;

·          the method of appointing the chair;

·          the quorum provisions;

·          the criteria for charity membership; and

·          powers of a third party to appoint trustees (where that third party has ceased to exist or consented to the change).[120]

 

4.36     If a proposed change does not fall within the two categories of provisions in section 280 of the Charities Act 2011, and if the governing document does not contain an express power of amendment, the charity must seek a scheme from the Charity Commission to amend provisions in the charity’s governing document (on which see below).

(4) Cy-près or administrative scheme

4.37     If an unincorporated charity wishes to amend its governing document but the powers outlined above are not available, then it can apply to the Charity Commission for a scheme to make the amendment sought.[121] As explained in paragraph 4.21 above, schemes are legal arrangements that change or supplement the provisions that would otherwise apply in respect of a charity or a gift to charity. There are two categories of scheme.

(1)        “Cy-près schemes” alter the purposes of a charity. “Cy-près” means “as near as possible” or “near to this”, and involves funds being applied for charitable purposes which are similar to the original purposes.

(2)        Administrative schemes” alter any other provisions of a charity’s governing document.

4.38     Cy-près schemes can be subdivided into those that deal with “initial failure” of a charitable purpose, and those that address “subsequent failure”. Initial failure tends to arise in the administration of wills, for example, where a testator has left insufficient funds to carry out the stated charitable purpose. Subsequent failure tends to concern the work of existing charities, for example, a charity’s original purpose is to provide accommodation for people with disabilities, but its beneficiaries would be best served by supporting them in their own homes.[122]

4.39     In the case of initial failure, a cy-près scheme can only be made if the donor has demonstrated a “general charitable intention”.[123] The same does not apply to subsequent failure; if the gift was given outright to a charity, then a cy-près scheme can be made on subsequent failure without having to demonstrate an initial general charitable intention on the part of the donor.

4.40     The power to make administrative schemes is wide; it can be exercised if it is expedient in the interest of the charity to do so.[124] By contrast, cy-près schemes are closely regulated; there are limitations on both the circumstances in which a cy-près scheme can be made and the changes that can be made by a cy-près scheme. Both are explained below.

How does the Charity Commission decide whether to make a cy-près scheme?

4.41     There are limitations on (A) the circumstances in which a cy-près scheme can be made; and (B) the changes that can be made by a cy-près scheme. Both are explained below.

(A) Cy-près schemes: the gateways

4.42     The circumstances in which the Charity Commission can make a cy-près scheme (known as the “cy-près occasions”) are set out in section 62 of the Charities Act 2011: see Figure 3. We refer to them as “the section 62 cy-près occasions”.

Figure 3: the section 62 cy-près occasions – gateways to a cy-près scheme

Property may be applied cy-près in any of the following situations:

(1)        where the original purposes, in whole or in part, have been fulfilled;[125]

(2)        where the original purposes, in whole or in part, cannot be carried out (or not according to the directions given and to the spirit of the gift);[126]

(3)        where the original purposes provide a use for only part of the property;[127]

(4)        where (i) the property, and (ii) other property applicable for similar purposes, can be more effectively used together and, regard being had to the “appropriate considerations”, can suitably be used for common purposes.[128] The “appropriate considerations” are:

(a)        (on the one hand) the spirit of the gift concerned; and

(b)        (on the other) the social and economic circumstances prevailing at the time of the proposed alteration of the original purposes;[129]

(5)        where the original purposes were laid down by reference to an area that has ceased to be readily identifiable;[130]

(6)        where the original purposes were laid down by reference to a class of persons or an area which has ceased to be suitable, regard being had to the appropriate considerations (see above), or to be practical in administering the gift;[131]

(7)        where the original purposes, in whole or in part, have been adequately provided for by other means;[132]

(8)        where the original purposes, in whole or in part, have ceased to be charitable;[133] and

(9)        where the original purposes, in whole or in part, have ceased in any other way to provide a suitable and effective method of using the property, regard being had to the appropriate considerations (see above).[134]

4.43     In the absence of a section 62 cy-près occasion, the Charity Commission cannot make a cy-près scheme to change a charity’s purposes.

4.44     Some consultees thought the cy-près occasions were too restrictive. Bircham Dyson Bell LLP said the cy-près occasions require trustees “to wait until the situation has become almost unrescuable” so they “do not encourage trustees to think ahead and plan to make their charity more effective before such a situation arises”.[135]

(B) Cy-près schemes: permitted changes

4.45     If a section 62 cy-près occasion has arisen, the Charity Commission can make a cy-près scheme. Section 67 of the Charities Act 2011 requires the Commission to have regard to certain matters, which we refer to as “the section 67 similarity considerations”: see Figure 4.

Figure 4: the section 67 similarity considerations

The court or Commission can make a cy-près scheme applying property for such charitable purposes as it considers appropriate, having regard to:

(1)        the spirit of the original gift;[136]

(2)        the desirability of securing that the property is applied for charitable purposes which are close to the original purposes; and

(3)        the need for the relevant charity to have purposes which are suitable and effective in the light of current social and economic circumstances.

 

4.46     The Charity Commission summarises its policy on exercising its discretion under section 67 as follows:

We should be flexible and imaginative in applying the cy-près doctrine, balancing usefulness and practicality with respect for the existing purposes and beneficiaries. The purpose of making a cy-près scheme is to enable a charity to continue being effective, useful and relevant to its beneficiaries’ needs in modern society, where without our intervention it would not be. We should, however, exercise caution where a proposed change might be a significant departure from the founder’s intentions or might exclude existing beneficiaries (unless, for example, the problem is that the existing beneficial class has ceased to exist). We should always take account of the trustees’ views when deciding how to amend a charity’s objects.[137]

Publicising schemes

4.47     The Charity Commission must give public notice of a proposed scheme where it appoints, discharges or removes a trustee. In all other cases, public notice must be given unless the Charity Commission considers it unnecessary.[138] The decision whether to give public notice will depend on whether the change is controversial. The Commission will usually expect the trustees to carry out their own consultation, which will assist the Commission in deciding whether the scheme is controversial and therefore whether public notice is required.[139]

4.48     The Charity Commission’s guidance says that publicity will almost always be required where the scheme will “change the use of community assets, give a power to dispose of designated property or involve the displacement of beneficiaries” since such schemes are often contentious.[140] Otherwise, the need for publicity will be considered on a case-by-case basis and the following factors might lead the Commission to decide that notice is required:

(1)        where there is a significant level of public interest in the aspects of the charity that the scheme will affect;

(2)        where the scheme will materially affect designated property but not to the extent that it can be sold, for example, where the scheme will substantially change the purposes for which the property can be used;

(3)        where the scheme will materially affect the objects of the charity; and

(4)        where the Commission is aware of opposition to the proposed scheme which has not been addressed by the trustees' consultation.

The Consultation Paper

4.49     In the Consultation Paper, we noted the difference between the amendment regimes for corporate charities (companies and CIOs) and unincorporated charities (trusts and unincorporated associations). We said it was arguable that the two regimes should be aligned. But we thought that aligning the amendment powers for existing charities could be unsatisfactory on the basis that “governing documents are drafted against the backdrop of the legal rules that exist at the time of drafting” and “it is possible that a particular legal structure has been chosen for the strict (or relaxed) rules concerning amendment that it entails”.[141] We were not attracted to creating a dual regime, one for existing charities and one for future charities. As a result, despite acknowledging the argument for alignment in principle we reached a provisional view that the different amendment regimes for existing corporate and unincorporated charities should not be aligned. We nevertheless invited consultees’ views about alignment for charities established in the future.[142]

4.50     As an alternative to alignment, we proposed that the section 275 power[143] be extended to charities with a larger income and invited views as to the appropriate income threshold. We also proposed that the exclusion of charities with designated land from section 275 be removed.[144]

4.51     We commented that the scope of the section 280 power[145] was uncertain, and that it was potentially too wide in some respects and too narrow in others. We invited consultees’ views as to whether the power was helpful and sufficiently clear and as to the types of provision that should fall within, and outside, the power.[146]

Consultation responses

Alignment with the regime for companies and CIOs

4.52     Despite our hesitation about aligning the regimes for corporate and unincorporated charities, the majority of consultees who addressed the issue expressed firm views that the amendment powers of unincorporated charities should, as far as possible, be aligned with the amendment powers of corporate charities. Consultees said that alignment would create consistency between charities and simplify the law. Some thought that an aligned amendment regime should apply to both existing and future charities. Historically, there have been numerous changes to the regime governing existing charities[147] and our provisional view that the regime should not be changed for existing charities “would suggest that charity law could never change but be crystallised around a trust as at the time it was created”.[148] Some consultees cast doubt on our suggestion that a particular legal structure is chosen deliberately for the more restrictive amendment rules that apply.[149] Moreover, unincorporated charities could potentially transfer to the regime for corporate charities – albeit at an administrative cost – by incorporating; they can wind up and transfer their assets and operations to a new charitable company established for the purpose of carrying on the charity’s work.[150]

4.53     The main counter-argument raised by consultees was that alignment would sweep away the law of cy-près, since changes to unincorporated charities’ purposes would no longer be subject to the precondition that a section 62 cy-près occasion had arisen and the section 67 similarity considerations. These consultees appeared to base their view on:

(1)        the need for some limitation on charities changing their purposes;

(2)        the importance of respecting the wishes of donors and founders; it was thought that increased flexibility might risk damaging donors’ willingness to set up charities if they know that the purposes they specify can be changed to something altogether different;

(3)        the cy-près regime providing a clear basis for the Charity Commission to make difficult decisions that must balance competing interests; and

(4)        familiarity with the current regime.

4.54     By contrast, some consultees thought that removing the law of cy-près was an attractive prospect since they considered the section 62 cy-près occasions to be unnecessarily restrictive, unclear and poorly understood.

4.55     This was an issue on which we sought further views in our Supplementary Consultation Paper.[151]

Changing purposes: cy-près schemes and section 275

4.56     The current law generally requires a change to a charity’s purposes (regardless of the charity’s legal form) to be overseen by the Charity Commission.[152] A clear majority of consultees thought that this should continue, whether the charity is large or small, and that the Charity Commission’s power to make cy-près schemes should not be extended to charity trustees.[153] Action with Communities in Rural England noted that trustees are volunteers and “they do not generally have the skills to ensure this type of change would be undertaken correctly”. Charity Commission oversight was seen as a means to ensure that a charity’s purposes, as altered, remained charitable.[154]

4.57     Consultees who favoured alignment of the regimes for corporate and unincorporated charities expressed mixed views about the continuing role of section 275. Most thought that the power should be retained, and extended to corporate charities.[155] Others thought that section 275 could be repealed as it would be unnecessary.[156]

4.58     Whether or not consultees favoured an aligned regime, and assuming that section 275 is retained, most agreed with our proposal to expand its scope. There was, however, a concern that section 275 did not include a capital threshold and so was potentially available to large charities that were asset-rich despite being income-poor; that concern would be intensified by an increase in the income threshold or by extending the power to charities with designated land.[157] Some consultees suggested that section 275 should include an additional threshold based on the capital value of the charity’s assets.

4.59     Most consultees agreed with our proposal that a section 275 resolution should only take effect if it has been agreed by a resolution of the charity’s members (if any). However, some consultees raised concerns about the additional administrative expense this would involve for what is intended to be a quick, inexpensive and easy power for very small charities;[158] other concerns were raised about the inability of some charities to identify, let alone contact, all of their members.[159]

Changing administrative provisions under section 280

4.60     Consultees generally found section 280 to be a helpful power; it allows charities “to ‘tidy up’ out-of-date, ambiguous provisions”[160] and it can enable charities to make amendments “without undue administrative upheaval and expense”.[161] But there was almost universal agreement that the scope of the power was unclear; it is “difficult to apply”[162] and the lack of clarity “may cause trustees to seek legal advice where they would otherwise be capable of using the power without advice”.[163] Consultees gave various examples to demonstrate the uncertain scope of the power. The most common uncertainties were:

(1)        can the ability to “modify” powers permit charities to add altogether new powers?

(2)        can the rights and powers of third parties (such as founders) be overridden?

(3)        can section 280 be used where the governing document includes an express power of amendment which is subject to more onerous conditions?

4.61     Consultees expressed a variety of views as to the provisions that should fall within, and outside, the power; many repeated their views that section 280 should permit any amendment save for “regulated alterations”, thereby aligning unincorporated charities with companies and CIOs.

Discussion and options for reform

Reforming sections 275 and 280

4.62     We do not think that the expansion of the power in section 275 should be the driver of reform. Section 275 is, in effect, a mini-cy-près regime, carved out from the general law of cy-près; rather than focussing on the carve-out, we should focus on the general law. Nor do we think that adjusting or amending section 280 to clarify its scope is the appropriate starting point. Instead, we should look more fundamentally at charities’ ability to change their purposes and amend their governing documents and, as far as possible, apply a consistent regime that retains safeguards. An assessment of the continued role of section 275 should follow on from that.

Alignment

4.63     Following responses to the Consultation Paper and Supplementary Consultation Paper, we agree that the amendment regimes for corporate and unincorporated charities should, as far as possible, be aligned. As we go on to explain below, we recommend the creation of a new statutory amendment power that would seek to align the regimes.

Is it appropriate for a more relaxed regime to apply to unincorporated charities?

4.64     As we noted in the Consultation Paper, some founders might choose to establish a charity as a trust rather than a company in order to limit the circumstances in which changes (such as to the charity’s purposes) can be made, and they might deliberately omit express powers of amendment. Such founders might, therefore, object to any expansion of the section 62 cy-près occasions, or to their removal, because it would make future changes easier. But, as noted at paragraph 4.52 above, some consultees disputed the strength of this argument, pointing out that a charity’s legal structure is not necessarily a deliberate decision and the potential for charitable trusts to change form through incorporation. We do not therefore see closer alignment with companies – and an associated widening of the circumstances in which a charity’s purposes can be changed – as inappropriate.

The Supplementary Consultation Paper

4.65     We saw the strengths of consultees’ arguments in favour of alignment. In the Supplementary Consultation Paper we expressed the view that the amendment regimes for corporate and unincorporated charities should, as far as possible, be aligned.

4.66     We were mindful of consultees’ concerns that alignment would sweep away the law of cy-près, which they considered would be a significant step since cy-près is an established part of charity law. We asked consultees for their views on the consequences of aligning the amendment powers in the case of a change of purposes and, in particular, what they thought should be the continuing role of the law of cy-près. We explained, however, that alignment need not bypass the whole law of cy-près. And even if it did, such a change was unlikely to be as radical in practice as it might at first sight appear. When considering the concern, we said that it is important to distinguish between the two aspects of the law of cy-près, namely the section 62 cy-près occasions and the section 67 similarity considerations.

4.67     The position of corporate and unincorporated charities under the current law is summarised in the table below.

Change of purposes by a company/CIO

Change of purposes by a unincorporated charity (absent express power or section 275)

Requires Charity Commission consent

Charity Commission discretion, exercised in accordance with case law and other relevant legislation

Cy-près scheme can only be made if case falls within a section 62 cy-près occasion

Section 67 similarity considerations will apply

 

4.68     In devising a regime that seeks to align more closely the amendment powers of unincorporated charities with corporate charities, we said in our Supplementary Consultation that there are three possible approaches to a change of purposes. The effect of each on the law of cy-près is different.

Option (1): No alignment for change of purposes

4.69     It would be possible to align the amendment powers more closely whilst retaining the law of cy-près; unincorporated charities could be given the power to make any amendments save for a change of purposes, which would remain subject to amendment under the current law (namely, any express power, the section 275 power or a cy-près scheme). This would be the preferred option for those who oppose any relaxation of the circumstances in which unincorporated charities can change their purposes.

Option (2): Complete alignment of the regimes

4.70     Complete alignment with corporate charities would mean that neither the first nor second aspect of the law of cy-près would apply; unincorporated charities would be able to change their purposes without having to establish a section 62 cy-près occasion and there would be no section 67 similarity considerations in deciding the new purposes.

4.71     Whilst this approach would effectively bypass the law of cy-près, we set out the arguments in favour of its adoption.

(1)        As noted above, some consultees criticised the section 62 cy-près occasions, saying they were too restrictive.

(2)        Many unincorporated charities can, in effect, already change their purposes under the regime that applies to companies; they will often have express powers of amendment and when such powers require the charity to obtain the Charity Commission’s consent to a change (such as the power in the Commission’s model governing documents),[164] the Commission will make its decision applying the same principles that it applies in deciding whether to consent to a change of purposes by a charitable company.

(3)        In any event, cy-près problems can be avoided by an unincorporated charity transferring to the regime for companies.[165]

(4)        An important safeguard continues to exist, even in the absence of the section 62 cy-près occasions: any decision to change a charity’s purposes would always be taken by the charity trustees in accordance with their general duty to act in the best interests of the charity.

Option (3): A middle ground

4.72     We said that alignment need not necessarily bypass the law of cy-près. It would be possible to retain the section 67 similarity considerations (and, as we discuss below, extend them to companies and CIOs); they ensure that similarity between old and new purposes is an important factor in deciding a charity’s new purposes, thereby protecting the wishes of founders and donors. An approach to alignment that retains the section 67 similarity considerations, but not the section 62 cy-près occasions, would not bypass the entire law of cy-près.

4.73     We noted that consultees’ criticisms of the law of cy-près were aimed at the section 62 cy-près occasions, not at the section 67 similarity considerations. Conversely, consultees who were concerned about effectively abolishing the law of cy-près tended to be concerned about the purposes of a charitable trust being changed to something altogether different (that is, a loss of the section 67 similarity considerations), not about removal of the section 62 cy-près occasions.

4.74     As part of devising a new, aligned, power of amendment for unincorporated charities, in the Supplementary Consultation Paper we proposed that the trustees of an unincorporated charity should have a power, with the consent of the Charity Commission, to change the charity’s purposes without having to establish a section 62 cy-près occasion. We said that the section 67 similarity considerations should continue to apply when the Charity Commission decides whether or not to give its consent to an unincorporated charity changing its purposes under a new, aligned, amendment power. As we go on to discuss, the majority of consultees agreed with us, and it is on that basis that we proceed to recommend the creation of a new amendment power.

A new amendment power for unincorporated charities

4.75     The vast majority of consultees supported a new statutory amendment power for unincorporated charities along the lines that we proposed in our Supplementary Consultation Paper. The power would enable unincorporated charities to change any provision in their governing document by a resolution of the trustees and/or members, save for certain listed alterations (similar to regulated alterations by companies and CIOs) which would require the consent of the Charity Commission. This power would replace the power under section 280 for unincorporated charities to make administrative amendments to their governing documents.

4.76     We address below various features of the new amendment power that we recommend and how it will operate. In doing so we note nuances in the position of unincorporated charities that would render complete alignment with the regime for corporate charities ineffective or inappropriate.

Relationship with express powers of amendment

4.77     Unincorporated charities often have the benefit of express powers to amend their governing documents, which might require particular conditions to be satisfied before the power can be exercised.[166] We do not want to interfere with existing powers. Like sections 275 and 280, the new amendment power should supplement existing powers. Charities might therefore be able to make the same change to their governing document using an express power or the new amendment power.

4.78     The regime for unincorporated charities will therefore differ slightly from that for charitable companies and CIOs. Any amendment by a company or CIO (whether it is pursuant to the statutory amendment power or an express amendment power) that is a “regulated alteration” must be approved by the Charity Commission. A similar requirement for Charity Commission approval of all regulated alterations by unincorporated charities would impose an additional burden on charities that can currently make such amendments under express amendment powers without having to obtain such consent. We do not wish to introduce a requirement for Charity Commission consent where it would be possible for trustees to act without it under the current law. Accordingly, under the new regime for unincorporated charities, amendments pursuant to express powers will not require Charity Commission approval, even if – had they been made using the new statutory power – they would have been regulated alterations.

Regulated alterations

4.79     Our recommended new power will be closely aligned with the position for charitable companies: any amendment to a charity’s governing document will be permitted, subject to obtaining Charity Commission consent to certain defined “regulated alterations”.

4.80     There was general agreement amongst consultees that unincorporated charities should not be given the power to make amendments that constitute “regulated alterations” for companies and CIOs without the consent of the Charity Commission. We agree, and we adopt that definition, as modified in accordance with our recommendations above.[167] However, the category of regulated alterations needs supplementing further to account for certain features that are specific to unincorporated charities. Consultees suggested three additional regulated alterations, namely amendments which would affect (1) third party rights; (2) permanent endowment; and (3) entrenched provisions. We discuss each of these in more detail below.

(1) Third party rights

4.81     Unincorporated charities’ governing documents sometimes include protections or rights for third parties and there is currently uncertainty as to the scope of the section 280 power in respect of provisions conferring such rights. The Charity Commission’s guidance refers expressly to two situations where third party rights arise, in relation to which it suggests that section 280 cannot be used (unless the third party has ceased to exist):

(1)        changing provisions giving third parties rights to nominate trustees; and

(2)        amending other powers which the governing document states that the trustees can only exercise with the consent of a third party.[168]

4.82     We can see good reasons, as a matter of policy and pragmatism, for the Charity Commission’s view; changing or removing the rights of third parties against their will is likely to be controversial and may distort a balance of power that was devised deliberately when the charity was established. We are not however convinced that section 280, as currently drafted, in fact provides any protection for third party rights. Some consultees commented that third party rights should be protected and appeared to view the Charity Commission’s current interpretation of section 280 as producing the right result. Only one consultee expressed the view that charities should be able to use section 280 to override third party rights.

4.83     We have concluded that the new amendment power should not be used to override third party rights. The CLA suggested that:

(1)        an amendment which would have required the consent of a third party[169] had it been made pursuant to an express amendment power; and

(2)        an amendment which would “affect the rights under the trusts of the charity of any third party (whether named in the charity's trusts in person or by reference to the holding of an office) who is alive or in existence (as the case may be) at the date on which the resolution is made”;

should require that third party’s consent, unless the Charity Commission decides that it is unnecessary to obtain their consent.[170] They envisaged that the Charity Commission might decide that consent is unnecessary if it is impossible or highly impracticable to obtain the third party’s consent.

4.84     We agree, and we broadly adopt this approach in our recommendation and draft Bill: see paragraph 4.86 below.

4.85     The CLA suggested that any new amendment power should not be more restrictive than the current law and that therefore only those rights that are currently protected ought to continue to be (see paragraph 4.81 above for the Charity Commission’s view on the current scope of section 280). We do not think that, in setting out the scope of regulated alterations, we should necessarily be confined by what is currently thought to fall outside section 280. If an amendment is a regulated alteration, that does not prevent the amendment from being made; rather, it means that the Charity Commission must consent to the amendment (unlike amendments that fall outside the scope of section 280, which cannot be made). It is impossible to provide a statutory formulation that will produce a clear answer in all cases; inevitably there will be some grey areas. But if, in practice, there are doubts as to whether or not a proposed amendment amounts to a regulated alteration, the solution is to treat it as such and seek the Charity Commission’s consent.

4.86     The draft Bill provides that:

(1)        an amendment that had it been made under an express power of amendment would have required the consent of a person (other than a trustee or member of the charity) is a regulated alteration, unless that person consents to the amendment or has died or (if a corporation or other body) is no longer in existence; and

(2)        an amendment that would “affect any right directly conferred” by the governing document on a named person, or the holder of an office or position specified in the governing document (other than that of a trustee or member) is a regulated alteration, again unless that person consents to the amendment or has died or (if a corporation or other body) is no longer in existence.[171]

Trustees and members are excluded from the definition on the basis that their rights are adequately protected by the requirement that they pass a resolution to exercise the amendment power.

4.87     The following amendments would generally be regulated alterations:

(1)        changing a power for X to nominate trustees for appointment;

(2)        changing a power for X to set the spiritual direction of a faith charity;

(3)        changing a requirement for X to consent to certain decisions or proposed amendments;

(4)        changing a right for X to be consulted on a particular matter;

(5)        changing a right for X to receive certain documents;

(6)        changing the named recipient of the charity’s property in a dissolution clause; and

(7)        introducing a power to merge in circumstances where Charity X is named as the recipient of property in the event of dissolution, and the creation of the power to merge renders the dissolution clause redundant.

4.88     On the other hand, the following amendments would not be regulated alterations:

(1)        changing the right of trustees to co-opt further trustees (since trustees are excluded from the definition);

(2)        changing the rights of members to appoint or remove trustees, or the requirement for members to ratify certain decisions (since members are excluded from the definition);

(3)        changing the rights of a category of people (such as the residents of a particular neighbourhood) to vote on certain matters (since they are not named persons, and do not hold a particular office or position specified in the governing document); and

(4)        changing provisions that confer benefits on individuals who are not named in the governing document, or provisions that confer indirect benefits, such as the benefits to a supplier of goods or services to the charity being affected by an amendment which causes the charity to stop purchasing those goods or service.

(2) Permanent endowment

4.89     Charitable trusts might include property that is permanent endowment, that is, property that is subject to a restriction on being spent. Generally, it must be held in perpetuity and the trustees are permitted to spend the income from the assets, but not the capital. We discuss permanent endowment in Chapter 8. There is a tailored regime in sections 281 and 282 of the Charities Act 2011 that permits trustees to release permanent endowment restrictions;[172] the existence of that tailored regime might suggest that permanent endowment restrictions in governing documents cannot be amended under section 280.[173] Some consultees commented that such restrictions should not be capable of amendment under section 280 (and none said they should be capable of amendment) and that, under an aligned regime, any amendment to such restrictions should require Charity Commission consent.

4.90     We agree that trustees should not themselves be permitted to release permanent endowment restrictions under the new statutory power; we make recommendations in Chapter 8 for reform of the sections 281 and 282 powers which are designed specifically for the release of permanent endowment restrictions, in some cases without the need for Charity Commission consent. But we do not think that amendments to permanent endowment restrictions should fall outside the new power altogether; we think that permanent endowment restrictions should fall within the category of provisions that can only be amended under the new power with the consent of the Charity Commission. Under the current law, the Charity Commission might amend permanent endowment restrictions by making an administrative scheme,[174] and such an amendment ought to be possible using the new power – thereby avoiding the need for a scheme – but retaining the requirement of Charity Commission approval. If the proposed amendment can properly be achieved under sections 281 or 282,[175] the trustees are likely to prefer that course (and, in any event, we would expect the Charity Commission to refuse consent under the new amendment power if the proposed amendment could be achieved using the tailored regime for permanent endowment in sections 281 and 282).[176]

(3) Entrenched provisions

4.91     The CLA suggested that two further matters should be protected under a new amendment power. First, the power should not “circumvent any express requirements, statements or entrenched provisions”, thereby providing some consistency with companies which can make provision for entrenchment. We think that it would be difficult to devise an appropriate definition of entrenched provisions to give effect to the CLA’s suggestion. Moreover, such provisions can often already be overridden using the section 280 power. Second, the CLA thought that if an unincorporated charity’s constitution expressly forbids amendment to the objects or any other provision, the charity ought to obtain a scheme to make the amendment. Again, this suggestion would place a limitation on what can already be done under section 280, and we think it unlikely that governing documents for existing charities would often include such a provision, since the drafter is unlikely to have anticipated and provided for an unknown future change to the law.

Conclusion

4.92     Aside from the provisions that we have identified above (namely, existing regulated alterations, and provisions concerning third party rights and permanent endowment), we do not think that the new amendment power should exclude any further provisions or require their amendment to be approved by the Charity Commission.

Additional safeguards concerning the exercise of the new power

4.93     Our supplementary consultation revealed some concerns about giving trustees a power to change charities’ purposes without having to establish a section 62 cy-près occasion in the absence of some further safeguards (in addition to those already discussed above). We have decided to adopt three of these proposed safeguards, which we address in turn below.

(1) Amendment must be in the best interests of the charity

4.94     The section 275 power to change a small charity’s purposes includes a requirement that the trustees must be satisfied that the amendment is in the best interests of the charity.[177] No such requirement is currently included in section 280. In many ways, it is self-evident that the power can only be exercised if the trustees consider it to be in the best interests of the charity to do so.[178] Nevertheless, we think that there are benefits to adopting the approach in section 275 to put the matter beyond doubt, and to make clear on the face of the statute what the trustees must consider before they use the new power.

4.95     Whilst consultees only suggested adding this express requirement in the context of changes to a charity’s purposes, we recommend just one new amendment power which covers all potential changes and which imposes consistent requirements as far as possible. Accordingly, we propose that any amendment under the new power should be subject to the “best interests” test.

(2) Amendment cannot result in charity ceasing to qualify for charitable status

4.96     In the case of CIOs, section 225 expressly provides that no amendment to a CIO’s constitution can take effect if it would stop the CIO from being a charity. While again this might seem self-evident we can see the benefits of including an equivalent provision in our new power.

(3) Public notice

4.97     We discuss at paragraph 4.47 above the publicity requirements for schemes. The Charity Commission, CLA and Bates Wells Braithwaite suggested including something similar under the new power in respect of amendments that would require Charity Commission consent. Specifically, the Charity Commission sought a power which would enable it to require trustees to give public notice of a proposed change or enable it to give public notice itself, prior to granting consent to the amendment. The Commission argued that its ability to give public notice of schemes is particularly important where an amendment raises more controversial issues, such as the disposal of designated land. We recommend that the Charity Commission should have a discretionary power to give notice (or require that notice be given) before deciding whether to consent to a regulated alteration. We recommend below that the Charity Commission should have an equivalent power when deciding whether to consent to regulated alterations by companies and CIOs.

Excluding, restricting or modifying the new power

4.98     Section 280 currently applies in addition to any express amendment power, and it is the generally accepted view that the section 280 power cannot be excluded or modified by a charity’s governing document. Some consultees thought that the new amendment power should be capable of being excluded, particularly in relation to a change of purposes. On balance, we have concluded that it should not be possible to exclude, restrict or modify the new amendment power in a charity’s governing document (similarly to section 280 at present) for the following reasons.

(1)        The new power will not enable trustees to amend a charity’s purposes on a whim. They have to be satisfied that the amendment is in the best interests of the charity. Moreover, such an amendment will also require the consent of the Charity Commission. As we go on to recommend in paragraph 4.139 below, when deciding whether to give its consent, the Commission will have regard to the desirability of the charity's purposes remaining close to the current purposes, as well as to the need for the purposes to be suitable and effective in the current social and economic circumstances.

(2)        We are recommending an express discretionary power for the Charity Commission to require public consultation in the case of regulated alterations. Therefore, in many cases we would expect trustees to consult (either voluntarily or at the direction of the Commission) with the settlor or other significant individuals before exercising the power.

(3)        Allowing the new amendment power to be excluded would only be of use to future charities as existing charities would be very unlikely to contain express wording that would exclude the application of a power that did not exist at the time of drafting. As Stone King LLP suggested, to allow governing documents to exclude the power would suggest that existing trusts should not be subject to the new regime. But that would, in effect, create a dual regime for existing and future charities, which consultees did not favour.

(4)        The new power has been designed in such a way as to be a suitable default power for all charities, which balances various competing considerations and includes appropriate safeguards.

(5)        In the supplementary consultation most charities agreed that it should be possible for trustees to change the purposes of an unincorporated charity without having to establish a section 62 cy-près occasion. Exclusion of the new amendment power would put trustees back in the position of having to establish a cy-près occasion in order to change the charity’s purposes.

(6)        We also think, as a matter of policy, that it is appropriate to have some restriction on dead hand control of charitable funds. If the trustees have decided, within the safeguards of the new power, that the purposes should be changed in the best interests of the charity, the law should not prevent them from making that decision.

(7)        Finally, we do not want to encourage founders to exclude the new power as a matter of course, thereby undermining the utility of the new power.

4.99     The principal argument in favour of being able to exclude the new power is a practical one about the possible effect of the new amendment power on the willingness of philanthropists to donate to charity. That concern does not apply to donations that have already been made but rather is a concern about the effect of the new power on future giving. We agree that it is important not to discourage philanthropy but believe that the other policy considerations set out above outweigh any potential risk. In addition, we do not think that the law should encourage philanthropy at all costs; we are not convinced that it is appropriate, in the name of encouraging philanthropy, for the law to prevent charities in years to come from using funds efficiently.

4.100  Furthermore, the policy of not allowing the new amendment power to be excluded is tempered by the fact that the new power already caters for certain restrictions in charities’ governing documents. It cannot, for example, be exercised to make an amendment that would (if being made under an express power) have required a third party’s consent, or would affect the rights of a third party, without the Charity Commission’s consent. That qualification to the power means that settlors can, in practice, ensure that certain provisions cannot be amended without (at the very least) Charity Commission consent.

Resolutions

4.101  It is necessary to consider the resolutions that would be required for an unincorporated charity to exercise the new amendment power. Before doing so, we explain the similarities and differences between the governance structure of corporate and unincorporated charities. Companies and CIOs have a body of members who have a role in approving resolutions to amend the charity’s governing document; trusts do not. Accordingly, it is not possible to align precisely the requirements for resolutions under the new amendment power for unincorporated charities with the requirements for resolutions for corporate charities.

Trustees and members

4.102  Unincorporated charities comprise:

(1)        trusts, which:

(a)        are controlled by the trustees; and

(b)        have no separate body of members.

(2)        unincorporated associations, which:

(a)        are controlled by the trustees; and

(b)        have a separate body of members.

4.103  Charitable companies (and CIOs):

(1)        are controlled by the directors of the company;[179] and

(2)        have a separate body of members (usually guarantors rather than shareholders, since the company will usually be limited by guarantee rather than by shares).

4.104  A charitable company’s members might be the same people as its directors (which essentially reflects the trust model); or a charitable company’s members might be different from its directors (which essentially reflects the unincorporated association model). Put another way:

(1)        if a charitable trust corporate as a company, the trustees would become both the directors and the members (guarantors) of the company; and

(2)        if an unincorporated association corporate as a company, the trustees would become the directors and the separate body of members would become the members (guarantors) of the company.

4.105  The company law rules concerning resolutions of members were not designed with charities in mind since:

(1)        when the directors and members of a charitable company are the same, there will be no distinction in practice between their roles;[180] and

(2)        the voting rights for shareholders reflect their financial interests in the company as a profit-making entity; by contrast, guarantors of a charitable company have no financial interests in its activities but instead hold the directors to account (assuming they are different people).

4.106  In summary, therefore, the effect of the company law rules is that:

(1)        when the directors and members of a charitable company are the same people, the requirement for a resolution of 75% of the members is effectively the same as requiring a resolution of 75% of the directors; and

(2)        when the directors and members of a charitable company are not the same people, the resolution will be passed by a majority of the directors[181] before being put to the members of the company, 75% of whom must approve the resolution.

The new amendment power: by whom should resolutions be passed?

4.107  Amendments under the new power should require a resolution of the charity’s trustees.[182] The trustees are entrusted with the management of the charity and are subject to various duties and it is appropriate that they decide whether to make an amendment under the new power. In the case of trusts, the trustees are the only people who can make a decision for the charity, since there are no members.

4.108  If the charity is an unincorporated association with a separate body of members, we think that any amendment should also be approved by them. By analogy, amendments by charitable companies require the approval of the company’s members. Moreover, amendments made under section 280 by charitable unincorporated associations currently require the approval of the charity’s members. In the Consultation Paper, we noted the anomaly under the current law that a members’ resolution is not required for changes to an unincorporated charity’s purposes under the section 275 power. Most consultees agreed with our proposal that section 275 should – like section 280 – require a members’ resolution.

4.109  Two concerns were raised about having to obtain members’ agreement to an amendment. First, it can be expensive to contact and arrange for approval by a charity’s membership. Some consultees added that the expense can be wasted if the Charity Commission subsequently objects to the amendment. We see the strength of these concerns, but we remain of the view that changes to a charity’s governing document should be scrutinised and approved by the charity’s members; it is important for the members to be content with any changes,[183] and the members of a charity often have an important role in holding the trustees to account. Moreover, most charities with a membership will hold an annual meeting and proposed amendments can be added to the agenda for such meetings in order to keep costs down. We accept, however, that both time and money can be wasted if the members approve an amendment which is subsequently refused by the Charity Commission. In the case of amendments under the new power that require Charity Commission consent, the trustees will be able to seek that consent before or after passing the resolution and before putting the resolution to a vote of the charity’s members.

4.110  Second, some charities have a very broad membership who cannot easily be identified or contacted (for example, all former pupils of a school, or graduates of a university; even donors to a charity might be given a notional membership status). We think that the difficulty can be addressed by defining more tightly what is meant by “an unincorporated association with a body of members distinct from the charity trustees”, which is the current formulation in section 280. The requirement in section 280 for a resolution of the members of the charity is intended to capture unincorporated associations whose members have a decision-making role and who hold the trustees to account, not charities that offer a notional membership status to individuals without any accompanying decision-making role. The new power limits the right to approve a resolution to any members entitled to attend and vote at a general meeting of the charity.

The new amendment power: what majority of trustees and members should be required?

4.111  There are various different majorities in charity law. Some consultees made a plea for general consistency between them. The majorities of particular relevance in this context are set out in Figure 5.

Figure 5: majorities for trustees’ and members’ resolutions in charity law

·          Amendments to governing documents under section 280: resolution of the majority of the trustees and (if the charity has a separate body of members) a resolution of two thirds of the members voting at a general meeting.[184]

·          Changes to objects under section 275: resolution of two thirds of the trustees (and no requirement for a members’ resolution).

·          Amendments to governing documents by charitable companies: resolution of 75% of the members (or unanimity if the provision to be amended has been entrenched).

·          Amendments to governing documents by CIOs:[185] resolution of 75% of the members at a general meeting (or unanimity if the resolution is passed otherwise than at general meeting, or if the provision to be amended has been entrenched).

·          Releasing permanent endowment restrictions under sections 281 and 282: resolution of the majority of the trustees (and no requirement for a members’ resolution).

·          Transfer of property under section 268: resolution of two thirds of the trustees (and no requirement for a members’ resolution).

 

4.112  We do not think that it would be appropriate to adopt one majority figure for use throughout charity law; the majority required can properly depend on the significance of the matter. Further, differing majorities are a consequence of whether or not the membership is involved in approving the decision. But we can seek to ensure that there is consistency as far as possible.

4.113  In setting the majorities under the new amendment power, the closest analogies are resolutions under section 280 and resolutions by companies and CIOs to amend their governing documents. The new amendment power is intended to align the position of unincorporated charities with charitable companies and CIOs as far as possible. For a summary of that position, see paragraphs 4.102 to 4.106 above. Closest alignment with companies and CIOs would require:

(1)        in the case of a charitable trust, a resolution of 75% of the trustees; and

(2)        in the case of a charitable unincorporated association with a separate body of members, a resolution of the majority of the trustees and a separate resolution of 75% of the members who attend and vote on the resolution.

4.114  We make a recommendation accordingly.[186] If the separate body of members is to vote otherwise than at a general meeting, we think that the resolution should require unanimity. We recognise that obtaining the unanimous agreement of an unincorporated association’s members would be difficult, but it might be possible in some circumstances and we think that it is worth providing an alternative to having to call a general meeting. A requirement for unanimity mirrors the position for CIOs wishing to make constitutional amendments otherwise than at a general meeting.[187] By contrast, companies only need a 75% majority to make amendments otherwise than at a general meeting, but the Companies Act 2006 includes detailed provisions that ensure all members are given notice of proposed resolutions.[188] A requirement for unanimity avoids the need for detailed requirements about giving notice of proposed amendments to all members.[189]

When should resolutions take effect?

4.115  Resolutions under section 280 take effect on the date specified in the resolution or, if later, the date on which the resolution is approved by the members of the charity (if any).[190] The same should apply to the new amendment power, save that resolutions that require the consent of the Charity Commission should not take effect until that consent has been obtained.[191] Unlike the position for corporate charities there is no requirement that unincorporated charities register the amendment with the Charity Commission. We do not propose to change this under the new amendment power.

The continued role of section 275

The purpose of section 275

4.116  We now turn to consider whether there is a continued role for section 275[192] following the introduction of a new amendment power for unincorporated charities. The principal justification for section 275 is that it is quicker, cheaper and easier to use than having to obtain a cy-près scheme. As the Independent Schools Council said, obtaining a cy-près scheme is “a more time consuming and expensive process” than section 275.[193] Under our recommendations, trustees would no longer have to obtain a cy-près scheme in order to change their charity’s purposes; rather, they would pass a resolution and obtain the Charity Commission’s consent. The procedure for all unincorporated charities would therefore be made simpler and less expensive than having to obtain a cy-près scheme. Thus the main justification for retaining section 275 is removed.

Advantages of section 275

4.117  There would be only one difference between the procedure under section 275 and under our recommended amendment power,[194] namely that section 275 requires trustees to notify the Charity Commission of the resolution, with a power for the Charity Commission to object, whereas our recommendation requires the Charity Commission actively to give its consent to the amendment. Some consultees said that section 275 was helpful as a “do-it-yourself” power for small charities, without requiring formal Charity Commission consent. But the difference is not significant; in both cases, the Charity Commission will consider the amendment and make a decision as to whether or not it is appropriate.[195]

Disadvantages of section 275

4.118  There are several problems with section 275, which became more evident as we analysed consultees’ responses to our questions about expanding its scope.

(1)        The power is intended for small charities but that is not always achieved by the income threshold; Geldards LLP said it had encountered charities that hold assets worth millions of pounds, but which have an annual income of below £10,000 so could fall within the section 275 power. The problem exists despite the exclusion of charities with designated land (see paragraph 4.28),[196] but extending the power to charities with designated land, as we proposed in the Consultation Paper, would exacerbate this problem. Further, creating an additional capital threshold (either instead of, or as well as, excluding charities with designated land) would make the power more complicated and expensive to use. Charities might have to pay for a surveyor or other expert to value the charity’s assets in order to work out whether or not the charity fell above or below the capital threshold.

(2)        Changes to a charity’s purposes should be overseen by the Charity Commission, in particular to ensure that the purposes remain charitable.[197] Arguably that oversight should be greater, not less (as it is under section 275), in the case of small charities. As the National Council for Voluntary Organisations, Association of Charitable Foundations, Charity Finance Group and Institute of Fundraising commented “the potential for the power to be used incorrectly is greater with small charities, since they are less likely to have access to legal advice”.[198]

(3)        Many consultees reported that the section 275 power was regularly used in respect of restricted funds, permanent endowment, or gifts by will to charities on the basis that the particular fund was a separate charity (at least where the holding charity is incorporated).[199] Arguably, section 275 is intended for small charities, not small funds held by larger charities.

(4)        As we have noted elsewhere, setting a financial threshold for the use of the power is arbitrary.

Conclusion

4.119  Companies and CIOs do not have access to a power equivalent to section 275. Consultees who commented on this inconsistency between corporate and unincorporated charities tended to suggest that companies and CIOs should have an equivalent power. But the absence of such a power for companies and CIOs does not mean that they have to fall back on a cy-près scheme to change their purposes; they simply need Charity Commission consent to the regulated alteration, which is a procedure that (in stark contrast to the cy-près regime for unincorporated charities) was not criticised in consultation.

4.120  We have concluded that the introduction of our recommended amendment power should be accompanied by the repeal of section 275. Our recommended new amendment power removes the need for section 275; if there is no need for a cy-près scheme, there is less need for a simplified procedure for small charities as an alternative to a cy-près scheme. Further, the difficulties that are created by section 275, and that are thrown up by any expansion of the power, do not justify the minimal benefit (if any) that it would achieve after our recommended amendment power is introduced. Whilst consultees generally favoured expanding section 275 (as we had provisionally proposed) and creating an equivalent power for corporate charities, we agree with the CLA that it should be repealed; “it would be more consistent to have one, simple, process for all”.

Recommendation 3.

4.121  We recommend that:

(1)        in place of section 280 of the Charities Act 2011, unincorporated charities be given a new statutory power to amend any provision in their governing documents, subject to a requirement that the Charity Commission approves the following amendments:

(a)        amendments that would be “regulated alterations” under section 198 if they were made by a company (as amended in accordance with Recommendation 2 above);

(b)        any amendment to a restriction that renders property permanent endowment;

(c)        any amendment that – had it been made under an express power of amendment – would have required the consent of a person (other than a trustee or member), unless that person consents to the amendment or has died or (if a corporation or other body) is no longer in existence;

(d)        any amendment that would affect any right directly conferred by the governing document on (i) a named person, or (ii) the holder of an office or position specified in the governing document (other than that of a trustee or member), unless that person consents to the amendment or has died or (if a corporation or other body) is no longer in existence; and

(e)        any amendment which would confer power on the charity trustees to make an amendment falling within paragraphs (a) to (d) above;

(2)        in the case of a charitable trust, the power should be exercisable by a resolution of 75% of the trustees;

(3)        in the case of a charitable unincorporated association that has a body of members with an entitlement under the governing document, to attend and vote at a general meeting, the power should be exercisable:

(a)        by a resolution of a majority of the trustees; and

(b)        by a further resolution of those members which is passed:

(i)          at a general meeting, by 75% of those members who attend and vote on the resolution;

(ii)         at a general meeting, by a decision taken without a vote and without any expression of dissent in response to the question put to the general meeting; or

(iii)        otherwise than at a general meeting, unanimously;

(4)        in the case of amendments that require the consent of the Charity Commission, the trustees should be able to seek that consent before putting the resolution to a vote of the charity’s members;

(5)        amendments should take effect on the later of:

(a)        the date of the resolution;

(b)        the date specified in the resolution for it to take effect (if any);

(c)        the date on which the resolution of the members of the charity is passed (if such a resolution is required); or

(d)        the date on which the Charity Commission consents to the amendment, (if such consent is required);

(6)        the power should only be exercised where the charity trustees are satisfied that it is expedient in the interests of the charity to pass the resolution;

(7)        the power should not be exercised in any way which would result in the institution ceasing to be a charity;

(8)        the Charity Commission should be given a power to give public notice, or require the charity trustees to give public notice, of any amendment in respect of which the Commission’s consent is required; and

(9)        section 275 of the Charities Act 2011 should be repealed.

 

4.122  Clauses 3 and 41 of the draft Bill would give effect to this recommendation.

The Charity Commission’s discretion to consent to a change of purposes

4.123  We recommend above that the amendment regime governing unincorporated charities be aligned more closely with the amendment regime for companies and CIOs. A charitable company or CIO can only change its purposes with the consent of the Charity Commission. Our recommendation for a new amendment power would permit unincorporated charities to change their purposes with the consent of the Charity Commission as well. We now turn to consider the way in which the Charity Commission should exercise its discretion.

The difference between corporate and unincorporated charities

4.124  Currently, when the Charity Commission changes the purposes of an unincorporated charity by way of a cy-près scheme, it must have regard to the section 67 similarity considerations when deciding on the new purposes.[200] By contrast, a change of purposes by a company or CIO simply requires the Charity Commission’s consent and the Commission will exercise its discretion according to its policy for the time being. The Commission’s current policy permits companies and CIOs to make significant changes to their purposes. In considering whether to give consent to a change of purposes, the Charity Commission asks three questions.

(1)        Are the new objects exclusively charitable?

(2)        Is the trustees’ decision to make the change a rational one in the circumstances of the charity?

(3)        Do the new objects undermine the previous objects?[201]

4.125  Crucially, as long as the trustees provide a “convincing explanation as to why their proposed changes are in the charity’s best interests”, the amended purposes can be “significantly different from the existing objects”.[202] Similarity between old and new purposes will be relevant to the decision-making process, but it is not given the same importance as under the section 67 similarity considerations.[203]

Should the section 67 similarity considerations be integrated into the new amendment power?

4.126  There are three similarity considerations (set out in Figure 4 above). The first – “the spirit of the original gift” – requires the Commission to examine the motivations behind the original foundation of the charity.[204] The second requires the Commission to consider the similarity between the charity’s current purposes[205] and the proposed new purposes. That is to be balanced against the third consideration, which refers to the current social and economic circumstances.

4.127  We suggested in the Supplementary Consultation Paper that the similarity considerations should be applied when the Charity Commission is consenting to a change of purposes under the new amendment power and the majority of consultees agreed with us. These consultees said that the section 67 considerations help to protect the original spirit of the gift and provide clarity for the Charity Commission in deciding whether or not to give consent. They are also familiar to charities and practitioners. Those consultees who were against retaining the similarity considerations were generally in favour of complete alignment between the regimes for corporate and unincorporated charities such that neither section 67, nor section 62 (discussed above) would apply. Stone King LLP argued that the wider regulated alterations test for corporate charities should apply to the proposed new amendment power instead of section 67.[206] By contrast, the Chancery Bar Association criticised the Commission’s current approach for corporate charities (discussed further below).

4.128  There is a balance to be struck between allowing charities to remain effective in changing times, and respecting the wishes of founders and donors. The CLA said that a requirement for the Charity Commission to consent to a change of purposes under the new amendment power “provides a suitable safeguard for the wishes of the settlor” and provides “a suitable balance between those wishes and what is expedient in the interests of the charity”. In our view, that is best achieved by adopting the section 67 similarity considerations.

4.129  We consider how the section 67 considerations should apply to the new amendment power below. However, it is first necessary to establish whether the similarity considerations (as modified) would apply only to the new amendment power for unincorporated charities or extend to corporate charities as well.

Should the section 67 similarity considerations apply when a company or CIO is changing its purposes?

4.130  Retaining the section 67 similarity requirements for unincorporated charities would leave an inconsistency with the amendment powers of corporate charities, contrary to our policy of aligning the amendment regimes. The Charity Commission’s approach to considering a change of purposes by a charitable company would be different from its approach to considering a change of purposes by an unincorporated charity under the new amendment power.

4.131  In the Supplementary Consultation Paper, we said that it is arguable that the position for corporate and unincorporated charities should be aligned by applying the section 67 similarity considerations to a change of purposes by a corporate charity. The two tests are regarded by some consultees as quite similar in practice. It has also been suggested to us that, particularly where there are linked corporate and unincorporated charities, it is difficult to explain to trustees that there are two different tests for a change of purposes. The concern, however, is that such an approach would increase regulation for corporate charities.

4.132  It is possible to justify the retention of two different approaches; our policy is to align more closely the amendment powers of corporate and unincorporated charities but some differences will remain (as we explain above). Moreover, Parliament has previously decided that a change of purposes by corporate charities should only be subject to Charity Commission consent rather than subject to a particular set of considerations specified in the statute.

4.133  In the Supplementary Consultation Paper we invited the views of consultees as to whether the Charity Commission should be required to have regard to the section 67 similarity considerations when it decides whether to consent to a company or CIO changing its purposes. As expected, this question caused the most divergence of opinion between consultees, though a majority favoured applying the similarity considerations to changes of purposes by corporate charities.

4.134  Those in favour of applying the similarity considerations argued that doing so would provide greater transparency as to how the Charity Commission exercises its discretion to consent to a change of purposes. They said that this increase in certainty would outweigh the slight increase in regulation. They criticised the current test for corporate charities, saying that there is little, if any, legislation or case law endorsing the Commission’s current approach. By contrast, some consultees preferred the Charity Commission’s approach for corporate charities and thought that applying the similarity considerations to corporate charities would be an unjustified increased burden.

4.135  The arguments are evenly balanced, and we acknowledge the concern about an increase (or at least a perceived increase) in regulation. On balance, however, following our supplementary consultation on the question, we think that the Charity Commission’s approach to deciding a change of purposes by a charity should be the same whether it is corporate or unincorporated, and we think that the section 67 similarity considerations strike the right balance between protecting donors’ wishes and allowing charities to adapt to change. From the perspective of protecting the wishes of donors, little if any attention will be paid to the legal form of the charity to which they are donating (and therefore the basis on which the purposes of the charity could be changed). We have therefore concluded that corporate charities should be subject to the same section 67 similarity considerations when changes are made to their objects.

Public notice

4.136  We recommend above that, when the Charity Commission is required to give consent to a proposed amendment under the new amendment power for unincorporated charities, it should have a discretionary power to give notice of the proposed amendment (or require that notice be given) before deciding whether to give consent.[207] For consistency, we recommend that the Charity Commission should have the same power when deciding whether to consent to a change of purposes, or any other regulated alteration, by a company or CIO.

How should the similarity considerations apply to the new amendment power for unincorporated charities and to companies and CIOs?

4.137  We have concluded that the section 67 similarity considerations should be integrated both into the new amendment power for unincorporated charities and the existing powers for corporate charities. However, the section 67 considerations as currently drafted were designed for situations where trust property is being applied cy-près, rather than changing the purposes of a charity (and in particular a corporate charity). The similarity considerations cannot, therefore, be sensibly integrated in their current form into the new power.

4.138  In particular the first consideration, “the spirit of the original gift”, will not be relevant in every change of purposes context as there will not always be an “original gift”. This consideration points to an examination of the reasons why the charity was first established. We therefore recommend alternative wording which captures the same idea but is applicable in a wider context: “the original purposes of the charity” when it was established.[208]

Recommendation 4.

4.139  We recommend that:

(1)        when considering whether to consent to:

(a)        a company or CIO changing its purposes under sections 198 and 226 of the Charities Act 2011; and

(b)        an unincorporated charity changing its purposes under the new amendment power that we recommend above;

the Charity Commission should be required to have regard to the following matters:

(a)        the purposes of the charity when it was established;

(b)        the desirability of securing that the property is applied for charitable purposes which are close to the purposes being altered; and

(c)        the need for the relevant charity to have purposes which are suitable and effective in the light of current social and economic circumstances; and

(2)        the Charity Commission should be given a power to give public notice, or require the charity trustees to give public notice, of any amendment by a charitable company or CIO in respect of which the Commission’s consent is required.

 

4.140  Clauses 1(3), 2(3), 3(2), and 41 of the draft Bill would give effect to this recommendation.

Continuing role of schemes and the law of cy-près

Schemes

4.141  The effect of our recommendations will be that the need for unincorporated charities to obtain cy-près and administrative schemes to make changes to their governing documents will be significantly reduced. We do not, however, suggest that the scheme making power of the court or Charity Commission be removed. There would remain situations in which the Charity Commission would be asked to make a cy-près scheme. For example, if a charitable gift by will is impossible or impracticable, the Charity Commission would continue to make a cy-près scheme to direct that gift to similar charitable purposes.[209] Similarly, there may be situations in which charities will want to effect a change to their governing document by way of a Charity Commission scheme rather than by exercising the new amendment power.

4.142  The Charity Commission gives public notice of some proposed schemes before they are made.[210] Schemes will generally be publicised if they are potentially controversial. The reduced call for Charity Commission schemes as a result of our recommendations for reform could result in less publicity of proposed changes to governing documents. But if an amendment under the new power requires the Charity Commission’s consent (such as a change to the charity’s purposes), the Commission would have a power to require the charity to give notice of the proposed amendment before consenting to the change, in the same way that it currently requires trustees to consult before it will make a scheme:[211] see paragraph 4.97. Finally, it will remain good practice for charities (of any legal form) to carry out appropriate consultation with members, beneficiaries and other interested individuals and organisations, before making constitutional changes.

Section 67 similarity considerations

4.143  Our new amendment power retains (in a slightly modified form) the section 67 similarity considerations. And when, in those rarer cases, the Charity Commission makes a cy-près scheme, the section 67 similarity considerations will still apply.

Section 62 cy-près occasions

4.144  Under our new amendment power, unincorporated charities will have the power to change their purposes without having to establish a section 62 cy-près occasion. In the Supplementary Consultation Paper we asked whether, on that basis, there is any continuing need for section 62.

4.145  The section 62 cy-près occasions are effectively redundant in the case of cy-près schemes that are made following the initial failure of a charitable gift. By definition, an initial failure only arises if a charitable gift cannot be put into effect, so it will fall within the section 62(1)(a)(ii) or (b) cy-près occasion.[212] In the case of subsequent changes to a charity’s purposes, our new amendment power would remove the relevance of the section 62 cy-près occasions; unincorporated charities will not need to establish the existence of a section 62 cy-près occasion in order to exercise the new amendment power.

4.146  If the section 62 cy-près occasions are retained, the result would be that charities would have a wider power to change their purposes (under our recommended new amendment power) than the Charity Commission would have pursuant to a cy-près scheme. Arguably, retaining the section 62 cy-près occasions would be an unnecessary and illogical constraint on the Charity Commission’s powers. It would be possible to remove the need for the Charity Commission to establish one of the section 62 cy-près occasions before making a cy-près scheme. On such an approach, the section 67 similarity considerations should still apply when the Commission decides on the charity’s new purposes.

4.147  But retaining the section 62 cy-près occasions would not necessarily be problematic, since we expect that a change of purposes will generally be undertaken using the new amendment power rather than by way of a cy-près scheme. Moreover, the power to make cy-près schemes arises not just on the application of the trustees, but it can also be exercised on the application of certain other people or on the Commission’s own motion.[213] Whilst it would be consistent to remove the need for section 62 cy-près occasions when the application is made by the charity’s trustees, we are not convinced that the same can be said when the scheme is made on the application of a third party or of the Commission’s own motion.

4.148  It would not be anomalous for the trustees of a charity to have a power to make a change which the Charity Commission could not itself make. The power for small charities to change their purposes under section 275 can be exercised without having to establish a section 62 cy-près occasion.[214] The trustees can therefore make some changes under section 275 (with Charity Commission oversight built into the process) which the Commission could not itself make by way of a cy-près scheme.

4.149  In the Supplementary Consultation Paper we suggested that the policy considerations behind expanding trustees’ own powers of amendment might be different from those concerning the exercise of the Commission’s scheme-making powers. As a result, we proposed retaining the section 62 cy-près occasions as pre-conditions to the Charity Commission making a cy-près scheme.

4.150  The vast majority of consultees agreed with our proposal. Lord Hodgson argued against it, describing section 62 as creating another hurdle inhibiting change which should therefore be removed. However, other consultees recognised the continued (if reduced) need for section 62 where a scheme is made on the application of a third party or of the Commission’s own motion.

4.151  Following this additional consultation we have concluded that section 62 cy-près occasions should remain as pre-conditions to the Charity Commission making a cy-près scheme.

Effect of our reforms

Type of amendment

Current law

Changes following our reforms

Charitable companies and CIOs

Changing purposes

Statutory power to amend by resolution of the members

·         Regulated alteration

·         Requires Charity Commission consent: discretion exercised according to its policy for the time being

Statutory power to amend by resolution of the members

·         Regulated alteration

·         Requires Charity Commission consent: discretion to give consent exercised having regard to:

(1)   the purposes of the company/CIO when it was established;

(2)   the desirability of securing that the purposes of the company/CIO are similar to the purposes being altered; and

(3)   the need for the company/CIO to have suitable and effective purposes in the current social and economic circumstances

Altering provisions concerning the distribution of property on dissolution

Authorising benefits to trustees or members

(“Regulated alterations”)

Statutory power to amend by resolution of the members

·         Regulated alteration

·         Requires Charity Commission consent: discretion exercised according to its policy for the time being

No change

Other amendments

Statutory power to amend by resolution of the members

·         Not a regulated alteration

·         No requirement for Charity Commission consent

No change

Unincorporated charities

Changing purposes

Express power in governing document

Or

Statutory power for certain small charities to amend by resolution:

·         Requires notice to be given to the Charity Commission

Or

Apply to the Charity Commission for a cy-près scheme:

·         Establish a section 62 cy-près occasion

·         Scheme to be made having regard to the section 67 similarity considerations

Express power in governing document

Or

New statutory power to amend by resolution under section 280A

·         Regulated alteration

·         Requires Charity Commission consent: discretion to give consent exercised having regard to:

(1)   the purposes of the charity when it was established;

(2)   the desirability of securing that the purposes of the charity are similar to the purposes being altered; and

(3)   the need for the charity to have suitable and effective purposes in the current social and economic circumstances

Or

Apply to the Charity Commission for a cy-près scheme:

·         Establish a section 62 cy-près occasion

·         Scheme to be made having regard to the section 67 similarity considerations

Amending provisions concerning the distribution of property on dissolution

Authorising benefits to trustees or members

Altering a restriction making property permanent endowment

Requiring a person’s consent

Affecting rights directly conferred on named persons or holders of an office/position

Express power in governing document

Or

Apply to the Charity Commission for an administrative scheme

Express power in governing document

Or

New statutory power to amend by resolution under section 280A

·         Regulated alteration

·         Requires Charity Commission consent: discretion to give consent exercised according to the Charity Commission’s policy for the time being

Or

Apply to the Charity Commission for an administrative scheme

Other amendments

Express power in governing document

Or

(In some cases) statutory power for charities to make certain administrative amendments by resolution

Or

Apply to the Charity Commission for an administrative scheme

Express power in governing document

Or

New statutory power to amend by resolution under section 280A

·         Not a regulated alteration

·         No requirement for Charity Commission consent

Or

Apply to the Charity Commission for an administrative scheme

Chapter 5: Charities governed by statute or Royal Charter: changing purposes and amending governing documents

Introduction

5.1        There are well-established and relatively simple procedures by which the most common forms of charity[215] can change their purposes and amend their governing documents. In Chapter 4, we made recommendations to align, rationalise and further simplify those procedures. In this chapter, we consider the ability of charities[216] established or governed by statute or Royal Charter to make similar changes; they must currently satisfy different requirements and engage with a convoluted procedure to change the provisions in their governing documents.[217]

5.2        There are three principal differences between the process by which statutory and Royal Charter charities amend their governing documents and the process applicable to other charities.

(1)        Charity trustees of statutory and Royal Charter charities are given less autonomy. Amendments are subject to the oversight of three different bodies: the Charity Commission, the Office for Civil Society in the Department for Digital, Culture, Media and Sport (“DCMS”), and (in the case of statutory charities) Parliament or (in the case of Royal Charter charities) the Privy Council.

(2)        There is a single procedure for all amendments, whereas the processes for other charities distinguish between major and minor amendments, the former requiring more scrutiny than the latter.

(3)        Most charities can seek a Charity Commission scheme to make an amendment if no other power is available to them. That involves some additional time and expense, which can be unpopular with charities, and on which we comment in Chapter 4. But it is a familiar and relatively straightforward process when compared with the process for statutory and Royal Charter charities who must comply with the additional requirement that a scheme be approved by Parliament or by the Privy Council (as the case may be).

5.3        In this chapter, we summarise the procedures that statutory and Royal Charter charities must follow, the criticisms that have been levelled at them and our provisional proposals for their reform. We then discuss consultees’ responses and make recommendations for both law reform and for the provision of guidance which, together, would create a simpler and more transparent process for such charities to undertake constitutional change. Finally, we consider the special position of higher education institutions.

The current law

Statutory charities

5.4        Where a charity is established or governed by statute, its governing document (or one of its governing documents) is an Act of Parliament. Some statutory charities were established by Act of Parliament;[218] others that were not established by statute are nevertheless governed by an Act which was passed in respect of the charity.[219] In the absence of any express power to amend a statute, the governing document can only be amended by a further Act of Parliament.[220] That requires Parliamentary time and can be a long and expensive process for the statutory charity wishing to make the amendment.

5.5        Section 73 of the Charities Act 2011 provides a mechanism by which a statute establishing or regulating a charity can be amended by secondary legislation (“the section 73 procedure”).[221] The procedure requires the Charity Commission to prepare a scheme – in much the same way that it prepares schemes for other charities[222] – that alters the provision made by an Act establishing or regulating a charity. The scheme is then given effect by order of the Secretary of State.[223] If the statute establishing the charity is a public general Act, the order must be approved by a resolution of both Houses of Parliament (“the affirmative procedure”).[224] If it is a private Act, the order must be laid before both Houses of Parliament and is subject to annulment by a resolution of either House (“the negative procedure”).[225] Most orders under section 73 follow the negative procedure.

5.6        Where a scheme is given effect by an order under the negative procedure (that is, where it is made in respect of a private Act), the Charity Commission or court can amend that scheme as if it were a scheme brought into effect by order of the Commission under section 69.[226] In effect, therefore, once a scheme amending a statute has been made and given effect by order, further amendments to that scheme do not require Parliamentary oversight. The further amendment must be an amendment of the scheme itself, and not the original Act. Accordingly, if the scheme is limited to certain issues, and parts of the original Act remain, only the issues addressed in the scheme can be amended by a further scheme.[227]

5.7        Whilst the section 73 procedure appears relatively straightforward, in practice there are numerous steps to be taken and various parties are involved: they are set out in Figure 6. Both the Charity Commission and DCMS have significant roles, but neither require any payment from a charity in respect of their involvement in the process.

Figure 6: statutory charities – the section 73 procedure[228]

(1) The pre-application phase

After discussions with the charity, the Charity Commission is satisfied that there is a need for a scheme, but no invitation to submit a formal application for a scheme is made.

The responsible Charity Commission lawyer submits a proposal to draft a scheme to the Commission’s Director of Legal Services, who considers whether the scheme should be brought to the attention of the Legal Board or to two legally-qualified members of the Board and whether the proposal is exceptional such that it should be brought to the attention of the Office for Civil Society at DCMS at an early stage.

Once the proposal to draft a scheme has been approved, a formal application for a scheme is invited from the charity.

(2) The application

The charity submits an application for a scheme with a copy of the resolution of the trustees. The Commission must be informed of any charity trustees who are not party or privy to the decision because it is under a statutory obligation to notify them of its intention to settle a scheme.[229]

(3) The drafting phase

The provisional text of the scheme is drafted by the Commission lawyer (unless the charity asks to provide its own draft) and is sent to the charity and to DCMS for comment.

DCMS considers and comments on whether there are any matters that might cause problems during the Parliamentary process.

The parties agree on the wording of the draft scheme. DCMS is asked to draft the Order that will give effect to the scheme.

(4) The publicity and modification phase

The Commission considers whether the draft scheme should be published by the charity.[230] This entails giving public notice of the scheme and inviting representations to be made within a period specified in the notice.

Any representations made within the notice period must be taken into account. The Commission then decides whether to settle the scheme either without modifications or with such modifications as it thinks desirable.[231] The Charity Commission will liaise with the charity and DCMS in respect of any modifications.

(5) Final internal approval

The revised scheme and draft Order are submitted to the Director of Legal Services for scrutiny and comment. The Director may refer it to either the entire Board or to two legally-qualified members of the Board at this stage. The scheme is approved but it is not settled.

(6) Submission to DCMS

On approval, the scheme and draft Order are submitted by the Chair of the Commission to DCMS in an agreed form. The Commission provisionally settles the scheme subject to approval by DCMS.

(7) DCMS approval and settlement

When DCMS approval is received, the scheme is settled and can be signed by the Director of Legal Services from the date of approval.

(8) Parliamentary phase

DCMS is asked to table the draft Order before both Houses of Parliament.

Affirmative procedure. Where the Act in question is a public general Act, the draft Order must be approved by a resolution of each House.[232] Once approved, the Order comes into force.

Negative procedure. Where the Act in question is a private Act, the Order is made by the Secretary of State and laid before Parliament. The Order will come into force on its specified commencement date, which will usually be at least 21 days after it is laid. The order will, however, be revoked if either House passes an annulment resolution within 40 days of it being laid.[233]

 

 

5.8        There is no distinction between amendments to the charity’s purposes and other amendments; any amendment to the governing document, no matter how significant, or insignificant, must follow the same procedure.

Royal Charter charities

5.9        Royal Charter charities’ governing documents typically comprise:

(1)        the Royal Charter, and any supplemental Charters;

(2)        bye-laws (sometimes known as rules or statutes); and

(3)        regulations (sometimes known as ordinances).

5.10     There is no clear delineation between the matters that are set out in Charters, bye-laws and regulations. The Charter will often formally incorporate the charity and set out its purposes and powers; the bye-laws might set out the charity’s governance structure; and the regulations tend to concern internal procedures.

5.11     The Privy Council Office (“PCO”) has a significant role in respect of amendments to Charters and bye-laws, but does not require any payment from a charity in respect of its involvement (save that, as we discuss below, charities are required to pay for their Charter and any supplemental Charters to be printed on vellum). The PCO has emphasised to us that it always encourages Charter bodies to contact the Office at an early stage in order to discuss proposed amendments.

(1) Amending a charity’s Royal Charter

5.12     A charity’s Royal Charter may be amended:

(1)        pursuant to a power of amendment in the Charter (“the express power procedure”);

(2)        by the grant and acceptance of a supplemental Charter (“the supplemental Charter procedure”);

(3)        by Order of the Queen in Council giving effect to a scheme made under section 68 of the Charities Act 2011 (“the section 68 procedure”); or

(4)        by Act of Parliament.[234]

Each is considered below.

5.13     As with statutory charities, the relevant procedure must be followed irrespective of the amendment sought though, as noted above,[235] provisions of minor importance will not usually appear in the Charter.

(A) The express power procedure

5.14     Many Royal Charters contain a power of amendment. This can typically be exercised by resolution of the charity trustees or members of the charity, always subject to the approval of the Queen in Council.[236]

5.15     The procedure that charities must follow is set out in guidance issued by the PCO, which is summarised in Figure 7.

Figure 7: Royal Charter charities – the express power procedure

(1) Initial contact with the PCO

Royal Charter charities are advised to consult with the PCO before any amendment resolution is passed, as this “allows the Privy Council’s advisers to provide informal comments and help shape proposed amendments before they are put to the members for approval”. A failure to do so increases the risk of the Privy Council refusing to approve a proposed amendment, which can result in delay and expense for the charity.

(2) Consultation between the PCO and interested bodies

The PCO will consult Government departments with a policy interest in the Royal Charter body. It will also consult the Charity Commission where the proposed amendments will make “material changes” to the objects of the charity, the name of the charity, the payment of the trustees (other than out-of-pocket expenses) or the dissolution clause.

(3) Informal response from the PCO

The PCO will give an informal response to the charity indicating that the proposed amendment is likely to be approved (with or without modifications) or rejected.

(4) Resolution passed

The charity trustees pass the resolution and (if appropriate) members of the charity approve it.

(5) Submission of resolution to the PCO

The charity trustees submit the resolution together with a certificate confirming that it has been passed in accordance with the Royal Charter.

(6) Approval by the Queen in Council

The resolution will be put before the Privy Council for approval by the Queen in Council at one of the nine Privy Council meetings held each year.

 

(B) The supplemental Charter procedure

5.16     If a Royal Charter does not itself make provision for its amendment, it can be varied by the grant and acceptance of a supplemental Charter.[237] Charities wishing to amend their Royal Charters in this way must petition the Queen in Council for a supplemental Charter. Supplemental Charters are granted by the Queen in Council at common law[238] in much the same way as a first Royal Charter: see Figure 8. A supplemental Charter may add to, remove from, or amend provisions in the original Charter, or it may entirely replace the original Charter.[239]

Figure 8: Royal Charter charities – the supplemental Charter procedure

(1) Initial contact with the PCO and other interested bodies

Royal Charter charities are advised to consult with the PCO, and other interested bodies, before making a formal petition for a new or supplemental Charter.[240]

(2) Submission of formal petition

The charity submits a formal petition for a supplemental Charter to the PCO.

(3) Publication of the formal petition

The PCO publishes the formal petition in the London Gazette for eight weeks, inviting interested bodies to comment.

(4) Other consultation

The PCO will also consult Government departments and the Charity Commission in the circumstances outlined in Figure 7 above.

(5) Consideration of comments and counter-petitions

The PCO will consider comments and counter-petitions received by interested bodies. The guidance states that “any proposal which is rendered controversial by a counter-petition is unlikely to succeed”.

(6) Approval by the Queen in Council

If the petition is uncontroversial, or any controversies are resolved, a supplemental Charter will be granted by the Queen in Council.

 

5.17     The charity is required by the Privy Council to pay to print the supplemental Charter on vellum which generally costs the charity around £300 per page. A supplemental Charter could be one page (if it makes one minor amendment) or 10 pages (it is makes more significant amendments or involves a re-print of the bye-laws).

(C) The section 68 procedure

5.18     Section 68 of the Charities Act 2011 provides an alternative mechanism for amendment of a charity’s Royal Charter by Order of the Queen in Council giving effect to a scheme. The court or Charity Commission[241] drafts a scheme that “does not purport to come into operation unless or until Her Majesty thinks fit to amend the Charter in such manner as will permit the scheme or that part of it to have effect”.[242] The scheme will be submitted to the Privy Council, and the Queen may amend the charity’s Royal Charter by Order in Council in any way in which the Charter could be amended by the grant and acceptance of a further Charter.[243]

(D) Amendment by Act of Parliament

5.19     Any Royal Charter may be amended or revoked by an Act of Parliament.[244] An Act that amends a Royal Charter could itself be amended using the section 73 procedure,[245] but we are not aware of this ever having occurred.

(2) Amending bye-laws

5.20     Bye-laws can be made or amended pursuant to an express power in the Royal Charter or pursuant to the common law power for corporations to make bye-laws for carrying out their purposes.[246]

5.21     Where the Royal Charter contains an express power to make bye-laws, the charity must comply with any conditions concerning the exercise of that power.[247] The Privy Council’s guidance suggests that amendments to bye-laws always require the approval of the Privy Council.[248] That is correct where – as in most cases – the power to make bye-laws is contained in the Royal Charter and expressly requires the charity to obtain the Privy Council’s consent. But where the Royal Charter confers a power to make bye-laws without imposing conditions, or where it is silent on the power to make bye-laws and so the charity must rely on its common law power, it is our view that the charity can make and amend bye-laws without the Privy Council’s consent.[249] We make a recommendation below that the guidance provided by the Privy Council be amended to reflect this.

(3) Amending regulations

5.22     The power to make and amend regulations is generally set out in the charity’s Royal Charter or bye-laws. Privy Council approval is not normally required.[250]

Criticisms of the current law

5.23     We summarised the criticisms of the current procedures for amendment in the Consultation Paper,[251] which were generally borne out by consultation. Criticisms by consultees fell into four broad, and overlapping, categories.

(1) Unnecessary complexity, delay and costs

Royal Charter charities

5.24     Consultees said the process for amendment was complex and that there was a lack of transparency (on which see paragraph 5.34 below), which added to the costs of constitutional change since it occupies staff time and, very often, charities feel that they have to engage external lawyers to navigate the procedure. Those costs are increased further by the length of the process. In the Consultation Paper, we said that:

(1)        the express power procedure could take as little as six to eight weeks since the PCO aims to respond to enquiries and requests within 15 working days, but in some cases the reality is that the process can take up to one year, given the need to discuss and negotiate amendments with the various parties, many of which have infrequent meetings;[252]

(2)        the supplemental Charter procedure would normally take up to a year, but it can take up to two years; and

(3)        whilst the amendment of bye-laws can be a quicker process, it can nonetheless take a long time since the consent of the Privy Council is still usually required.

5.25     Keith Lawrey (an adviser) said that delays were not caused by the PCO, which is “remarkably efficient in seeking comments from its advisers”, but by the delayed responses from the advisers themselves. He said that consultation with these advisers was important, and simply changing the organisation that requests their advice will not solve any problems. The PCO queried whether the perceived problems warranted statutory intervention since it deals with relatively few Charter amendments and supplemental Charters. It disagreed that there were delays in the process: “the only process ‘delays’ that we are aware of are as a result of a chartered charity proposing amendments that are perhaps inappropriate or unacceptable … not as a consequence of the approval process”.[253] Some other consultees were content with the process. For example:

(1)        the Society for Radiological Protection said “the time and expense is not particularly excessive but it does take a long time in order to be thorough”; and

(2)        Imperial College London said its experience had been “positive” and the PCO had provided “helpful guidance and support”.

5.26     But there is undeniably dissatisfaction with the process amongst some Royal Charter charities. For example:

(1)        Cancer Research UK said that the process to amend the Charter and bye-laws of one of its predecessor charities, Imperial Cancer Research Fund, in order to simplify complex administrative provisions, was convoluted and time-consuming;

(2)        the Independent Schools Council reported that its member schools had found constitutional change to be “disproportionately complicated, time-consuming and expensive”;

(3)        the Royal Statistical Society has made recent minor changes and reported that it “took substantial staff time to engage with the Privy Council, including a six week wait for comments and then a response time after our Special General Meeting. Waiting on the Privy Council makes it difficult to predict when changes will take effect to allow for comprehensive planning”;

(4)        University College London said “the process is lengthy and challenging”, and that this had been “a deterrent to bringing forward re-organisational changes”;

(5)        Francesca Quint, a barrister, said “constitutional change for charities of these kinds is often put off because it is perceived as expensive, long-winded and complex or because non-specialist solicitors simply don't know how best to advise”;

(6)        Anthony Collins Solicitors LLP said that amendments for Royal Charter charities “are significantly more time-consuming and costly than for other charities, often disproportionately so”; and

(7)        Veale Wasbrough Vizards LLP described the supplemental Charter process as cumbersome, lengthy and costly.

5.27     The requirement for Royal Charter charities to pay to print supplemental Charters on vellum was also criticised by some consultees. It was seen as an inappropriate use of charitable funds; one consultee described it as “an affectation and an unnecessary expense”.[254]

Statutory charities

5.28     The section 73 procedure for statutory charities is complex and can take several years. The National Trust said the time taken to draft its section 73 scheme was proportionate and a helpful process, but that the Parliamentary process was “difficult to navigate and required us to instruct specialist parliamentary agents at a relatively high cost”.

5.29     Based on its recent experience, the National Churches Trust said the section 73 process was complex, expensive and time-consuming, taking 10 years to complete; “it is completely unreasonable to expect charities to incur this amount of staff time and mounting legal fees over a considerable period of years, when such resources could instead be put to the primary task of delivering the charity’s objects”. It therefore “fully [concurred] with the expressions of frustration and complaint about the section 73 procedure”.

5.30     The RSPCA’s statutory governing documents have been the source of uncertainty and the subject of two High Court rulings. The RSPCA concluded: “Whilst such issues may be of great interest to lawyers, it makes the business of updating the charity’s constitution very complicated and costly which benefits neither the charity nor the wider public.”

(2) Disproportionality

5.31     Consultees’ criticism of the complexity, delay and expense of the process was often based on the view that it was disproportionate for the Privy Council or Parliament to be involved in all amendments. As we said in the Consultation Paper in relation to Royal Charter charities, “the principal concern, it seems to us, is not with the level of service provided by the PCO, but rather as to whether the extent of their involvement is necessary, or could be limited to situations where their expertise and regulatory function would be more valuable”.[255]

5.32     Consultees offered mixed views about the service provided by the PCO, but were generally positive.[256] But even those who acknowledged the expertise and assistance provided by the PCO often maintained that the procedure was complicated, lengthy and bureaucratic. For both statutory and Royal Charter charities, the level of oversight is not tailored to the importance of the proposed amendment. One consultee said that PCO consultation with other public bodies takes time and was disproportionate when minor amendments are involved, particularly where the amendments simply “reflect good practice in other organisations”.[257]

5.33     Some consultees commented that there was something special about being a Royal Charter charity: there is respect for “the prestige and status of being a Royal Charter body and the cachet it brings”.[258] The PCO’s view is that, by accepting a Royal Charter and that special status, charities are agreeing to accept an additional level of governmental regulation:

New grants of Royal Charters are these days reserved for eminent professional bodies or charities which have a solid record of achievement and are financially sound. … Both in the case of charities and professional bodies, incorporation by Charter should be in the public interest. This last consideration is important, since once incorporated by Royal Charter a body surrenders significant aspects of the control of its internal affairs to the Privy Council. Amendments to Charters can be made only with the agreement of The Queen in Council, and amendments to the body’s by-laws require the approval of the Council (though not normally of Her Majesty). This effectively means a significant degree of Government regulation of the affairs of the body, and the Privy Council will therefore wish to be satisfied that such regulation accords with public policy.[259]

(3) Lack of transparency in the amendment process

5.34     There was a perception amongst consultees that the amendment process is shrouded in mystery. Bircham Dyson Bell LLP said that the amendment process for Royal Charter charities can be “frustrating, opaque and applied inconsistently”, that it can become political and that it was unclear how the Privy Council assesses the views of its advisers. The CLA reported the experience of those involved in the amendment of the British Council’s Charter in 2010 and 2011. Following consideration of the proposed changes both internally and with external advisers, a formal request for approval of the amendments was made to the PCO. Those involved “felt that the process of PCO approval was very opaque and hard for non-legal (or even legal but non-specialist) colleagues to understand. … In general it was felt that the process could certainly be clearer and more transparent…”.[260]

5.35     The Institute of Chartered Secretaries and Administrators thought it would be helpful for the PCO to establish and publish “service level standards” which would “enable charities to better understand the timeframe for all types of dealings with the PCO”.

5.36     Similar criticisms were made of the process for statutory charities. Bircham Dyson Bell LLP said that the process can be drawn-out and can seem opaque, and that it discourages charities from making amendments.

(4) Inconsistencies

5.37     In the Consultation Paper, we said that there were two inconsistencies in the amendment regimes.

(1)        The ease by which statutory charities can make an amendment might turn, by chance, on whether a section 73 scheme is already in operation in relation to the provision to be amended, since such a scheme can be amended without Parliamentary oversight.

(2)        Royal Charter charities can amend more easily if they have an express power of amendment, but face a longer, more complicated and more expensive process if they do not. And the ease of making an amendment will depend on whether the provision is contained in the Royal Charter, the bye-laws or the regulations, yet the same issue may be addressed in one charity’s Charter, another’s bye-laws and another’s regulations.[261]

Conclusion

5.38     Whilst some consultees saw no difficulties with the process for constitutional change, most voiced some or all of the criticisms set out above. The consequence is that charities decide not to make amendments that ought to be made owing to “the daunting process of effecting change”;[262] they are left with out-of-date governing documents and must find ways to work around the problem. The current position is unsatisfactory.

Our provisional proposals

5.39     We suggested three principal options for reform in the Consultation Paper. The first was self-standing. We presented the second and third as alternatives, though asked whether they might work together.

5.40     First, we noted that a Royal Charter charity whose Charter does not contain an express power of amendment will usually amend the Charter by using the supplemental Charter procedure, which takes longer and is more expensive. We noted that Royal Charters granted since the 1950s generally contain express amendment clauses. We provisionally proposed that any Royal Charter or bye-laws that do not contain an express amendment clause should be deemed to include a power for any provision to be amended, subject to any amendment being approved by the Privy Council.[263]

5.41     Second, we noted that when the PCO is approached by a Royal Charter charity seeking to amend its Charter or bye-laws, the PCO will often encourage the charity to use the opportunity to reallocate the different provisions of the charity’s constitution between the Charter, bye-laws and regulations. Accordingly, if provisions concerning internal governance feature in the Charter, it may be appropriate to move them to the bye-laws so that they can be amended more easily in the future. Similarly, it may be appropriate for more minor provisions to be moved from bye-laws to regulations, so that they can be amended in the future by the trustees without Privy Council oversight. We endorsed this re-allocation approach and asked consultees whether it could be facilitated by the PCO and Charity Commission issuing guidance concerning the types of provision that they would normally expect to see in a charity’s Charter, bye-laws and regulations.

5.42     Third, we provisionally proposed that both statutory and Royal Charter charities should be given a power to make minor amendments to their governing documents without the oversight of Parliament or the Privy Council (as the case may be). We invited consultees’ views as to the types of amendment that should fall within and outside the amendment power and asked further questions about how such a power would operate.

5.43     We also asked some supplemental questions about:

(1)        the role of the Charity Commission in making amendments to statutory and Royal Charter charities’ governing documents;

(2)        whether section 73 schemes should always be subject to the negative procedure (rather than, in some cases, requiring the affirmative procedure);

(3)        the revision of PCO guidance concerning the amendment of bye-laws; and

(4)        whether it would be helpful for the various public bodies involved to issue joint guidance concerning the process for statutory and Royal Charter charities to make constitutional changes.

Discussion and recommendations for reform

Royal Charter charities: improving the supplemental Charter procedure

Default amendment power exercisable with Privy Council consent

5.44     Charity advisers have told us that many Royal Charter charities do not have an express amendment power and that, given the time and expense involved under the supplemental Charter procedure, they often decide not to proceed with an amendment. They are therefore left with inconvenient, inappropriate and out-of-date governing documents.[264] Our provisional proposal for a default amendment power, to be exercisable with the consent of the Privy Council,[265] received unanimous support from consultees. It would create a “level playing field” between those (generally more recent) charities with an express power, and those (generally older) charities without such a power.[266] The PCO said it “could reduce the time taken to give effect [to] any proposed changes by removing the currently unavoidable need for a supplemental Charter”.

Should the power apply if there is an existing express amendment power?

5.45     In the Consultation Paper, we said that the power should only apply to charities that do not already have an existing power of amendment. We said that existing powers of amendment may require certain conditions to be satisfied which are likely to have been carefully framed to suit the charity and which would be overridden if the default power operated in place of, or as an alternative to, existing amendment powers. We said that the particular problem that we were seeking to address is the position of Royal Charter charities without any existing power of amendment who therefore have to use the supplemental Charter procedure, not charities that already have an express power of amendment and that can therefore already use the express power procedure.

5.46     Whilst most consultees agreed with us, some thought that the new amendment power should operate as an alternative to any express amendment powers, similarly to section 280 for unincorporated charities.[267] Stone King LLP said that our proposal would result in giving greater flexibility to a charity which previously had no power of amendment as compared to a charity with an existing (albeit more stringent) power of amendment. The CLA and Bircham Dyson Bell LLP agreed, though thought that any requirements for third party consent in any existing express amendment powers should continue to apply to the exercise of the new power.

5.47     We can see the strength of the argument for the new power to apply where there is an existing power, particularly as section 280 is currently available as an alternative to existing express amendment powers and we maintain that position in our recommendations above.[268] But we do not think that the new amendment power for Royal Charter charities should operate in the same way as section 280 for four reasons.

(1)        As noted above, the new amendment power is not intended to provide a universal amendment power; it is intended to put charities without an express amendment power (generally those whose Charter pre-dates the 1950s) in a similar position to charities with an express amendment power (generally those whose Charter post-dates the 1950s).

(2)        The new amendment power is not the same as section 280. Section 280 allows the trustees to act alone without oversight. The new amendment power for Royal Charter charities would require Privy Council consent, in much the same way as express amendment powers. So for Royal Charter charities with express amendment powers, our proposed power is unlikely to give them very much more than they already have; both powers would require Privy Council consent to be operated. But permitting such charities to use both powers might have the disadvantage of circumventing the provisions in the existing tailored provision by replacing it with a universal power.

(3)        There is a good argument for saying that section 280 should not be available to charities that have existing amendment powers.[269] But section 280 can already be used by such charities, so to limit section 280 to cases where there is no express amendment power would significantly curtail the existing powers of such charities. By contrast, Royal Charter charities do not currently have any similar default power, so limiting the new amendment power would not curtail the existing powers of Royal Charter charities.

(4)        We explain below a theme from consultation responses that Royal Charter charities have a special status and that they are incredibly diverse, such that it is not possible to devise an appropriate list of provisions that would be appropriate for such charities to have freedom to amend without Privy Council oversight. Similarly, if Royal Charter charities have a tailored express amendment power, that should be respected. By comparison, consultees seemed comfortable that all charitable trusts and unincorporated associations were sufficiently similar that a universal amendment power (as under section 280) was appropriate.

5.48     We therefore remain of the view that the default amendment power for Royal Charter charities should only be available where the charity does not have an express amendment power.[270]

Exercising the power

5.49     In the Consultation Paper, we proposed that the power should be exercisable by a resolution of two-thirds of the charity trustees and, if the charity had a separate body of members, by a resolution of two-thirds of the members at a general meeting.[271] These majorities mirrored those required in many existing express amendment powers of Royal Charter charities.

5.50     The vast majority of consultees agreed that resolutions of the trustees and members should be required, although some suggested alternative majorities. The main alternative suggestion was for an ordinary resolution of the trustees and a resolution of 75% of the members, which was based on a desire for consistency with amendments by companies. We can see the benefits of aligning – so far as possible – the majorities required under an amendment power for Royal Charter charities with those required for companies and under our proposed new power for other charities (see paragraph 4.121 above). Having different majorities depending on the legal form of the charity makes it more expensive and time-consuming for charities using legal advice and increases the likelihood of (potentially costly) mistakes.

5.51     Consultees who disagreed with a requirement for a members’ resolution generally did so for two reasons. First, they said it can be difficult to identify whether a Royal Charter charity has a membership. As we noted in relation to section 280,[272] the purpose of a members’ resolution is to capture a charity with a body of members who have a role in the governance of the charity by virtue of an entitlement to vote on certain matters. It is not intended to capture charities that confer a membership status (for example, on previous students or on donors) where the members cannot easily be contacted and do not have a role in the governance of the charity. This first concern can therefore be addressed by requiring a members’ resolution only when the charity has members with an entitlement to vote under the charity’s governing document.

5.52     Second, there was a concern about the expense of obtaining a members’ resolution, particularly given that the Privy Council might subsequently refuse consent to the amendment in which case the expense of obtaining the members’ resolution will have been wasted. We think that this second concern can be addressed by permitting trustees to obtain an indication from the Privy Council as to whether the amendment would be approved before having to incur the expense of obtaining a members’ resolution.

Involving the Privy Council Office at an early stage

5.53     Amendments under the new power would only take effect when they are approved. In order to avoid potentially wasted costs of putting a proposed amendment to a vote of the charity’s membership, only for the amendment to be refused, the PCO have suggested to us that that charities should speak to them at an early stage. That will enable potential problems to be resolved, and the PCO to indicate approval in principle to the proposed amendment, before the resolution is put to a vote of the charity’s membership. We agree, and the same applies whenever a charity wishes to amend its Charter or bye-laws under the existing routes. The PCO is keen to assist Charter bodies from an early stage in the process, and to ensure that amendments can be made as efficiently as possible. We would therefore encourage charities to engage with the PCO at an early stage, regardless of whether the proposed amendment can be made under the new statutory power or under existing routes for amendment.

Should the power apply to bye-laws?

5.54     In the Consultation Paper, we said the power should permit amendments to a Royal Charter and bye-laws, though we said it would rarely apply to bye-laws since they usually permit amendment with Privy Council consent.[273] The Cambridge Colleges said it was unnecessary for the new power to apply to the bye-laws since either:

(1)        the bye-laws will have been created by the Charter, in which case the new power to amend the Charter will also permit amendment of the bye-laws; or

(2)        the bye-laws will have been created under the Charter, in which case the new power can be used to amend the Charter so as to introduce a power to amend the bye-laws.[274]

5.55     We agree; the new power to amend the Charter could be used to amend any bye-laws for which there was no express amendment power.

Recommendation 5.

5.56     We recommend that:

(1)        a statutory power be created for Royal Charter charities to amend any provision in their Royal Charter which cannot be amended under any existing express power of amendment, subject to the amendment being approved by the Privy Council;

(2)        in the case of a charity that has a body of members with an entitlement to vote under the Royal Charter, the power should be exercisable:

(a)        by a resolution of a majority of the trustees; and

(b)        by a further resolution of those members which is passed:

(i)          at a general meeting, by 75% of those members who attend and vote on the resolution;

(ii)         at a general meeting, by a decision taken without a vote and without any expression of dissent in response to the question put to the meeting; or

(iii)        otherwise than at a general meeting, unanimously;

(3)        in the case of a charity without a separate body of members, the power should be exercisable by a resolution of 75% of the trustees;

(4)        the trustees should be able to seek an indication from the Privy Council as to whether a proposed amendment would be approved before putting the resolution to a vote of the charity’s members; and

(5)        amendments should take effect on the date on which the Privy Council consents to the amendment (or, if the resolution specifies a later date for it to take effect, on that date).

 

5.57     Clause 4 of the draft Bill would give effect to this recommendation.

Will the default amendment power solve the problems of using the supplemental Charter procedure?

5.58     The new statutory power that we recommend will remove the need for Royal Charter charities without an express amendment power to follow the supplemental Charter procedure. Such charities will not have to draft a supplemental Charter; the amendment can instead be made by an Order in Council, which can be far simpler and quicker. Moreover, such charities will not be subject to the requirements that petitions be publicised in the London Gazette and that Charters be printed on vellum.

5.59     But there will remain charities – with or without an express power of amendment – that want to effect an amendment by way of a supplemental Charter, for example, if the charity is merging or undertaking a fundamental constitutional change that would be more easily achieved by “starting again”.

5.60     Moreover, the PCO’s response revealed that the new default amendment power would not always solve the problem of added costs and delay caused by the need for a supplemental Charter. The PCO suggested that only the numbered articles, and not the preamble paragraphs, of a Charter should be capable of amendment under the new power. “When a chartered body undergoes a significant change, such as a change of name or a merger with another body, the historical narrative in the preamble should be updated to reflect the change, and this is only achievable via the grant of a supplemental Charter”. We disagree that the new amendment power would be so limited. But there might still be circumstances in which the Privy Council would refuse to authorise an amendment under the new amendment power, or indeed under an express amendment power, which would leave the trustees in the position of having to obtain a supplemental Charter.

PCO practice

5.61     The main differences between the supplemental Charter procedure and the express power procedure are:

(1)        the requirement for the charity to pay for a supplemental Charter to be printed on vellum; and

(2)        the increased publicity requirements for supplemental Charters, namely publishing the petition in the London Gazette for eight weeks.

These are requirements imposed by the PCO as a matter of course.

Publicity

5.62     The PCO explained that the London Gazette remains the official record of Government matters, that the cost of publishing a petition by a charity in the Gazette is not borne by the charity, and that during the publicity period the petition is under active consideration by the Privy Council so the publicity requirement is unlikely to create an additional delay in the process. Nevertheless, we understand that, in practice, it is rare for the PCO to receive comments in response to publicity in the Gazette. Moreover, we think that the requirement is an added layer of “process” which can make the amendment procedure appear to be more complicated or take longer.

5.63     An automatic requirement for publicity is a rather blunt approach to a wide range of potential amendments. In cases where fundamental changes are proposed, it might be appropriate to publicise petitions. But in many cases, and certainly for minor changes, it will not be necessary to give public notice of the supplemental Charter (and if the charity had an express amendment clause, the Privy Council would not require any such publicity). By analogy, the Charity Commission has a discretion as to whether to publicise proposed schemes and it makes a decision based on whether it considers the scheme will be controversial.[275]

5.64     Moreover, even if it is desirable to publicise a proposed amendment, it does not seem necessary to require, in every case, public notice to be given in the London Gazette, either for a period of eight weeks or at all. By analogy, when the Charity Commission publicises a scheme, it will do so by publishing it on its website. In the context of amendments to higher education institutions’ Charters, the University of Birmingham suggested that publicity in the Gazette was unnecessary if changes are publicised on the institution’s own website, which is far more likely to be noticed by those with an interest in the amendment than publicity in the Gazette.

5.65     We therefore agree with Bates Wells Braithwaite’s suggestion that the existing publicity requirement be removed or reduced. We think that consideration should be given to publishing proposed amendments on the PCO’s website, the Charity Commission’s website, and the charity’s own website.

Vellum

5.66     We agree with those consultees who expressed the view that it was inappropriate that charities should be required to pay for a supplemental Charter to be printed on vellum.[276] In its day-to-day activities, the charity will use an electronic or paper copy of the Charter; there is no need for it to have the Charter printed on vellum.[277]

5.67     In October 2015, in response to a request from the House of Lords, the House of Commons Administration Committee agreed that vellum should no longer be used for recording Acts of Parliament.[278] The matter was debated in April 2016 on a Backbench Debate motion on which the House divided. The motion to reconsider the decision was carried and communicated to the House of Lords, following which the House of Lords reconfirmed its decision to use archival paper. In January 2017 the House of Commons Commission endorsed the provision to the Lords of front and back vellum covers for record copies of Acts. The remainder of each Act is now printed on archival paper.[279]

5.68     The PCO explained that it continues to use vellum because it is strong enough to support the impression of the Great Seal of the Realm, under which all Charters are passed. However, they suggested that the “wafer seal” could be used instead, in which case the Charter could be printed on good quality paper. We are of the view that the Privy Council should abandon its policy of requiring charities’ supplemental Charters (and the original grant of a Charter) to be printed on vellum.[280] If charities considered it an appropriate use of their funds, they would not be prevented from voluntarily paying to have their Charter printed on vellum.

Recommendation 6.

5.69     We recommend that:

(1)        the Privy Council review its current policy of requiring all petitions by charities for Charters and for supplemental Charters to be publicised in the London Gazette for eight weeks with a view to removing, or replacing, that requirement; and

(2)        the Privy Council cease to require Charters or supplemental Charters granted to charities to be printed on vellum.

 

5.70     We are not aware of any legal requirement for the Privy Council to publish petitions for Charters in the London Gazette nor of any legal requirement for Charters to be printed on vellum. Our recommendation is therefore that the Privy Council revise its existing practices; as such, this recommendation does not require provision for its implementation in the draft Bill.

The end result

5.71     Following the implementation of our recommendations, it will be easier, quicker and cheaper to amend a Charter that does not contain an express power of amendment. Moreover, where – for any reason – a supplemental Charter is needed to effect an amendment, the process will be quicker and cheaper.

Statutory and Royal Charter charities: power to make minor amendments and guidance

5.72     We proposed that statutory and Royal Charter charities be given a power to make minor amendments to their governing documents without Parliamentary or Privy Council oversight. We noted the counter-arguments; principally that such charities might have a special status that is preserved by the state’s control over amendments. But we said that the legal form of a charity can sometimes be no more than a historical accident and that there is no reason for statutory and Royal Charter charities to face a higher degree of regulation and protection than other charities. We argued that trustees can be trusted and that if a charity’s governing document prevents it from pursuing its purposes in the best way possible then its work is hampered.[281] We suggested the types of amendment that could fall within, and outside, an amendment power and invited consultees’ views.[282]

Support for a minor amendment power

5.73     Most consultees agreed, at least in principle, that charities should be given a power to make constitutional amendments without Parliamentary or Privy Council oversight. It would help address the criticisms of the current law set out above and “would help institutions avoid having inconvenient, inappropriate and out-of-date governing documents”.[283] Opinions differed on the range of matters that should fall within the power. Some consultees thought that the power should apply to any provision save for regulated alterations;[284] others thought that the power should be more limited.

Concerns about a minor amendment power

5.74     There were two principal concerns about our provisional proposal to confer a power on charities to make minor amendments to their governing document.[285]

5.75     First, some consultees expressed a constitutional concern about the propriety of charities and trustees, by resolution, making changes to primary legislation or a Royal Charter without oversight and without the approval of Parliament or the Privy Council. The PCO said it would be “a fairly major constitutional shift”. We accept that creating such a power for any charity governed by a Royal Charter or statute (as opposed to named charities) could be controversial, but we do not believe that it is insurmountable.

5.76     Second, several consultees commented on the particularly diverse range of Royal Charter and statutory charities.[286] Stone King LLP said that Royal Charter charities range from:

charities set up centuries ago, which might not be set up in the same way today given the range of options now available, through to Royal Charter bodies set up in the last few years, where there has been an active decision to choose a Royal Charter ‘vehicle’ with the ability to regulate it more tightly.

That led some consultees to raise a practical concern about whether it would be possible to devise a suitable list or category of provisions that would always be sufficiently uncontroversial so as to be appropriate for trustees to amend without the consent of Parliament or the Privy Council.

5.77     The PCO said that provisions that are minor for benevolent institutions would not be minor for professional and management institutions. For example, membership criteria can include permission to use various levels of chartered membership or chartered designations. The PCO explained that its “oversight of membership criteria and levels, and the power to use titles and post nominal descriptors must be retained to ensure stability and parity within the chartered professional title area.”

5.78     The Independent Schools Council gave the example of independent schools with a religious designation for whom a change to the criteria for trustees’ religious beliefs would likely be a significant change.

5.79     Similarly, the CLA and Bircham Dyson Bell LLP did not think that it would be feasible to define “minor amendments” for all statutory or Royal Charter charities.[287] The CLA said that “for some charities it would be difficult to find any amendment which would be considered “minor” for that charity’s constitution … Ostensibly minor amendments … could potentially have far-reaching consequences.”

5.80     In short, as the Charity Law and Policy Unit (University of Liverpool) said, “one size may not fit all”. It is noteworthy that, in response to our question about the types of provision that should fall outside the new power, consultees gave numerous and varied types of provision for which they thought that amendment without oversight would be inappropriate, which tends to reinforce the view that one size does not fit all.

5.81     We accept these practical concerns about the diverse range of statutory and Royal Charter charities. In response, it might be possible to limit a new amendment power to the most minor provisions. For example, changing the month in which a charity’s annual general meeting must be held is extremely unlikely to be controversial for any statutory or Royal Charter charity. But the more limited the power, the less likely it is to be useful since more amendments would have to be effected by existing means. A very limited power would also fare poorly under a cost-benefit analysis, since the significant effort required to devise the power and to overcome the constitutional sensitivities would not be justified by the limited utility that the amendment power would provide in practice.

5.82     An alternative response to consultees’ practical concerns would be to confine the amendment power to certain charities. We acknowledge that there are different types of statutory and Royal Charter charity; the General Medical Council is a very different organisation from the National Trust (both of which are statutory charities), and the Royal College of Anaesthetists[288] is a very different organisation from the Royal Society for the Protection of Birds (both of which are Royal Charter charities). The PCO distinguished between Charter charities that are benevolent institutions and those that are professional or management institutions. It might be possible to devise a suitable list of provisions to fall within an amendment power for benevolent institutions (as the PCO called them), but it would be difficult to devise a clear definition of benevolent institutions and we are reluctant to create a new statutory categorisation of charities along these lines. In any event, in the light of consultees’ comments set out above, we are not convinced that it would be possible to devise a list of minor amendments that would be suitable for all benevolent institutions, whilst still being sufficiently wide so as to be useful in practice.

5.83     In response to doubts about the possibility of devising an appropriate list of minor amendments, the CLA and Bircham Dyson Bell LLP suggested a different statutory procedure for making amendments. They thought that Royal Charter charities could pass resolutions proposing any amendments (save for regulated alterations) which would then be submitted to the PCO. The PCO would have three months to consider and, if appropriate, object to resolutions, failing which the amendments would take effect.[289] They suggested that officials in the PCO could make approval decisions to speed up the process, just as officials at the Charity Commission make decisions on its behalf. The CLA also suggested a similar process for statutory charities, under which Parliament would have a set period to object to a proposed amendment. It seems to us that the CLA’s proposal, in effect, retains a similar level of oversight but codifies and simplifies the process with the addition of a deadline.[290] We regard the CLA’s proposal, at root, as a plea for transparency in the process and certainty as to the timescales, which – as we discuss below – we think can be achieved more easily by improving the process (and guidance as to how to navigate the process), than by codifying a procedure in statute.

5.84     The attraction of the CLA’s proposal, however, is that it is intended to improve the process generally for all constitutional amendments by all statutory and Royal Charter charities, rather than focussing on a limited range of constitutional amendments or a limited class of statutory and Royal Charter charities. But we think that such an improvement to the process can be achieved in the alternative way that we discussed in the Consultation Paper, namely:

(1)        encouraging the re-allocation of provisions within governing documents so that future amendment can be carried out with appropriate oversight;[291] and

(2)        providing guidance both about such re-allocation and about the amendment procedures.

5.85     In the Consultation Paper, we said that that there was a link between the creation of a minor amendment power and encouraging re-allocation. The wider the amendment power, the less need there would be to re-allocate provisions, and conversely the narrower the amendment power, the more need there would be to re-allocate provisions.[292] Some consultees noted that re-allocation would still take place even if the minor amendment power was wide.[293] A minor amendment power would not be a complete solution to the difficulties faced by Royal Charter charities in respect of all constitutional amendments, so facilitating re-allocation and providing guidance would still be helpful.

5.86     In the Consultation Paper, we endorsed the re-allocation approach for Royal Charter charities and said that it could be used to greater effect by the PCO and Charity Commission issuing guidance concerning the types of provision that would normally appear in a Charter, bye-laws and regulations.[294] A minority of consultees expressed their preference for the re-allocation approach over the proposal for a minor amendment power: “an initial amendment could establish, for the Royal Charter charity concerned, the appropriate demarcation between minor and non-minor amendments”.[295]

5.87     Despite the fact that the majority of consultees supported (at least in principle) a minor amendment power, we are not recommending its introduction. That is because we agree with the concerns of those consultees who thought that it would be practically difficult to identify categories of provision that were in all cases suitable for amendment without oversight, or that such categories would be so limited as to rob the amendment power of any practical utility. We have concluded that a power for statutory and Royal Charter charities to make minor amendments to their governing documents should not be introduced, but that instead re-allocation of provisions should be encouraged and facilitated, and that the process for amendment should be easier to navigate. We now turn to consider how re-allocation works, the means by which it could be encouraged, and improvements to the existing processes.

Re-allocation of provisions

5.88     Since amendments to both the Charter and bye-laws of a Royal Charter charity require Privy Council consent,[296] moving provisions from the Charter to the bye-laws does not have a great benefit.[297] The principal benefits of re-allocation are therefore felt by moving provisions from the Charter or the bye-laws (amendment of which requires Privy Council consent)[298] to the regulations.

5.89     The re-allocation approach can also be used, in a slightly different way, by statutory charities. Statutory charities could obtain a section 73 scheme that removed provisions from Parliamentary oversight by providing that the charity is permitted to issue regulations concerning certain matters without Parliamentary oversight of their content. An alternative, adopted by the National Trust in its section 73 scheme, is to include an express power to amend the scheme, subject to certain procedural requirements but without requiring Parliamentary oversight.[299]

5.90     Re-allocation might require a significant overhaul of a charity’s governing documents, or it might be done on a smaller scale in respect of a few provisions when a charity wishes to make an ad hoc amendment to its governing document. Following consultation, we have concluded that a re-allocation approach would be assisted, first, by guidance as to how the amendment process works, and second, by guidance as to how provisions should be allocated in governing documents.

5.91     But not all charities wishing to amend their governing documents will wish to re-allocate provisions; they might be content with the general structure of their governance, and for Parliament or the Privy Council to have oversight of amendments, but nevertheless wish to make changes to certain provisions. Following consultation, we have concluded that the first category of guidance, concerning how the amendment process works, would be of great assistance to such charities.

Guidance to facilitate re-allocation and amendment of governing documents

5.92     We asked consultees about both categories of guidance, the first being concerned with the process of amendment, the second with the substance of those amendments. As for the first category, the PCO already provides some guidance for Royal Charter charities. Some consultees said that it was helpful; others said that it could be improved. There is no guidance for statutory charities. The second category of guidance concerns the distribution of provisions between different parts of the charity’s governing documents,[300] and therefore questions of good governance.

5.93     Most consultees thought that both categories of guidance would be helpful, though some thought that the first category was a higher priority.

Guidance concerning the process of amendment

5.94     There was strong support from consultees for the first category of guidance. Consultees commented that guidance would be helpful and provide transparency. It can also make clear the extent to which different bodies are involved in the process[301] and ensure a consistent approach between the various public bodies involved.[302] Consultees said that the current guidance is “very limited”[303] and that the PCO’s guidance “leads charity trustees to believe that it is procedurally very complicated and it could potentially put trustees off pursuing amendments”.[304] Veale Wasbrough Vizards LLP said it would be helpful to have flowcharts indicating the likely timescales for the different steps as well as template documents. The CLA wanted the guidance to set out the preliminary steps that charities should take as well as specifying the process for consultation with other bodies so that the process is understood, consistent and avoids becoming politicised. Bates Wells Braithwaite said that for section 73 schemes, it would be useful to have guidance concerning whether, and if so when, an impact assessment will be required.

5.95     We think that guidance on the process of amendment will go a long way to solving the lack of transparency reported by consultees. Francesca Quint commented, for example, that the process is “perceived as expensive, long-winded and complex” and that “non-specialist solicitors simply don't know how best to advise”. Transparent guidance would be likely to:

(1)        overcome misconceptions about the process;

(2)        ensure a consistency of approach by each body involved, and between the different bodies involved; and

(3)        assist both charities and their advisers in working out the best way to proceed, the steps that they need to take, and the likely timetable.

Royal Charter charities

5.96     For Royal Charter charities, we think that such guidance should be published by the PCO, with input from the Charity Commission and DCMS. We think that the guidance should:

(1)        encourage charities to contact the PCO at an early stage in order to seek advice and assistance in respect of proposed amendments;

(2)        explain the role of the different bodies involved;

(3)        explain the preliminary steps that should be taken;

(4)        include template or sample documents, where possible; and

(5)        include information about the approval process itself, such as:

(a)        the difference between amendment by way of a supplemental Charter and amendment pursuant to an express power;

(b)        the distinction between an Order in Council (approval at a Privy Council meeting) and an Order of Council (approval of Privy Councillors);

(c)        the basis on which – and process by which – the PCO will consult with other bodies;

(d)        the likely timescales; and

(e)        the dates of the forthcoming Privy Council meetings (and the point at which a charity’s proposed amendments would need to be submitted to the PCO in order to be considered at those meetings).

Statutory charities

5.97     For statutory charities, in principle we think that the guidance should be issued jointly by the Charity Commission, DCMS and Parliament, since all are involved in the process. We suspect that, in reality, such guidance would more easily be produced by the Charity Commission and DCMS, which would be satisfactory since Parliament’s involvement is at the very end of the process and both the Charity Commission and DCMS assist statutory charities to navigate the Parliamentary process under a section 73 scheme. We think that the guidance should:

(1)        explain the role of the different bodies involved;

(2)        explain the preliminary steps that should be taken, including when an impact assessment will be required; and

(3)        include information about the approval process itself (on which, see Figure 6 above), including the likely timescales.

Guidance concerning the substance of amendments

Royal Charter charities

5.98     Consultees thought that the second category of guidance would particularly assist Charter charities that were looking to overhaul their governing documents. It was suggested that it would help to facilitate a more standardised approach to the governing documents of Charter bodies, though other consultees saw a risk of guidance reducing flexibility by being treated as prescriptive. The PCO thought that guidance from the Charity Commission covering benevolent institutions might be appropriate, but thought it would be “difficult to provide general guidance of any real practical use” for the wide range of remaining bodies. Some consultees commented that any guidance that catered for that variety of bodies would become confusing or unwieldy,[305] though some universities suggested sector-specific guidance which might solve the problem.[306]

5.99     We rejected a universal minor amendment power owing to the diverse range of statutory and Royal Charter charities. We accept that, for the same reasons, it would not be possible to provide rigid guidance as to the appropriate allocation of different provisions in such charities’ governing documents. But guidance permits flexibility; it can set out general principles yet proposed amendments would still be considered on a case-by-case basis. Further, guidance can set out broad categorisations of different statutory and Royal Charter charities (for example, benevolent institutions, professional membership bodies, regulatory bodies), for whom the appropriate allocation of provisions will differ. It would be possible to look at some sample Charters, bye-laws and regulations and extract any themes that emerge – for example, provisions concerning the charity’s purposes, powers and board structure might generally appear in the Charter; provisions concerning the election of trustees might generally appear in bye-laws; and provisions concerning the procedure for meetings might generally appear in regulations.

5.100  We are encouraged that the PCO thought that guidance on reallocation could be provided for Royal Charter charities that are benevolent institutions. We suspect that such guidance would reflect the distinction for the more common forms of charities (see Chapter 4) between provisions that do, and do not, require Charity Commission oversight. For example, provisions that would be regulated alterations (for companies or CIOs) should appear in the Charter or bye-laws, whilst other provisions might appear in the regulations to permit future amendment without oversight.

5.101  For other types of Royal Charter charity, the guidance can set out the matters that will generally be of public interest and therefore require Privy Council approval, such as the different membership categories for a professional membership body, and the disciplinary procedures for a regulatory body. We consider guidance for higher education institutions separately below.[307] The PCO and Charity Commission could seek input from appropriate governance experts in drafting such guidance. It might be that a sector working group could be established to assist with the preparation of such guidance, to draw on existing experience, expertise and good practice concerning appropriate oversight of constitutional amendments. A similar sector-led group has recently published a new Charities Governance Code.[308]

Statutory charities

5.102  We noted above that a re-allocation process was slightly different for statutory charities, but would still involve removing certain provisions from Parliamentary control. It is difficult to expect Parliament to issue guidance about the sorts of provision that ought to remain subject to Parliamentary control. We expect that Parliament would be guided by the expertise of the Charity Commission in approving appropriate governance arrangements when it prepares a section 73 scheme. We think that it would be helpful for the Charity Commission, in conjunction with DCMS, to publish guidance concerning the matters that it considers are generally suitable for Parliamentary control for different types of statutory charity (perhaps reflecting the guidance for Royal Charter charities). Parliament would not be bound by such guidance since it, rather than the Charity Commission, is the final decision-maker on constitutional amendments by statutory charities. But we would expect good practice guidance from the Charity Commission to carry weight when Parliament considers section 73 schemes.

Model governing documents

5.103  As part of guidance on the appropriate allocation of provisions in governing documents, the PCO, Charity Commission and DCMS could produce simple model governing documents for statutory and Royal Charter charities to be used as a basis for constitutional change. The Charity Commission and PCO have suggested difficulties with this approach since (as we have discussed above) statutory and Royal Charter charities are so diverse, so it would not be possible to devise a single section 73 scheme or a single Charter that would be appropriate for all such charities. But a basic model (or different models) could be produced, or reference might be made to the governing documents of existing statutory and Royal Charter charities (where these are available) which could be used as a point of reference.

Conclusion

5.104  It is important that constitutional change for statutory and Royal Charter charities is made as easy as possible. It should not be difficult, for example, to change the date of a charity’s annual general meeting or allow a charity to send its accounts to members by email rather than by post.[309] Rather than introducing a minor amendment power to permit such changes to be made, we have concluded that the best way to improve charities’ ability to carry out constitutional change is:

(1)        (for Royal Charter charities) by both avoiding the need for supplemental Charters and also improving the process for obtaining a supplemental Charter where it remains necessary;

(2)        (for both statutory and Royal Charter charities) by charities overhauling their governing documents so as to permit the future amendment of certain matters without the consent of Parliament or the Privy Council;

(3)        (for both statutory and Royal Charter charities) by the provision of clear and accessible guidance concerning the process by which amendments can be made; and

(4)        by the provision of flexible guidance (for Royal Charter charities) concerning the allocation of provisions between the Charter, bye-laws and regulations and (for statutory charities) concerning the matters that should generally remain subject to Parliamentary control.

5.105  We hope that, with improved guidance and transparency, constitutional change will be easier and trustees will be less reluctant to engage the process.

Existing PCO guidance

5.106  We noted above that the PCO’s guidance currently suggests that the amendment of bye-laws always requires consent, whereas some bye-laws can be amended without consent.[310] In the Consultation Paper, we proposed that the guidance be changed to reflect this point. No consultee disagreed. The PCO said that it was happy to clarify its guidance, but added “only a handful of Charters (about 1-5%) are, in fact, silent on the matter of amendment, so we do question the value added”. We consider that there is clear benefit in guidance being accurate, even if the benefit is only felt by a small number of Charter charities. Our recommendation would require the guidance to say that charities must comply with any conditions in the Charter concerning the amendment of bye-laws, which will generally require the Privy Council’s consent.

Recommendation 7.

5.107  We recommend that:

(1)        in order to improve the process by which charities can make constitutional amendments:

(a)        the Privy Council Office, in consultation with the Charity Commission and DCMS, produce guidance concerning the process by which Royal Charter charities can amend their governing documents;

(b)        the Charity Commission and DCMS produce guidance concerning the process by which statutory charities can amend their governing documents;

(2)        in order to facilitate the re-allocation of provisions within governing documents:

(a)        the Privy Council Office, in consultation with the Charity Commission and DCMS, produce guidance for Royal Charter charities concerning the types of provisions that should generally appear in the Royal Charter, the bye-laws or the regulations;

(b)        the Charity Commission, in consultation with DCMS, produce guidance for different statutory charities concerning the types of provision that should generally be subject to Parliamentary control; and

(3)        the PCO amend its guidance to make clear that amendments to bye-laws only require approval when that is expressly required by the Royal Charter itself.

 

5.108  We discuss below the provision of similar guidance for higher education institutions which are governed by Royal Charter or by statute.[311] That tailored guidance for higher education institutions should, so far as possible, be consistent with the guidance that we recommend for all Royal Charter and statutory charities above.

Other improvements to the amendment process

5.109  We have already recommended that the PCO stops requiring supplemental Charters to be printed on vellum and that they remove or reduce the publicity requirements for a supplemental Charter. We have further recommended that guidance be produced to assist charities both in overhauling their governing documents and navigating the amendment process. We now turn to consider other suggestions made by consultees to improve the amendment processes.

Royal Charter charities

5.110  Consultees made various suggestions of ways in which the PCO could make its processes quicker and easier to navigate. We noted above the suggestion that the Privy Council publish service standards, and the suggestion that it provide template documents. Similarly, Stone King LLP suggested that the PCO provide online forms for charities to seek consent to amendments.

5.111  University College London suggested the introduction of a “fast-track approval procedure” under which charities could show that their proposed changes fell entirely within matters covered by guidance, or permitted amendments, and the Privy Council could then agree to approve the changes without going through the process of consulting with stakeholders. In a similar vein, the CLA suggested that PCO officials could give approval to certain amendments without having to await formal consent from Privy Councillors or at a meeting of the Privy Council.

5.112  Bates Wells Braithwaite suggested that the Privy Council’s requirements for the drafting of resolutions to make changes be relaxed as they can cause considerable costs. They said that the Privy Council had recently “been very helpful in allowing us to show replacement provisions in a schedule to the resolution, which is much quicker”.

5.113  These suggestions by consultees concern PCO practices, rather than a need for law reform. Therefore, we have not reached any conclusion as to the desirability or practicality of any of the specific suggestions that were made to us. We think, however, that these, and other, improvements to the PCO’s procedures warrant further discussion both by the PCO and those charities and advisers who engage with the PCO in making constitutional amendments. It seems to us that the best and most practical way to monitor and improve the current procedures is for the creation of a user group with representatives from the PCO, charities and their advisers, and perhaps other non-charitable Chartered bodies, which can discuss improvements which the PCO can then implement.

Recommendation 8.

5.114  We recommend that the Privy Council Office establish a user group to allow those who engage with the process of amending Charters and bye-laws to propose and discuss improvements to the procedures.

 

Statutory charities

The alternative affirmative and negative procedures in section 73

5.115  In the Consultation Paper, we proposed that all section 73 schemes should be subject to the negative procedure, rather than distinguishing between section 73 schemes in respect of private Acts (which follow the negative procedure) and schemes in respect of public general Acts (which follow the affirmative procedure).[312] All consultees who answered this question agreed; the CLA thought that the negative procedure provided sufficient Parliamentary oversight. The National Churches Trust, which had recent experience of obtaining a section 73 scheme through the affirmative procedure said:

The parliamentary process (involving the affirmative procedure) included work by the NCT on briefing ministers in both Houses of Parliament, including advising on their speeches and answers to likely questions, and liaising with opposition frontbenchers. We were able to deal with this effectively but this might be a challenge for some small charities not used to dealing with Parliament and its technical procedures.

5.116  We recommend that all section 73 schemes should be subject to the negative procedure. Charities founded by public general Act are not necessarily more well-known, or larger, than charities founded by private Acts. The National Trust, for example, was founded by a private Act, the amendment of which is subject to the negative procedure. The Incorporated Church Building Society, by contrast, is perhaps less well known than the National Trust but was incorporated by a public general Act such that amendments are subject to the affirmative procedure. We do not think that the mere fact that a statutory charity is governed by a public general Act, rather than a private Act, justifies a greater degree of scrutiny in respect of amendments.

5.117  Moreover, the very existence of the distinction means that consideration must be given to which procedure applies, which can take additional time or result in further expense if advice is sought on the issue.[313] For consistency, we think that there should be a single procedure for amendment, regardless of whether the Act that is being amended is a public general Act or private Act. In our view, that single procedure should be the negative procedure. First, the negative procedure is already followed in respect of the majority of section 73 amendments as most statutory charities are governed by a private Act. Second, there are significant constraints on Parliamentary time, yet the affirmative procedure requires Parliamentary time for a debate and resolution from both Houses of Parliament. The amendment process under the affirmative procedure can therefore be more time-consuming and prone to failure than under the negative procedure. Third, we consider that the negative procedure provides a sufficient degree of Parliamentary oversight for amendments to statutory charities’ governing documents.

Recommendation 9.

5.118  We recommend that all section 73 schemes be subject to the negative procedure, regardless of whether the governing document is contained in a private Act or a public general Act.

 

5.119  Clause 5 of the draft Bill would give effect to this recommendation.

Other procedural improvements

5.120  The procedure in section 73 itself is fairly straightforward. Broadly speaking, the process involves two steps: a scheme is drafted that would change the effect of the charity’s governing document, and the scheme is then given effect by an order which is subject to the negative or affirmative procedure. But as a matter of practice there are various additional steps: see Figure 6. It would be helpful for DCMS, the Charity Commission and the Parliamentary authorities to review their existing procedural requirements, with a view to reducing and simplifying them. That does not require law reform since the requirements in section 73 do not prescribe the detailed procedural requirements set out in Figure 6.

5.121  In addition, it might be possible for the Charity Commission and DCMS to offer and promote amongst statutory charities a single section 73 order (and therefore a single Parliamentary process) that would implement schemes for multiple statutory charities (“a collective section 73 order”). As statutory charities are so diverse, we do not think that it would be possible to have a single scheme that applies to all charities that take part in a collective section 73 order; rather, each scheme would have to be unique for each particular charity.

5.122  A collective section 73 order along these lines would provide economies of scale for the second stage of the process (namely giving effect to schemes by an order), since some steps would not have to be taken for each individual charity. A collective section 73 scheme is already possible so does not require law reform. It is a possibility that charities and their representatives could discuss with the Charity Commission and DCMS.

Higher education institutions

5.123  In the Consultation Paper, we asked for views as to how a new minor amendment power should apply to higher education institutions (“HEIs”), many of which are statutory or Royal Charter charities. Since the close of consultation, there has been significant reform in respect of English HEIs as a result of the Higher Education and Research Act 2017 (“HERA”). The relevant provisions of the HERA are not yet in force, and nor do they extend to Wales. We explain the provisions below, but we also explain the current law, which will continue to apply to Welsh HEI’s when the provisions of the HERA are brought into force.

Constitutional change: the current law

5.124  The procedures by which HEIs can undertake constitutional change depends on how they are governed, although the Privy Council is always involved in the process. There are four broad categories.

(1) Universities governed by Royal Charter

5.125  Some universities are incorporated by Royal Charter. Amendments to their Charter and bye-laws (referred to in this context as their statutes) require the Privy Council’s consent in the usual way.

(2) Universities governed by Act of Parliament

5.126  Other universities, which may or may not be established by Royal Charter, are governed by individual Acts of Parliament which set out the procedure for the amendment of the university’s statutes.[314] The procedure is different under each Act, but amendments always require the consent of the Privy Council.

(3) Higher education corporations under the Education Reform Act 1988

5.127  Higher education corporations (“HECs”) are bodies corporate established under section 122 of the Education Reform Act 1988 (“the 1988 Act”)[315] for the purpose of providing higher education services. An HEC’s constitution comprises three documents.

(1)        Its “instrument of government”, prepared by way of an order of the Privy Council.[316] Schedule 7A to the 1988 Act sets out the matters for which provision must be made and those for which provision may be made. The instrument of government can be amended only by an order of the Privy Council.[317]

(2)        Its “articles of government”, prepared by the HEC itself and approved by the Privy Council. The matters to be addressed in the articles of government are set out in section 125 of the 1988 Act. The articles may be varied or revoked by the HEC with the approval of the Privy Council.[318]

(3)        Its rules and bye-laws, which the articles empower the HEC to make and which are not subject to Privy Council consent.

(4) Designated institutions under the Education Reform Act 1988

5.128  A few higher education institutions are structured as companies or trusts and are “designated institutions” under section 129 of the 1988 Act. There are broad requirements for the contents of their governing documents (to be called the instrument and articles of government, as with HECs).[319] Such bodies have the same powers to amend their governing documents as other companies and trusts, but by reason of being designated under the 1988 Act they must obtain the Privy Council’s consent to any such amendment.[320]

Re-allocation of provisions

5.129  In 2006, the Westminster Government wrote to the Vice Chancellors of English universities, and the Welsh Government wrote to the Vice Chancellors of Welsh universities, setting out the categories of provision that they considered did, and did not, require Privy Council oversight (“the 2006 Letter”).[321] (We refer to provisions that require oversight as “the public interest matters”.) Those bodies were invited to submit proposals to the Privy Council for amended governing documents under which Privy Council oversight was retained only in respect of the public interest matters. HEIs governed by Royal Charter or Act of Parliament would move non-public interest matters from their statutes into ordinances, and HECs and designated institutions would move non-public interest matters from their instrument and articles of government into rules. The accompanying written Ministerial statement stated:

while the Government cannot require institutions to liberalise their governance arrangements, we very much hope that they will bring forward proposals that will relieve them of the obligation of having all amendments to their governing arrangements agreed by the Privy Council.[322]

5.130  Some HEIs took this opportunity to overhaul their governing documents, but many did not. HECs faced additional difficulties in seeking to overhaul their governing documents since the 1988 Act requires certain provisions to be included in their instrument and articles of government (and therefore to remain subject to Privy Council oversight).

5.131  In 2011 and 2012, concerns about amendment procedures for HEIs were raised in Government consultations and the Government agreed that improvements could be made.[323]

The Consultation Paper

5.132  In the Consultation Paper, we endorsed the approach taken in the 2006 Letter of setting out the public interest matters to allow HEIs to re-allocate provisions in their governing documents so that their future amendment is subject to an appropriate level of oversight.[324] We asked consultees whether, and if so how:

(1)        the new minor amendment power that we proposed should apply to HEIs;

(2)        the 2006 list of public interest matters should be revised; and

(3)        the 1988 Act and other individual Acts governing HEIs could be improved.[325]

5.133  Most consultees thought that the current amendment procedures for HEIs were overly restrictive, burdensome and complex. There was a call for one amendment regime that applies to all HEIs. Consultees were generally supportive of both (a) the reallocation approach, and (b) the creation of a power to make minor amendments that was tailored to HEIs.

5.134  As for the reallocation approach, both before and during consultation, we heard criticisms that deregulation by way of the 2006 Letter did not go far enough; in particular, amendments to the “Model Statute” (concerning employment matters) were to remain subject to Privy Council control. In fact, we were told by officials from (what was then) the Department for Business, Innovation and Skills (“BIS”) that – as far as English HEIs were concerned – it subsequently removed two matters from the list of public interest matters in the 2006 Letter, including the Model Statute, but there appeared to be little knowledge in the sector of the change.

English HEIs: BIS 2015 Green Paper

5.135  After the close of our consultation period, BIS published a Green Paper[326] with various proposals concerning the amendment of English HEIs’ governing documents, including:

(1)        simplifying the requirements for HEC’s governing documents in the 1988 Act as part of proposals for wider deregulation of HECs’ constitutional arrangements;[327] and

(2)        simplifying the role of the Privy Council in approving amendments by:

(a)        “reviewing, with input from the sector, the current principles of public interest [in the 2006 Letter], and to issue a further Ministerial letter to Vice Chancellors explaining the options and including detailed guidance on how to deregulate governing documents and the process and timing for doing so”;[328] and

(b)        “In the longer term, the Government is seeking views on removing the requirement for changes to the governing documents of HEFCE[329]-funded providers to be approved by the Privy Council. Responsibility for protecting the public interest in their governing documents would transfer to the [new Office for Students], with the principles of public interest incorporated in to the terms and conditions of grant funding.”[330]

5.136  In January 2016, we shared with BIS consultees’ responses to our Consultation Paper concerning HEIs. In addition, we shared with BIS our intended recommendations for reform following consultation, which we set out below.

Our conclusions following consultation

5.137  As explained above, in relation to statutory and Royal Charter charities generally, we recommend that guidance be provided concerning (1) the process for amendment, and (2) the categories of provision that generally require oversight, so as to facilitate an overhaul of charities’ governing documents.

(1) Guidance concerning the process

5.138  Consultation revealed that HEIs – like other statutory and Royal Charter charities – would be assisted by guidance about the amendment process, with some consultees suggesting that there could be specific guidance for HEIs. Our view following consultation was that such guidance would be helpful.

(2) Guidance concerning re-allocation

5.139  Our recommendation for all Royal Charter charities is that the PCO issue guidance concerning the matters that should generally appear in a charity’s Charter, bye-laws and regulations, in order to facilitate the re-allocation of provisions as part of an overhaul of a charity’s governing documents. Such guidance for HEIs has already been issued in the 2006 Letter, and we continue to endorse an approach whereby HEIs are provided with guidance concerning the public interest matters, and encouraged to overhaul their governing documents so as to remove non-public interest matters from Privy Council oversight.

5.140  Our view following consultation was that the current position could be improved for HEIs in two respects.

(1)        Guidance as to the public interest matters should be placed on a formal basis by being set out in guidance issued by Government or an appropriate public body. The 2006 Letter was helpful, but it was informal. Consultation revealed a lack of knowledge amongst those in the higher education sector both as to the existence of the 2006 Letter, and also as to the subsequent removal (in England) of two matters from the list of public interest matters.

(2)        The list of public interest matters should be reviewed and updated, following consultation with the sector, and should continue to be updated over time.

(3) Higher education corporations

5.141  Guidance concerning the public interest matters would assist HEIs in carrying out an overhaul of their governing documents; matters that are not on the public interest list can be removed from Privy Council control. There would, however, remain a problem for HECs for whom the 1988 Act sets out the matters that must be contained in their governing documents. Pinsent Masons LLP said the Instrument and Articles of Government are “tied to the era of 1988 when HECs were set free from local authority control (but with strings attached)”. Consultees generally agreed that the prescriptive requirements in the 1988 Act as to the contents of HECs’ constitutions were now unnecessary. They prevent HECs from carrying out an overhaul of their governing documents in accordance with a list of public interest matters.

5.142  Our view following consultation was that the prescriptive requirements in the 1988 Act should be removed. Any overhaul of an HEC’s or designated institution’s governing documents would still have to be approved by the Privy Council, but once overhauled the matters that fell outside the public interest list would thenceforth be capable of amendment without Privy Council oversight.

English HEIs: the Higher Education and Research Act 2017

5.143  The proposals in the BIS Green Paper were taken forward in the HERA, which was introduced in May 2016 and received Royal Assent in April 2017. The HERA involves significant reform to HEIs, including two measures that address our three conclusions following consultation.[331]

(1) Guidance concerning the public interest matters

5.144  The new Office for Students (which is to replace HEFCE) is required to determine “initial registration conditions” and “general ongoing registration conditions” for HEIs.[332] Such conditions may include “a public interest governance condition”,[333] namely “a condition requiring the provider’s governing documents to be consistent with the principles in the list published under this section”.[334] The Office for Students must, following appropriate consultation, publish “a list of principles applicable to the governance of English higher education providers”, and the principles “must be those that the [Office for Students] considers will help to ensure that English higher education providers perform their functions in the public interest”.[335]

5.145  Accordingly, there is to be formal guidance – replacing and updating the 2006 Letter – issued by the Office for Students following consultation with the sector that sets out the public interest matters. HEIs can be required, as a condition of registration, to amend their governing documents in conformity with those public interest matters. The HERA therefore addresses, in England, our second conclusion following consultation.[336]

5.146  We hope that the Office for Students would, at the same time as publishing its guidance on the public interest matters, also publish guidance concerning the process for amending governing documents in accordance with that published list, or at least assist HEIs in navigating the amendment process. Such guidance would address, in England, our first conclusion following consultation.[337]

(2) Deregulation for HECs

5.147  The HERA removes the prescriptive requirements for the contents of HECs’ governing documents set out in the 1988 Act. This reform will allow HECs to re-allocate provisions in their governing documents (removing some from Privy Council oversight) in accordance with the Office for Students’ guidance concerning the public interest matters.

5.148  The HERA therefore also addresses, in England, our third conclusion following consultation.[338]

Welsh HEIs

5.149  Since higher education is devolved to Wales, the HERA only applies to English HEIs. Welsh HEIs will therefore continue to be governed by the current law.[339]

5.150  Our three conclusions following consultation apply to both English and Welsh HEIs. We think that Welsh HEIs would be greatly assisted by (1) guidance concerning the process for amending governing documents, (2) guidance concerning the public interest matters that should remain subject to oversight (issued either by Government or some other public body), and (3) removal of the prescriptive requirements for the constitutions of HECs under the 1988 Act.

5.151  In England, those policy aims have been addressed by the HERA. We recommend that the Welsh Government consider measures to address the current problems faced by Welsh HEIs. The reforms in the HERA provide one possible model for such measures, but that Act is by no means the only way in which the Welsh Government could respond to the difficulties faced by Welsh HEIs. For example, the provision of guidance concerning the amendment process, and guidance concerning the public interest matters (updating the 2006 Letter), does not require primary legislation. Deregulation for HECs would, however, require amendment of the 1988 Act by primary legislation. We have discussed our conclusions with officials from the Welsh Government, and are encouraged that the Welsh Government has recently published a consultation seeking views on amending the legislation governing HECs under the 1988 Act.[340]

Recommendation 10.

5.152  We recommend that, in order to facilitate the amendment of, and the re-allocation of provisions within, the governing documents of Welsh higher education institutions (“HEIs”), the Welsh Government should consider introducing the following measures:

(1)        the publication of guidance concerning the process for amending governing documents;

(2)        following consultation with the sector, the publication of guidance (either by the Welsh Government or some other public body) setting out the matters of public interest in the governing documents of HEIs, amendment of which should remain subject to oversight; and

(3)        the removal of the requirements in the Education Reform Act 1988 as to the content of the governing documents of higher education corporations so as to enable those bodies to re-allocate provisions in accordance with guidance concerning public interest matters.

 

HEIs with individual Acts of Parliament

5.153  Some HEIs are governed by individual Acts of Parliament.[341] Such HEIs must obtain Privy Council consent to any amendment of their statutes and they will therefore be able to take advantage of guidance on public interest matters in order to overhaul their governing documents. Pinsent Masons LLP reported, however, that these HEIs face greater difficulties in making constitutional amendments than HEIs governed by Royal Charter since “the Act prescribes the content of underlying statutes”. In so far as an HEI’s individual Act of Parliament prevents it from making constitutional amendments in accordance with the guidance on public interest matters, we would encourage it to seek a section 73 scheme to change the effect of the governing Act. Moreover, it might be possible for the small number of HEIs with individual governing Acts of Parliament to join together in seeking one section 73 order to effect the necessary changes to their governing Acts.

 

Chapter 6: Cy-près schemes and the proceeds of fundraising appeals

Introduction

6.1        Charities often undertake fundraising appeals for a particular purpose, for example, to fund repairs to the charity’s buildings, to purchase an item of equipment, or to assist the victims of a natural disaster. It can be difficult to predict how much money will be needed for the purpose, and even harder to estimate how much will be raised by the appeal. Sometimes that will not matter; the money raised by the appeal can be applied to the particular purpose and what the charity can do will depend on the amount raised. But where a particular sum is required to achieve the purpose of the appeal (for example, to rebuild a church hall), the appeal may not raise enough money, or it may raise more than is needed. We refer to appeals that do not raise enough money as “failed appeals”, and appeals which raise more than is needed as “surplus cases”.

6.2        Both kinds of fund can, in some circumstances, be applied to other purposes under a cy-près scheme. Lord Hodgson recommended that “proceeds of a failed appeal should be applied for the charity’s general purposes unless the donor expressly requests otherwise…”[342] This chapter arises from that recommendation.

6.3        In this chapter, we summarise the current law and then make recommendations to expand and simplify the situations in which funds from failed appeals and surplus cases can be applied cy-près.

The current law

General charitable intention

6.4        We discussed cy-près schemes above.[343] We distinguished between:

(1)        the initial failure of a charitable gift, for which a general charitable intention on the part of the donor is a pre-requisite to a cy-près scheme; and

(2)        the subsequent failure of a charitable gift, for which there is no requirement for a general charitable intention before a cy-près scheme can be made.

Surplus funds

6.5        It is generally accepted that, when an appeal raises more money than is needed, there is a subsequent failure of the particular charitable purpose as regards the surplus.[344] As long as the donation was an outright gift,[345] there is no need for the donors to have had a general charitable intention for the surplus funds to be applicable cy-près.

6.6        The Charity Commission can make a cy-près scheme directing that the surplus funds be used for other charitable purposes. The section 67 similarity considerations will apply when making the scheme.[346]

Failed appeals

6.7        When insufficient funds are raised to carry out a particular purpose, it is generally considered to be a case of initial failure.[347] Depending on the terms of the fundraising literature, it may be possible to find a general charitable intention on the part of the donors, in which case a cy-près scheme can be made. But, generally, when a donation has been made to a particular appeal, there will be no general charitable intention on the part of donors.

Identifiable donors

6.8        Historically, where donations were made by identifiable donors without a general charitable intention, a cy-près scheme could not be made in respect of those donations. Instead, the charity trustees held the funds on resulting trust for the donors and had to return the funds to them.[348] If the donors could not be found, the money had to be paid into court.[349]

6.9        Special provision was made by the Charities Act 1960 for the Charity Commission to make cy-près schemes in respect of donations from identifiable donors if the charity trustees had reasonably attempted, but failed, to find the donors to offer them a refund.[350]

Unidentifiable donors

6.10     The historical treatment of donations from unidentifiable donors was more difficult. It was unclear whether a general charitable intention ought to be imputed to unidentifiable donors, and hence whether a cy-près scheme could be made.[351]

6.11     The Charities Act 1960 provided that the Charity Commission could make a cy-près scheme in respect of donations from donors who cannot be identified following reasonable advertisements and inquiries by the trustees. It also created a presumption that proceeds of cash collections and money raised from lotteries and competitions were given by donors who could not be identified, thereby allowing a cy-près scheme to be made in respect of those proceeds.[352] The authors of Tudor on Charities describe this reform as “in effect, a statutory presumption that unidentified donors have a general charitable intention”.[353]

The current regime

6.12     If a fundraising appeal informs donors that the funds will be used for other purposes in the event that the principal purpose cannot be achieved, the charity trustees are free to use the funds for those other purposes.[354] Otherwise, the situation is one where funds have been donated for a specific charitable purpose which has failed and so the charity trustees must invoke the provisions of sections 63 to 66 of the Charities Act 2011[355] and, where relevant, comply with the detailed requirements set out in the Charities (Failed Appeals) Regulations 2008 (“the 2008 Regulations”).[356]

6.13     The Charities Act 2011 provides that the purpose of an appeal fails if any difficulty in applying the proceeds of the appeal to that purpose makes them available to be returned to the donors.[357] Sections 63 to 66 of the Charities Act 2011 permit the Charity Commission to make a cy-près scheme in relation to the proceeds of a failed appeal in any of five situations.

Case (1): Donors who cannot be identified or found

6.14     First, a cy-près scheme can be made in respect of funds given by a donor who cannot be identified, or cannot be found, after certain advertisements are published and inquiries are made: see Figure 9.[358] If a donor has not responded to the advertisements and inquiries within three months, a cy-près scheme may be made.[359] If a donor makes a claim within six months of the date of the scheme for the return of his or her donation, the trustees must repay the donation to the donor, subtracting any expenses incurred by the trustees after the date of the scheme in administering the claim.[360] After six months, the donor loses any entitlement to repayment.

Figure 9: requirements for advertisements in the 2008 Regulations[361]

(1)        Advertisements must be published in English and, where the appeal was published in another language, in that language.

(2)        Advertisements must be published in a newspaper or other periodical which is:

(a)        written in the same language as the advertisement; and

(b)        sold or distributed throughout the area in which the appeal was made.

(3)        Where the purposes of the appeal were directed towards the benefit of an area wholly or mainly within a local authority district, a London Borough, or the City of London, a copy of every advertisement must be published by fixing copies of it to two public notice boards in the relevant area.

(4)        Advertisements must be in the following prescribed form:

ADVERTISEMENT

Name of charity (if applicable):

Registered charity number (if applicable):

Purpose for which money or other property was given:

NOTICE is given that money and other property given for this purpose cannot be used for that purpose because [state reasons].

If you gave money or other property for that purpose you are entitled to claim it back. If you wish to do so you must tell [insert name] of [insert address] within 3 months of [specify date]. If you wish the money or other property to go to a similar charitable purpose and to disclaim your right to the return of the money or other property, you must ask the person named above for a form of disclaimer.[362]

If you do not either make a claim within the three months or sign a disclaimer, the Charity Commission may make a Scheme applying the property to other charitable purposes. You will still be able to claim the return of your money or other property (less expenses), but only if you do so within 6 months from the date of any Scheme made by the Commission.

Date of this notice: [specify date]

Case (2): Donors disclaiming

6.15     Second, a cy-près scheme can be made in respect of funds given by donors who have disclaimed their right to have the funds returned using the prescribed form: see Figure 10.

Figure 10: form of disclaimer under the 2008 Regulations[363]

A disclaimer must be executed in English as follows (or in Welsh in the form equivalent in that language):

I HEREBY DISCLAIM my right to the return of the sum of £....../ the property consisting of (insert description of property) given by me for (insert name of charity to which, or descriptions of purposes for which, the money or property was given).

Signed:                                               Name in capitals:

Address:                                             Date:

 

Case (3): Donors treated as disclaiming

6.16     Third, a cy-près scheme can be made in respect of funds given by a donor where the donor is treated as having disclaimed any right to the return of the donation.[364] The provision applies where:

(1)        the appeal or request informs donors that their donations will be applied cy-près in the event that the specific purposes fail; and

(2)        the donor is given the opportunity to make a written declaration at the time of making the donation that, in the event that the specific purposes fail, he or she wishes the charity trustees to give him or her the opportunity to request the return of the donation (“a Declaration”).

6.17     If the donor does not make a Declaration, then in the event that the specific purposes fail the property can be applied cy-près.[365]

6.18     If the donor does make a Declaration, then a cy-près scheme can still be made if:

(1)        the charity trustees have written to the donor[366] with the information set out in Figure 11; and

(2)        the donor has not been found or does not request the return of the donation within three months.[367]

Figure 11: notification to be given to donors who have made a Declaration

The notification must:

(1)        state the nature or value of the property (as applicable) and the specific charitable purpose for which it was given;

(2)        inform the donor that the specific charitable purpose has failed;

(3)        enquire whether, in accordance with the declaration which he or she made, the donor wishes to request the return of the property (or a sum equal to its value);

(4)        advise the donor that if he or she wishes to exercise his or her right to request the return of the property, he or she must do so within three months of the trustees sending the written notification; and

(5)        advise the donor that if he or she does not reclaim the property, the Charity Commission may make a Scheme to apply it for other similar charitable purposes.

 

Case (4): Cash collections and the proceeds of certain fundraising activities

6.19     Fourth, a cy-près scheme can be made in respect of funds given by a donor through (a) a cash collection, either by means of a collecting box or by other means “not adapted for distinguishing one gift from another”, or (b) “the proceeds of any lottery, competition, entertainment, sale or similar money-raising activity”.[368]

Case (5): Return of the donations would be unreasonable

6.20     Fifth, a cy-près scheme can be made in respect of funds given by a donor where the court or Charity Commission[369] considers:

(1)        that it would be unreasonable, having regard to the amounts likely to be returned to the donors, to incur expense with a view to returning the property; or

(2)        that it would be unreasonable, having regard to the nature, circumstances and amounts of the gifts, and to the lapse of time since the gifts were made, for the donors to expect the property to be returned.[370]

6.21     In its guidance, the Charity Commission states that, if the total funds raised were less than £1,000 and all came from unidentifiable donors, the Commission “may decide that the trustees can automatically apply the funds for purposes similar to those of the original appeal, without any legal authority from us”.[371]

National Health Service charities

6.22     The National Health Service Act 2006 makes special provision for National Health Service (“NHS”) charities. In the case of failed appeals, the trustees are permitted to apply the proceeds to other similar purposes of the charity.[372] Accordingly, the requirement for a general charitable intention is overridden and there is no need to use Cases (1) to (5). A similar power exists for NHS charities in respect of surplus funds.[373]

Avoiding the difficulties of failed appeals and surplus funds

6.23     In summary, charities face three problems under the current law.

(1)        In the case of failed appeals, donors cannot usually be shown to have a general charitable intention, so the default position is that donations must be returned, unless particular conditions can be satisfied in order to make the donations applicable cy-près (i.e. Cases (1)-(5) above). That difficulty does not arise in surplus cases, since there is no requirement for a general charitable intention; the surplus can therefore be applied cy-près.

(2)        In surplus cases it can be unclear which individual donations comprise the surplus to be applied cy-près. If particular donations are not given as outright gifts,[374] complicated questions arise as to which gifts have been used to achieve the purpose of the appeal, and whether individual gifts (which are not outright gifts) can be appropriated by the trustees so as to prevent them forming part of the surplus.

(3)        In the case of failed appeals (where one of the conditions for the donations to be applicable cy-près in Cases (1) to (5) is met) and in surplus cases, the trustees need to obtain a cy-près scheme before the fund can be used for other purposes.

6.24     These difficulties arise from the fact that gifts are given for a specific charitable purpose. The Charity Commission recommends that charity trustees should consider phrasing their fundraising literature in such a way that would prevent the initiative from being limited to a specific charitable purpose.[375] The example given by the Charity Commission is a fundraising appeal stating:

We are raising funds to buy a scanner for the hospital. If for any reason we can’t buy the scanner, or there are surplus funds left over following the purchase of the scanner, we will use the money to buy other equipment that the hospital could not otherwise have.[376]

6.25     If insufficient funds are raised for a scanner, the charity trustees will be able to use the funds for the other specified purposes (the purchase of other equipment) without having to contact donors or obtain a cy-près scheme. Similarly, if too much is raised, the surplus can be used for other specified purposes. The terms of the fundraising appeal could even state that in the event that the primary purpose (here the purchase of the scanner) fails, the trustees will be able to use the money raised to support the charity’s work generally. NCVO, ACF, CFG and IoF[377] noted that the Code of Fundraising Practice requires appeals for particular purposes to include a statement indicating what will happen to funds received if the total funds raised are insufficient or exceed the target.[378] This approach overcomes the difficulties identified in paragraph 6.23 above.

6.26     Some consultees said that failed appeals can be “easily avoided”[379] and that the best solution to the difficulties presented by failed fundraising appeals is to make express provision for the eventuality in the fundraising literature.[380] We endorsed such an approach in the Consultation Paper,[381] and we continue to agree that all of the difficulties that arise under the current law can be avoided if trustees think about and make provision for what will happen if their appeal raises insufficient, or surplus, funds.[382] We think that there should be greater awareness in the charity sector of the need to prepare fundraising literature carefully and to pre-empt the possibility of a failure or surplus. That is all the more important with the increasing popularity of crowdfunding and other online fundraising campaigns for specific purposes. But there will remain cases where trustees do not address the possibility of a failure or a surplus in advance, either by omission or a deliberate decision not to include a secondary purpose in their fundraising literature.

Analysis

6.27     Failed appeals concern initial failure, so at common law the funds could not be applied cy-près unless the donors had a general charitable intention. Cases (1) to (5) relax that position by setting out circumstances in which funds from failed appeals can be applied cy-près, despite the absence of a general charitable intention.[383]

The issues

Failed appeals

6.28     Our consideration of failed appeals raises three issues.

(1)        Issue (A): Should the precondition to a cy-près scheme, namely the requirement for a general charitable intention, be removed in respect of failed appeals? That would remove with it the need for Cases (1) to (5).

(2)        Issue (B): If not, can the procedures for Cases (1) to (5) be improved?

(3)        Issue (C): If a cy-près scheme can be made (either because the requirement for a general charitable intention is removed, or because one of Cases (1) to (5) apply), should the trustees be permitted to apply the funds cy-près without the involvement of the Charity Commission?

Surplus cases

6.29     Issues (A) and (B) do not arise in relation to surplus cases since there is no requirement for there to be a general charitable intention on the part of the donors; Cases (1) to (5) are therefore irrelevant. Surplus cases do, however, raise Issue (C): should trustees have the power to apply the surplus cy-près without the involvement of the Charity Commission?

6.30     We turn to consider Issues (A), (B) and (C) in turn. Our consideration of each Issue involves consideration of Cases (1) to (5).

Issue (A): failed appeals – the requirement for a general charitable intention

6.31     In the light of the complexity of Cases (1), (2) and (3), it is arguable that the requirement, in the case of failed appeals, for a general charitable intention should be removed. There would then be no need for trustees to follow the procedures in Cases (1) to (3) (and Cases (4) and (5) would become irrelevant). That would allow the proceeds of failed appeals to be applied cy-près more easily.

The Consultation Paper

6.32     Our provisional view in the Consultation Paper was that the requirement for a general charitable intention should be retained. We said the requirement applied in all cases of initial failure of a charitable gift and that the law had evolved over time to reflect, and protect, donor autonomy. We did not think that the requirement for a general charitable intention should be removed for one instance of initial failure (failed fundraising appeals) but retained for other instances of initial failure (such as gifts by will which are impossible). We said that, broadly, the circumstances in which the requirement for a general charitable intention can be overridden in Cases (1) to (5) strike a fair balance between donor autonomy and ensuring effective use of charitable funds. Instead, we suggested some improvements to Cases (1) to (3) (on which see Issue (B) below) as well as deregulation to allow small funds or small donations to be applied cy-près without having to follow the procedures in Cases (1) to (5).[384]

Removing the requirement generally

6.33     A significant minority of consultees thought that the requirement for a general charitable intention before the proceeds of a failed fundraising appeal can be applied cy-près should be removed, subject to any express intentions of donors. Stewardship said that, whilst it is difficult to generalise, “once a donation is made there is an expectation on the part of the donor that these funds will not be returned”. NCVO, ACF, CFG and IoF said “the culture of giving is changing – now, more often than not, people make donations without imposing restrictions because they are motivated by the end cause, rather than the particular project”. The attraction of reversing the default position is that it would remove the need for the section 63 to 66 procedures. The majority of consultees, however, thought that the requirement for a general charitable intention should be retained as an important protection of the wishes of donors.

6.34     Under the current law, donors to failed fundraising appeals are presumed to want their donations to be returned but that position will yield to any different statement of intention (for example, if donors execute disclaimers or simply decline the invitation to have their donation returned). Removing the requirement for a general charitable intention would effectively reverse the default position; donors to a failed fundraising appeal would be presumed to want their donations to be applied to other purposes, rather than have their donations returned.

6.35     Whilst some donors might expect their donations to be used for similar charitable purposes in the event of the original purposes failing (and perhaps particularly in the case of smaller donations), we do not think that it should be presumed as the default position. Moreover, we think that it is unrealistic to expect donors to attach express conditions to their gifts; an ordinary donor[385] to a fund is unlikely to say expressly that, if the appeal does not succeed, he or she would like the donation to be returned. Given that the rigours of the current presumption are mitigated by Cases (1) to (5), we think that reversing the default position would go too far in overriding donors’ wishes. We also note that reversing the default position would distinguish failed appeals from other instances of initial failure.[386] We have therefore concluded that the requirement for a general charitable intention as a precondition to a cy-près scheme in the case of failed appeals should be retained; we do not think that it is appropriate, or realistic, to expect donors to impose express conditions on their gift if they do not want their gift to be applied cy-près.[387]

Removing the requirement for small funds or small donations

6.36     We asked consultees whether it should be possible to apply small funds or small donations cy-près in spite of the absence of a general charitable intention. We said that, arguably, donors’ wishes should be protected in the same way regardless of the size of the fund or the size of their donations, but when the fund or donation is small, the costs of administering it in accordance with Cases (1) to (5) will often be disproportionate.

6.37     The majority of consultees thought that, whilst the requirement for a general charitable intention should be retained, it should be possible to apply small funds or small donations cy-près despite the absence of such a general charitable intention. They thought that donors of small amounts are less likely to object to their donations being used for different purposes than donors of large sums, and that deregulation for small funds or small donations was a practical and proportionate compromise between the competing interests.

6.38     There is a balance to be struck between (a) protecting donors’ wishes, and (b) the administrative inconvenience and expense of seeking to contact donors to offer a refund. Indeed, we think that many donors of small sums would not expect trustees to incur (and might even disapprove of trustees incurring) expense in seeking to contact them to offer them a refund of a small donation. We have therefore concluded that there should be deregulation in respect of small funds or small donations.[388]

6.39     The same result can often already be achieved by seeking an order from the Charity Commission,[389] but a tailored statutory procedure for applying small funds and small donations to similar purposes would be attractive to trustees, particularly if they can operate the procedure without the involvement of the Charity Commission (on which, see Issue (C) below).

Thresholds for small funds, small donations, or both

6.40     In the Consultation Paper, we suggested that appeals that raised a small amount, say £1,000 or £5,000, could be applied cy-près, and that small donations, say £100 or £500, could be applied cy-près. Some consultees thought that there should be both a fund threshold and a donation threshold. They generally thought that such thresholds should operate cumulatively, so small donations would only be applicable cy-près if the total fund also fell below a financial threshold. A minority thought that they should operate as alternatives, so that small donations should be applicable cy-près (regardless of the total fund value), and that small funds should be applicable cy-près (regardless of the size of the constituent donations).

6.41     Stone King LLP queried the need for a fund threshold because even small funds might include large donations. “For example, you could have a fund of £10,000 which contains only donations of £10 or less, and a fund of £5,000, that contains two donations of £1,000 each. … the individuals who gave the £1,000 are far more likely to have views on whether the donation should be used for general charitable purposes than the individuals giving £10, and the aim of the legislation is to protect that donor intention where it exists, and so we would only have a limit on the size of donations.”

6.42     We agree with Stone King LLP’s argument, although it is only relevant in so far as a fund threshold would operate as an alternative to a donation threshold. If the two thresholds operated cumulatively, the fund threshold would simply be an additional limitation on the scope of the power. But is it necessary to limit the cy-près application of large funds when all the constituent donations are small? No matter how large the fund, if every donation is less than £20, it will remain administratively disproportionate for the trustees to contact all the donors to offer a refund (and the donors, too, might think that such action is a disproportionate use of the charity’s funds). The extent to which individual donor autonomy is overridden is no different in the case of a large fund simply because there have been more donors. We have therefore concluded that small donations should be applicable cy-près, regardless of the overall size of the fund.[390]

Setting the threshold

6.43     The Association of Church Accountants and Treasurers pointed out that the threshold should apply in respect of each donor, and not in respect of each donation. Multiple donations might be given by the same donor, and the question should be whether the donor’s total donations to the appeal exceed the threshold, not whether each donation exceeds that threshold. In principle, we agree. There might be some concerns about the practicality of requiring charities to identify all the donations to a fund made by each donor. It is likely that charities would often be able to identify all donations from an individual donor relatively easily, for example from bank account statements, or from Gift Aid records (since the names and addresses of donors must be recorded and included on the claim form submitted to HMRC). Nevertheless, in order to address concerns about the ability of charities to identify donors, our recommendation is that the threshold should be based on the total donations made by a donor over the course of a financial year: trustees would not need to examine records covering many years to ascertain whether a donor had given more than the specified amount to the fund. In addition, we recommend that the test should be satisfied where, after taking reasonable steps to ascertain the identity of donors to the fund, the trustees believe that a donor’s total donations do not exceed the threshold; the utility of our recommendation would be reduced if the trustees had to be certain that they had identified all of a donor’s donations.

6.44     Consultees’ views differed as to an appropriate donation threshold, ranging from £10 or £20[391] to £500,[392] the most common suggestion being £100. The threshold should be based on what donors would, in general, consider to be a relatively small donation, which does not justify the time and expense of offering a refund in the event of failure of the original purposes. We discussed the threshold with the CLA. In response to our proposal that the threshold should be based on a donor’s total donations in a financial year, the CLA suggested a threshold of £120, which would include a common donation pattern of £10 per month. As we discuss elsewhere, setting a threshold is inevitably arbitrary but, drawing on the views of consultees and the sense of capturing small sums given by regular donors over one year, we have concluded that the threshold should be set at £120. As with other thresholds in the Charities Act 2011, we think that it should be capable of amendment by secondary legislation.

6.45     Should donors be able to prevent their small donations becoming applicable cy-près under this reform? A balance has to be struck between donor autonomy and efficiency. We think that, if a donor expressly states that his or her donation should not be applied for other purposes, the donation should not be applicable cy-près under this reform. A donor is very unlikely to do so, and other options will remain available for applying such a donation cy-près: see our discussion of Cases (1) to (5) under Issue (B) below. But as this additional ground for applying property cy-près is based on the view that donors would not generally expect small donations to be returned, if a donor has expressly stated that his or her small donation should be returned we think that should be respected.

Recommendation 11.

6.46     We recommend that:

(1)        in the case of failed appeals, a donation should be applicable cy-près without the trustees having to take steps to contact the donors in order to offer to return the donation if:

(a)        the donation does not exceed £120; and

(b)        the trustees reasonably believe that the total given by the donor to the fundraising appeal over the financial year did not exceed £120;

unless the donor states that the donation must be returned if the specific charitable purposes fail.

(2)        those financial thresholds should be capable of amendment by way of secondary legislation.

6.47     Clause 6 of the draft Bill, inserting section 63A(3) into the Charities Act 2011, would give effect to this recommendation.

Issue (B): failed appeals – the procedures in Cases (1) to (5)

6.48     In the Consultation Paper, we said that Cases (4) and (5) are helpful provisions, allowing cash collections to be applied cy-près and allowing the Charity Commission to dispense with the advertisement and inquiry processes. But we said that Case (1) – requiring advertisements and inquiries, then offering refunds – is cumbersome, and that Cases (2) and (3) – requiring a disclaimer or declaration from donors – seemed unrealistic and we doubted that they were used.

Case (1): advertisement and inquiry

6.49     Under the original regime in the Charities Act 1960, the steps to be taken were not set out in statute. That led to an application for directions in Re Henry Wood National Memorial Trust[393] in which the Judge directed that reasonable steps in that case required adverts to be placed in two editions of each of the three national newspapers, as well as notices being sent to the recorded addresses of donors. The requirements in the 2008 Regulations are therefore less onerous. Other jurisdictions only require the trustees to take reasonable steps to contact donors, as under the Charities Act 1960, rather than setting out detailed requirements in secondary legislation.[394]

6.50     In the Consultation Paper, we said that Case (1) could revert to a regime that does not prescribe the detailed steps to be taken, leaving the steps to trustee discretion, monitored by the Charity Commission which would decide whether reasonable steps had been taken before it would make a cy-près scheme. Alternatively, we suggested removing the requirement to advertise, leaving only a requirement to make inquiries of recorded donors.

6.51     The existing requirements were universally criticised by consultees as being disproportionate and out of date. Stone King LLP said the current regime “simply is not geared up for the ‘digital age’, where the ability to use notices on websites and email rather than using newspapers and post could be a significant advantage”. Similarly, Veale Wasbrough Vizards LLP said “Today, when a number of appeals are made online through Twitter, Facebook and online publications, it may be difficult to ascertain (a) which newspaper or periodical the advertisement should be placed in and (b) in which area the appeal was made.”

6.52     We made three suggestions for reform in the Consultation Paper.

(1)        Remove the advertisement requirements and retain the inquiries requirements.

(2)        Require trustees to take reasonable steps to contact donors, thereby giving them the flexibility to decide what steps (by way of advertisement, inquiry, or otherwise) to take.

(3)        Simplify the 2008 Regulations.

6.53     The most popular suggestion among consultees was to replace the 2008 Regulations with a flexible requirement that the trustees take reasonable steps to contact donors: see paragraph 6.52(2). Some consultees suggested that trustees would be assisted by Charity Commission guidance in deciding on the appropriate steps. Others thought that appropriate steps should be agreed in advance with the Charity Commission.

6.54     Those consultees who favoured simplification of the 2008 Regulations (paragraph 6.52(3)) said that they should be brought up to date to permit, for example, notices to be placed on charities' websites and inquiries to be made by email or text message.

6.55     The purpose of the advertisement and inquiry requirements is to contact donors. The best way to contact donors will necessarily depend on how the appeal was conducted; it will differ depending on whether the appeal was made through newspapers or periodicals, on television, on the radio, on the charity’s website, by social media (such as Twitter or Facebook), by fundraising on the street, by doorstep fundraising, or by a combination of these methods. Moreover, it is pointless to require charities to incur the expense of placing adverts in publications, or to require them to place notices on notice boards, if such adverts or notices are unlikely to be seen by donors.

6.56     We agree with those consultees who thought that the approach should be tailored to the particular appeal. We do not think that it is possible to devise an appropriate list of detailed requirements that would be suitable for all failed appeals. We have therefore concluded that the requirement should be to take reasonable steps to contact donors, whether that is by way of inquiries, notices, advertisements, or otherwise.

6.57     Most consultees thought that trustees should be left to decide reasonable steps, with guidance from the Charity Commission, and that the question of whether they had taken appropriate steps would be policed by the Charity Commission when it came to making a cy-près scheme.[395] If the Charity Commission is to continue to assess the adequacy of the steps taken by trustees to contact donors in all cases, we think that there is a risk of wasted expenditure by trustees if the Charity Commission is only involved when it comes to making a scheme. Trustees might take an overly cautious approach and expend funds on advertisements unnecessarily. Alternatively, trustees might not take sufficient steps and then be required by the Charity Commission to repeat the process, such that the expense of the first process will have been wasted since the steps will be duplicated (and increased).

6.58     We have therefore concluded that the appropriate steps to be taken by trustees to contact donors should be agreed with the Charity Commission in advance. We are cautious about increasing the Charity Commission’s workload, but we think that this would be an insignificant demand on the Commission’s resources. First, as was made clear in consultation, appeals rarely fail because either the funds raised can still be used (albeit less ambitiously) for their original purposes, or because the appeal literature includes secondary purposes. Second, trustees would be expected to devise their own proposals for the reasonable steps to be taken to contact the donors in their case. With appropriate guidance from the Commission about what it would generally consider to be reasonable steps, trustees can be expected to suggest an appropriate range of steps for the Charity Commission then to approve. Third, the Commission must already assess whether trustees have complied with the detailed requirements in the 2008 Regulations before making a cy-près scheme. Under our recommended approach, the Commission would instead assess whether the trustees’ proposals were reasonable and then whether the trustees had followed them.

Post-scheme claims

6.59     At present, donors have three months to respond to advertisements and inquiries after which a cy-près scheme can be made. But even after a cy-près scheme has been made, donors have a further six months to make a claim for the return of their donations. That additional six-month period was criticised by two consultees. The CLA said that it was onerous and unnecessary when communication with donors is “generally far simpler and quicker than it has ever been”. Anthony Collins Solicitors LLP went further and thought that the initial three-month period for donors to respond should be reduced to one month.

6.60     In accordance with the actions agreed between the charity and the Charity Commission to attempt to contact donors, donors will have a period of time to respond to the charity. Depending on the circumstances, that period might be three months (as it is at present), or it might be longer or shorter. But we think that, once trustees have taken steps to contact donors and donors have been given a reasonable period in which to respond, the funds should become applicable cy-près without any further redress by donors. We therefore recommend that the six-month period for making a claim after the proceeds of a failed appeal are applied cy-près should be removed.

Cases (2) and (3): disclaimer and declarations

6.61     The disclaimer procedure (Case (2)) requires the donor actively to waive his or her right to have a donation returned, using the prescribed form. The declaration procedure (Case (3)) requires the donor actively to request the return of the donation. In the Consultation Paper, we said that neither is likely to be used in practice; they are likely to be administratively costly, and if trustees are aware of the procedures, they are likely also to discover the Charity Commission’s recommended practice concerning the drafting of fundraising literature. If they follow that practice, neither process is likely to be necessary. We asked consultees whether the procedures remain of any use.

6.62     Consultees expressed a range of views as to whether the procedures should be removed or simplified, the majority thinking that they should be removed. Those who thought they should be retained tended to focus on the desirability of donors having an ability to restrict donations to particular purposes or an ability to disclaim an entitlement to the return of their donation. But, as other consultees pointed out, that would remain possible even if the disclaimer and declaration procedures were removed. Anthony Collins Solicitors LLP said that “the same result can be achieved (more transparently) by appropriately worded appeal literature”. Similarly, Bates Wells Braithwaite said that the procedures were “overly complicated” and if donors want to retain control over their donation, “they are more likely to put in place bespoke arrangements … around restricted uses for the funds, rather than rely on these statutory procedures”.

6.63     Accordingly, the two procedures make specific, precise and detailed provision for something that can already be achieved under the current law.

(1)        There is no need for a prescribed form of disclaimer (Case (2)); if a donor responds to an offer of repayment simply by saying that he or she does not want the money, the funds can be applied cy-près.[396] We accept that the existence of a prescribed form might be helpful, but it can also cause confusion by suggesting that it is the only way to achieve the desired result. We think that it would be preferable for the Charity Commission’s guidance on failed fundraising appeals to give advice as to how donors could disclaim any entitlement to repayment, rather than having such a precise statutory procedure.

(2)        Similarly, some consultees pointed out that the declaration procedure (Case (3)) might be useful. We agree, but the same result can be achieved by the fundraising literature, and again can be the subject of Charity Commission guidance. It is not, in fact, of particular assistance to donors since it can only be used if charities voluntarily fundraise on the basis of the qualifying solicitation. It would be preferable, in our view, for charities to have the freedom to fundraise on express terms which can be tailored to the charity and the appeal, rather than retain a straitjacketed statutory procedure.

6.64     We acknowledge that the disclaimer and declaration procedures are effectively enabling provisions; there is no obligation on trustees or donors to use them, and they might be helpful in some cases. We should therefore be cautious about removing them. But consultation has revealed that the procedures are rarely, if ever, used, and the same outcomes can be achieved without them. We think that, in the spirit of simplifying the law and focussing trustees’ attention on making express tailored provision for failed appeals, the two procedures should be removed.

Recommendation 12.

6.65     We recommend that sections 63 to 66 of the Charities Act 2011, concerning the cy-près application of the proceeds of failed appeals, be simplified as follows.

(1)        Case (1) (the advertisement and inquiry requirements under section 63 of the Charities Act 2011) should be replaced with a requirement that the trustees take reasonable steps to contact donors in order to offer the return of their donations, such steps to be agreed in advance with the Charity Commission.

(2)        After proceeds of a failed appeal have been applied cy-près pursuant to Case (1), the six-month period in which donors can continue to make a claim for the return of their donations should be removed.

(3)        Case (2) (the disclaimer procedure in section 63(1)(b)) and Case (3) (the declaration procedure in section 65) should be repealed.

6.66     Clause 6 of the draft Bill, inserting section 63A into the Charities Act 2011, would give effect to this recommendation.

Case (5): Charity Commission decision that it would be unreasonable to contact the donors

6.67     Our recommendations to allow donations up to £120 to be applicable cy-près, and to allow more flexible requirements for contacting donors, will remove much of the need for Case (5). In some cases, however, it might be difficult to locate donors even if their names are known (for example, a charity might only have records of a donor’s name, with no other details that would allow the charity to trace them). Case (5) will remain as a residual power.

Failed appeals: summary

6.68     In the case of a failed appeal, following implementation of our recommendations under Issues (A) and (B) above, the funds can be applied cy-près if:

(1)        the donation is small, that is, less than £120;

(2)        the trustees have taken reasonable steps, as agreed in advance with the Charity Commission, to contact the donors (a simplified Case (1));

(3)        the funds are raised through a cash collection or from a lottery, competition or other similar activity (Case (4)); or

(4)        the Charity Commission decides that it would be unreasonable to take steps to contact the donors (Case (5)).

6.69     We now turn to consider how those funds can be applied cy-près (Issue (C)). Unlike Issues (A) and (B), this issue is not limited to failed appeals; it also includes surplus cases.[397] Our discussion of Issue (C) therefore covers both failed appeals and surplus cases.

Issue (C): failed appeals and surplus funds – Charity Commission involvement

6.70     Issue (C) concerns the making of cy-près schemes, once donations have become applicable cy-près either following a failed appeal (on which see Issues (A) and (B) above) or in a surplus case.

6.71     In the Consultation Paper, we asked whether – once funds have become applicable cy-près – trustees ought to be empowered to decide how the funds are applied rather than having to ask the Charity Commission for a cy-près scheme. We noted that small charities (with an annual income of £10,000 or less) had a power to change their purposes under section 275 by notifying the Commission, with a power for the Commission to object to the resolution.[398]

6.72     We have already recommended that the requirement for a general charitable intention should be removed (and therefore a cy-près scheme could be made without having to take steps to contact the donors) in respect of donations of up to £120 to a failed appeal (see Issue (A) above). In the Consultation Paper, we said that on this approach, the trustees should be able to decide on the cy-près application of the funds without the involvement of the Charity Commission. We also said that trustees could be given a similar power in surplus cases.

6.73     The vast majority of consultees agreed that trustees should be permitted to decide on the cy-près application of funds that fell below the threshold under Issue (A). They also thought that trustees should have an equivalent power in surplus cases.

6.74     Most consultees went further and suggested that trustees should be able to decide on the cy-près application of small funds, whether arising from a failed appeal or a surplus case. They generally suggested that trustees should notify the Charity Commission of their decision and that the Commission should have a power to object, as under the powers in sections 275 and 282.[399] Consultees’ suggestions for an appropriate fund value threshold ranged from £1,000 to £20,000. The proposal would avoid the need for trustees to obtain a cy-près scheme from the Commission. NCVO, ACF, CFG and IoF said it would remove an administrative burden for charities and the Charity Commission and give trustees “ownership and responsibility for deciding on the application of funds in line with their overall objective of furthering the best in interests of the charity”.

6.75     In Chapter 4, we have made recommendations concerning changes to charities’ purposes. We recommend that unincorporated charities be given a power to change their purposes by resolution without requiring a cy-près scheme, but subject nonetheless to obtaining the Charity Commission’s consent to the change which should be guided by the section 67 similarity considerations (see paragraphs 4.121 and 4.139). In consequence, we recommend the removal of the section 275 power for small charities to change their purposes.[400]

6.76     Consistently with those recommendations, we think that the proceeds of failed appeals and surplus cases should be applicable to similar purposes by a resolution of the charity trustees (taking into account the section 67 similarity considerations, with some modification), rather than requiring a formal cy-près scheme.

6.77     Consultees tended to agree that, in general, the Charity Commission should have oversight of the cy-près application of funds. We agree; the Commission’s oversight ensures that the trustees have, for example, taken appropriate steps to try to contact donors (where that is required) and it ensures that the alternative uses of the fund are sufficiently similar to the original purposes.[401]

6.78     But consultees generally thought that oversight by the Charity Commission was not necessary in respect of small funds or small donations. We have concluded that a power for the trustees to make the decision alone should be based on the size of the fund rather than the size of individual donations within a fund. Taking Stone King LLP’s example in paragraph 6.41 above, it is more important that the Charity Commission oversees the use of the £10,000 fund than the £5,000 fund, despite the fact that the larger fund comprises individual donations of £10 whereas the smaller fund comprises individual donations of £1,000. The threshold should reflect the risk of trustees applying funds inappropriately; it should therefore be based on the size of the fund, not the constituent donations.

6.79     What should the threshold be? The CLA noted that the Charity Commission already permits failed appeals raising less than £1,000 from unidentifiable donors to be applied cy-près without a scheme,[402] and said it would be sensible to formalise this approach in legislation. As already noted, setting a threshold is inevitably arbitrary but, drawing on the views of consultees and the Charity Commission’s existing practice, we have concluded that the threshold for trustees to be able to act alone should be set at £1,000. We think that the threshold should be capable of amendment by secondary legislation.

Recommendation 13.

6.80     We recommend that, where the proceeds from failed appeals and from surplus cases are applicable cy-près:

(1)        trustees should have a power to resolve that the proceeds be applied for new purposes, having regard to:

(a)        the desirability of securing that the purposes are, so far as reasonably practicable, similar to the specific charitable purposes for which the proceeds were given; and

(b)        the need for the purposes to be suitable and effective in the light of current social and economic circumstances;

(2)        if the proceeds exceed £1,000, such a resolution should only take effect when the Charity Commission consents to it; and

(3)        that financial threshold should be capable of amendment by way of secondary legislation.

 

6.81     Clause 7 of the draft Bill, inserting section 67A into the Charities Act 2011, would give effect to this recommendation.

 

Chapter 7: Acquisitions, disposals and mortgages of charity land

Introduction

7.1        In this chapter we consider the restrictions on charity trustees disposing of, or granting mortgages over, charity land.[403] The regime is complex and was considered by some consultees to be burdensome for charities. Broadly speaking, charities are required to obtain advice from a qualified surveyor (a member of the Royal Institution of Chartered Surveyors (“RICS”)) before disposing of any interest in land. Consultees generally agreed that it was desirable for charities to take advice on property matters from suitably qualified and experienced professionals. The key policy question is the extent to which charities should be compelled to obtain advice before disposing of charity land.

7.2        Gerald Eve LLP (surveyors) gave an example of a sale of charity land for £1.15 million that would have been made by the trustees for £1 million had the trustees not been required to obtain their advice. On the other hand, the National Trust reported that, over five years, it has made around 1,000 disposals of land and that in only two or three cases did the RICS surveyor’s report result in “significant added value”. To what extent should the law impose conditions in all cases to cater for those reportedly rare instances when trustees might dispose of land at an undervalue?

7.3        The regulation of disposals of charity land split consultees. Some argued strongly that the current requirements were indiscriminate and disproportionate, and that trustees should have flexibility to decide whether to obtain advice, what sort of advice, from whom, and at what stage. Others argued, equally strongly, that trustees can make mistakes when disposing of land and that they should therefore always obtain advice from a RICS surveyor in order to obtain the best terms[404] for the charity. The opposing arguments concerning whether and how the regime should be reformed are finely balanced.

Structure and summary of this chapter

7.4        We start by articulating the concepts of powers and restrictions. We then look briefly at the historical background to transactions involving charity land before explaining the current regime, including the provisions that protect purchasers from the risk of transactions being void or voidable as a result of the current law. After summarising consultees’ diverse views, we make recommendations for reform. We do not recommend removing the existing requirements to obtain advice but instead make two principal recommendations; first, we recommend simplification of the detailed advice requirements, and second, we recommend expanding the category of professionals who are permitted to provide advice. Finally, we consider the special position of charities governed by the Universities and College Estates Acts 1925 and 1964.

Powers and restrictions

7.5        In looking at the ability of charity trustees to acquire and dispose of land, we have to distinguish between trustees’ powers to do so – without which, attempts to buy, sell or otherwise deal with land would be void – and restrictions upon the exercise of those powers. Such restrictions may be in the trust deed,[405] articles of association or other governing document of the charity, and are therefore particular to that charity; or they may be in statute and therefore of general application. Absent those restrictions, all dealings that are within the trustees’ powers would be valid.[406] Where there are restrictions, failure to comply with them would – depending on their construction – have one of the following consequences.

(1)        A purported disposition may be void, in which case it is of no effect.

(2)        A disposition may be voidable, in which case it takes effect unless and until it is set aside, also known as being “avoided”.

(3)        Failure to comply may have no effect at all upon the validity of the disposition but may make the trustees liable for breach of trust.[407]

7.6        We present a brief account of the evolution of statutory restrictions as an aid to understanding the present position.

The historical background[408]

7.7        Case law before the middle of the nineteenth century demonstrated a developing jurisprudence about charity trustees’ powers to dispose of land and restrictions on those powers. The position that evolved was summarised in Bayoumi v Women’s Total Abstinence Educational Union Ltd:

Subject to the terms on which the land had been conveyed to them, charitable corporations and charity trustees had power to sell, lease or mortgage charity land. But the transaction was liable to be set aside in equity unless it was shown to be beneficial to the charity.[409]

7.8        From 1855 onwards the position was made clearer by statute. The Charitable Trusts Amendment Act 1855 prohibited charity trustees from disposing of land that formed part of the charity’s endowment without the consent of Parliament, the court or the Charity Commissioners.[410] The restriction was introduced owing to concerns about trustees entering into land transactions that were not in the charity’s interests.[411]

7.9        The restriction imposed by the 1855 Act remained unchanged for over a century. The Charities Act 1960 modified it so that it applied only to “permanent endowment” and “functional land”, rather than to the entirety of a charity’s endowment.[412] As a result, the requirement to obtain consent from the court or Charity Commission no longer applied to the disposal of land which had been purchased using expendable funds and which was not occupied by the charity.

7.10     More significant, however, was the Charities Act 1992, which extended but also relaxed the restriction in the 1960 Act.[413] The 1992 Act extended the restriction to all land held by, or on trust for, a charity; it was no longer limited to permanent endowment and functional land. It relaxed the restriction by introducing certain procedures that charity trustees could follow to avoid having to obtain the consent of the Charity Commission or court to disposals of, or mortgages over, charity land. In the case of disposals or long leases of charity land, the procedure required the charity trustees to obtain advice from a RICS surveyor.[414] For mortgages or short leases, the procedure involved less stringent requirements to obtain advice.

7.11     The provisions of the 1992 Act concerning charity land were re-enacted in the Charities Act 1993,[415] were subject to minor amendments in the Charities Act 2006, and were consolidated in the Charities Act 2011.[416] Broadly speaking, the provisions introduced by the 1992 Act still apply today, and are explained in detail below. As can be seen, therefore, whilst the current regime has been criticised as being burdensome, it is in fact the result of deregulation over time.

The current regime: limitations on disposals and mortgages

7.12     The current regime concerning charity land is set out in Part 7, sections 117 to 129, of the Charities Act 2011 (“Part 7”). There are separate provisions for disposals of charity land and for mortgages of charity land. The regime applies to both corporate and unincorporated charities. Failure to comply with the regime, where it applies, renders a disposition void.[417] Purchasers may, however, be protected in the event that a disposition is void.[418]

Transactions to which the regime applies

7.13     Any disposal[419] of charity land[420] falls within the regime unless it is:

(1)        a disposal authorised by a statutory provision or scheme;[421]

(2)        a disposal for which the authorisation of the Secretary of State is required under the Universities and College Estates Act 1925;[422]

(3)        a disposal to another charity “otherwise than for the best price that can reasonably be obtained” which is authorised by the transferor charity’s trusts;[423]

(4)        a lease to a beneficiary of the charity “granted otherwise than for the best rent that can reasonably be obtained” and intended to enable the premises to be occupied for the charity’s purposes;[424]

(5)        a disposal of land held by or in trust for an exempt charity;[425]

(6)        a disposal of an advowson;[426]

(7)        the release of certain rentcharges;[427] or

(8)        a disposal of glebe land or certain other ecclesiastical property.[428]

7.14     Any mortgage or other security over charity land falls within the regime unless it is:

(1)        authorised by a statutory provision or scheme;

(2)        a mortgage for which the authorisation of the Secretary of State is required under the Universities and College Estates Act 1925;

(3)        a mortgage granted by an exempt charity;[429] or

(4)        a mortgage of glebe land or certain other ecclesiastical property.[430]

The default rule: no transaction without the consent of the court or the Charity Commission

7.15     The default rule is that charity trustees cannot proceed with a transaction that falls within the regime unless they have obtained an order from the court or the Charity Commission authorising them to do so.[431] But the default rule does not apply if certain requirements are met. The requirements differ depending on whether or not the proposed transaction is a mortgage.

(A) Dispositions other than mortgages

7.16     Where the transaction is not a mortgage, charity trustees[432] are not required to obtain an order from the court or the Charity Commission if the disposal of land satisfies two conditions,[433] namely:

(1)        the disposition is made to a person who is not a “connected person”, or a trustee or nominee for a connected person (“Condition 1”); and

(2)        the charity trustees obtain and consider advice on the disposition (“Condition 2”). The advice required differs depending on whether the disposition is a lease for a term of seven years or less which is not granted in consideration of a premium (“a short lease”) or any other disposition;[434] less stringent requirements apply to the former than the latter.

7.17     There are further requirements where the disposal is of “designated land”. In the text that follows we discuss connected persons, the advice requirement, and the additional rules for designated land.

Condition (1): connected persons

7.18     A connected person is someone who falls into the following list at the time of the disposition itself, or any contract for the disposition:[435]

(1)        a charity trustee[436] of the disposing charity or “a trustee for the charity”;[437]

(2)        a person who is the donor of any land to the charity (whether on or after the establishment of the charity);

(3)        a child,[438] parent, grandchild, grandparent, brother or sister of any such trustee or donor;

(4)        an officer, agent or employee of the charity;

(5)        the spouse or civil partner of any person falling within (1) to (4);[439]

(6)        a person carrying on business in partnership with any person within (1) to (5);

(7)        an institution controlled by anyone within (1) to (6), or by two or more of them;[440]

(8)        a body corporate in which a substantial interest is held by anyone within (1) to (7), or by two or more of them.[441]

Condition (2): advice requirements

7.19     The second condition under section 117(2) is that the charity trustees have obtained advice. The advice requirements are set out in sections 119 and 120.

Section 119: Dispositions other than short leases

7.20     Section 119(1) applies to dispositions other than the grant of a short lease,[442] and requires that, before entering into an agreement for the sale, lease or disposal of the land, the charity trustees must:

(1)        obtain and consider a written report on the proposed disposition from a qualified surveyor instructed by the trustees and acting exclusively for the charity;

(2)        advertise the proposed disposition for such period and in such manner as is advised in the surveyor’s report, unless the report advises that it would not be in the best interests of the charity to advertise it; and

(3)        decide that they are satisfied, having considered the surveyor’s report, that the terms on which the disposition is proposed to be made are the best that can reasonably be obtained for the charity.[443]

7.21     A qualified surveyor is “a fellow or professional associate of the Royal Institution of Chartered Surveyors” who is “reasonably believed by the charity trustees to have ability in, and experience of, the valuation of land of the particular kind, and in the particular area, in question”.[444]

7.22     The qualified surveyor’s report must comply with the Charities (Qualified Surveyors’ Reports) Regulations 1992 (“the 1992 Regulations”),[445] which require numerous matters to be addressed: see Figure 12.

Figure 12: the Charities (Qualified Surveyors’ Reports) Regulations 1992

A qualified surveyor’s report must address the following points:

(1)       a description of the land and its location, to include measurements, current use, number of buildings included, measurements of buildings, number of rooms in buildings and their measurements; a plan (not necessarily to scale) may be used;

(2)       whether the land or part of it is leased by or from the charity trustees, and details of any lease (length, period outstanding, rent, service charge, rent or service charge review provisions, liability for rent and dilapidations, any other lease provision affecting value);

(3)       whether the land is burdened or benefited by any easement or restrictive covenant, or is subject to any annual or other periodic sum charged on or issuing out of the land except rent reserved by a lease or tenancy;

(4)       whether any buildings are in good repair, and if not the surveyor’s advice as to whether it would be in the charity’s best interests to repair them, what the repairs should be and the estimated cost;

(5)       if the surveyor considers that it would be in the charity’s best interests to alter buildings before disposition, a note of that opinion and an estimate of the cost;

(6)       advice as to the manner of disposing of the land so that the terms on which it is disposed of are the best that can reasonably be obtained for the charity, including the possibility of dividing the land, advertising period and manner or reasons why the surveyor does not think it would be in the charity’s best interests to advertise, and any view on whether it would be best to delay the disposition or not;

(7)       VAT advice, if relevant and the surveyor feels able to give it (and if not, a statement to that effect);

(8)       the current value of the land in present circumstances, or possible rent under a lease, and its value if advice, opinions and recommendations given are followed; and

(9)       if the surveyor considers that the proposed disposition is not in the best interests of the charity because it does not make the best use of the land, his opinion to that effect and reasons, plus advice on which disposition would constitute best use.

Section 120: short leases

7.23     Section 120 applies when the proposed disposition is a short lease,[446] and requires that, before entering into an agreement for the lease, the charity trustees must:

(1)        obtain and consider advice on the proposed lease from a person who is reasonably believed by the trustees to have the requisite ability and practical experience to provide them with competent advice on the proposed lease; and

(2)        decide that they are satisfied, having considered the advice, that the terms of the proposed lease are the best that can reasonably be obtained for the charity.[447]

Differences between the requirements of sections 119 and 120

7.24     The main differences between the advice requirements for dispositions under section 119 and for short leases under section 120 are therefore:

(1)        section 119 requires a qualified surveyor, section 120 does not – for example, an estate agent may suffice;

(2)        section 119 requires advertising (unless the surveyor advises it is not in the best interests of the charity), section 120 does not; and

(3)        section 119 requires a written report with specified content, section 120 does not.

Designated land: additional restrictions

7.25     Section 121 of the Charities Act 2011 imposes additional requirements where land is held by or in trust for a charity, and “the trusts on which it is held stipulate that it is to be used for the purposes, or any particular purposes, of the charity”. This is known as “designated land”[448] or “specie land”.[449]

7.26     Section 121(2) requires the charity trustees to invite representations before the disposition is made, by taking the following steps:

(1)        they must give public notice of the proposed disposition, inviting representations to be made within a time specified in the notice (not less than one month from the date of the notice); and

(2)        they must take into consideration any representations made to them within that time about the proposed disposition.[450]

7.27     The additional requirements in section 121 do not apply where:

(1)        the disposition is made with a view to acquiring replacement property to be held on the relevant trusts;[451] or

(2)        the disposition is the granting of a lease for a term ending not more than two years after it is granted, and not granted wholly or partly in consideration of a premium.[452]

7.28     The Charity Commission can make directions granting exemption from the designated land restrictions in section 121. Exemption may be granted in respect of a specific disposition, or of dispositions (generally, or by reference to a specific class) by a charity or class of charity.[453] An application for a direction must be made by the charity or charities in question, and the Charity Commission must be satisfied that giving a direction would be in the interests of the charity or charities.[454] As Luxton notes:

The aim of this saving is to make life less difficult for charities which make many dispositions of functional land each year. The paradigm case is the National Trust, which has some 10,000 properties leased out on relatively short leases … . The sub-section enables the Charity Commissioners to make appropriate directions to relieve it, or charities in a similar position, of the burden of having to serve thousands of public notices each year.[455]

7.29     Disposing of designated land with no intention to replace it, with the result that it will not be possible to carry on the purposes for which the land was held after the disposal, would require a cy-près scheme from the Charity Commission.[456] The Charity Commission gives the example of an almshouse charity wishing to sell its almshouses and to use the proceeds to relieve poverty in other ways.[457] A cy-près scheme is not required for a small disposal which has no impact on the charity’s ability to further its objects; but if ownership of the land is central to fulfilling the charity’s purposes, or if there is a surplus left over, the charity will require a cy-près scheme[458] to apply those funds to some other purpose.

Obtaining a Charity Commission order to authorise a disposal

7.30     When Condition (1) or Condition (2) cannot be met, the charity trustees must obtain the consent of the Charity Commission to the disposal. In some cases the Charity Commission will consider making an order authorising a disposition even though the charity could satisfy Condition (2) by obtaining a surveyor’s report.[459] The guidance suggests that authorisation will be possible in three cases:[460]

(1)        the cost of obtaining a surveyor’s report is “out of all proportion” to the value of the land, and the value of the transaction is genuinely low;[461]

(2)        “the land is in a remote area where it may be difficult to find a qualified surveyor with sufficient knowledge of local land values”; the Charity Commission would look for an estate agent’s report to be obtained instead; and

(3)        transactions at an undervalue which do not fall within the existing exemption.[462]

(B) Mortgages

7.31     Where the transaction is a mortgage, the charity trustees are not required to obtain an order from the court or the Charity Commission if the mortgage is executed after they have obtained and considered written advice on the mortgage.[463]

7.32     There is no separate condition that the mortgagee must not (without the consent of the Charity Commission) be a connected person. However, the charity trustees’ fiduciary duties[464] would be likely to prevent them from granting a mortgage to a connected person.

Matters on which the charity trustees must obtain advice

7.33     Where the mortgage is to secure the repayment of a proposed loan or grant,[465] the trustees must be advised on:

(1)        whether the loan or grant is necessary in order for the charity trustees to be able to pursue the particular course of action in connection with which they are seeking the loan or grant;

(2)        whether the terms of the loan or grant are reasonable having regard to the status of the charity as its prospective recipient; and

(3)        the ability of the charity to repay on those terms the sum proposed to be paid by way of loan or grant.

7.34     If the mortgage is to secure the discharge of any other proposed obligation, the trustees must be advised as to whether it is reasonable for the charity trustees to undertake to discharge the obligation, having regard to the charity’s purposes.[466]

7.35     The person who advises on the above matters must:

(1)        be someone reasonably believed by the charity trustees to be qualified by ability in and practical experience of financial matters; and

(2)        not have any financial interest in relation to the loan, grant or other transaction in question.

7.36     The legislation states that the person may be someone giving the advice in the course of their employment as an officer or employee of the charity or of the charity trustees.[467]

Formalities and land registration

Failure to comply with the requirements of the current regime

7.37     As we mentioned above, failure to comply with the requirements of Part 7 of the Charities Act 2011 renders the disposition – be it a transfer, lease, mortgage or any other arrangement – void.[468] If a disposition is void, it is of no effect. That would have serious consequences for purchasers from charities. The Charities Act 2011 therefore contains provisions designed to safeguard purchasers of land from charities against that risk. The same provisions also protect purchasers from the risk that the transaction will be rendered void or voidable because of non-compliance with any other restrictions on the trustees' powers, in the trust deed or other governing document of the charity.

The conveyancing procedure

7.38     Sections 122 and 123 of the Charities Act 2011 ensure that those who need to know whether Part 7 applies to the transaction are informed of the position; more importantly, they provide that any restrictions on the trustees’ powers – not only in Part 7 but also elsewhere – are deemed to have been complied with when the trustees so certify. The workings of the conveyancing provisions are best understood if we begin with acquisition.

7.39     When land is acquired by a charity – whether by purchase, gift or assent – the transfer or other document is required to state that the land is going to be held by a charity as a result of the disposition. This is the case whether the charity is an exempt charity, and (if it is not exempt) whether the requirements of Part 7 will apply to any disposal of the land.[469] The result of that statement is that when the acquisition is registered (whether or not that is a first registration[470]) HM Land Registry will enter a restriction on the register of title if Part 7 applies. The effect of the restriction is that no future disposition of the land by the charity will be registered unless the requirements of Part 7 have been met.[471]

7.40     Accordingly, a disposition of charity land to which Part 7 applies – whether a sale, a mortgage, or any other relevant disposition – will be controlled by the restriction. The restriction alerts a future purchaser to the requirements of the statute and to the need to ensure that the transfer, lease or other instrument is in a form on which he or she can rely. However, the purchaser is not required to check that an order of the Charity Commission or of the court has been made, or that advice has in fact been given in accordance with the requirements of sections 119, 120 or 124.[472]

7.41     Instead, the transfer, mortgage or other disposition that triggers Part 7, and any contract for such a disposition, must state that the land is charity land, whether the charity is an exempt charity, and whether the Part 7 requirements apply.[473] If they do, the trustees must certify in the transfer, mortgage or other deed that they have power under the trusts of the charity to effect the disposition and that the requirements of Part 7 have been complied with.[474] Where that certificate is given it is conclusively presumed, in favour of a purchaser,[475] to be true.[476]

7.42     That presumption means that when the disposition is registered, the registrar can be satisfied that the restriction has been complied with and will register the disposition; it also protects the purchaser from any later finding that the disposition was void.

7.43     Where the charity is disposing of unregistered land, the mechanism of the restriction is absent. Instead, the purchaser on examining the charity’s title deeds (prior to buying the land or taking a mortgage) will often be aware of the need for the trustees to comply with the requirements of Part 7;[477] again, if a certificate is given in the transfer[478] (or mortgage, lease, or other deed) then the purchaser is protected.

7.44     Section 122(6) adds a further protection: if the certificate is not given, the requirements of Part 7 are nevertheless deemed to have been complied with in favour of a purchaser in good faith. This is most likely to be relevant where the charity is disposing of unregistered land. It is unlikely to be relevant in registered land because the restriction ensures that the transaction will not be registered unless the certificate is given, and accordingly the purchaser will not enter into a contract to purchase the land unless the contract includes an obligation on the charity to provide a certificate in the transfer.[479] If the registered title does not contain a restriction, a purchaser is already protected since he or she is entitled to assume that there is no limitation on the registered proprietor’s powers.[480]

7.45     The system is thus designed (i) to protect purchasers, and (ii) (because of the form of the protection, given by the making of statements and certificates) to alert charity trustees to their duties. It does not in fact ensure compliance with those duties; the purchaser is protected even if the certificate is false. And, as noted above, the protection given to purchasers encompasses not only compliance with Part 7 but also compliance with any other restrictions on the trustees' powers since the certificate has to state that the trustees have power under the trusts of the charity to effect the disposition. It is to charities’ benefit that purchasers are not wary of dealing with charities by reason of potential invalidity of transactions with them.

Evaluation of the current law

7.46     We summarised the advantages and disadvantages of the Part 7 regime in the Consultation Paper.[481] Consultees’ views concerning those advantages and disadvantages were split, and we summarise them below.[482]

Criticisms of the Part 7 regime

7.47     Bircham Dyson Bell LLP said that Part 7 “is more often than not seen as interfering with, rather than enabling, the proper management of a land transaction”; it is “bureaucratic and unnecessary”. Consultees’ criticisms of the Part 7 regime can be seen to fall into 11 categories.

(1) Costs and delay

7.48     Disposals other than mortgages require a report from a RICS surveyor addressing the numerous matters in the 1992 Regulations. Consultees told us that, in the case of fairly standard property transactions, reports generally cost between £400 and £2,000. For charities involved in numerous land transactions, the costs of surveyors’ reports and legal costs of complying with Part 7 are large. Cancer Research UK thought that £100,000 was a reasonable estimate of its annual compliance costs, which is “out of all proportion to the risks involved”.

7.49     A common criticism amongst consultees was of the need to obtain a surveyor’s report when the cost of a report is disproportionate to the low value of the transaction, such as the grant of an easement or the sale of a small strip of land.[483] Sustrans and Railway Paths said that a report costing £300 established that a small piece of disused railway land was worth £100. The Landmark Trust said that a report costing £500 was necessary when its neighbours wished to extend septic tank soakaways over its land for £2,000.

(2) No added value

7.50     Consultees said that a report is often obtained, with the associated expense and delay, “once a deal has all but been agreed” so constitutes “an expensive box ticking exercise”.[484] The report will often “simply repeat an estate agent’s valuation”.[485] For example, when property is left to charity by will, the personal representatives often accept an offer to purchase the property, but then a RICS report has to be obtained confirming that the offer reflects the market value of the property. We discuss legacy cases (where a charity is left property in a person’s will) in more detail below.[486]

(3) The adviser

7.51     Reports must be obtained from RICS surveyors, who are experts in land management and development. They are qualified, must comply with professional standards, and are regulated. Consultees, however, commented that advice from a RICS surveyor may not always be necessary. In the case of a residential property, for example, a local estate agent might be best placed to advise on a marketing strategy and on value.

7.52     There is some confusion as to whether advice can be provided by a RICS surveyor who is also a trustee or employee of the charity. In the case of a mortgage, the Charities Act provides that advice can be given by a person “in the course of their employment as an officer or employee of the charity or the charity trustees”.[487] However, there is no equivalent provision for dispositions other than mortgages which has raised doubts about whether an officer or employee of the charity can provide advice in these cases. Subject to managing conflicts of interest, consultees said that there is no reason why officers or employees should not provide such advice, and during consultation we were told that, in some charities, advice is regularly obtained from staff.

(4) Indiscriminate application of the requirements

7.53     Consultees criticised Part 7 for being inflexible and indiscriminate by applying to all disposals, regardless of the nature of the land, the manner of disposal and the value of the land.

7.54     The 1992 Regulations were also criticised for being overly prescriptive (for example by requiring the measurements of individual rooms) but also for “surprising omissions” (for example, insufficient focus on how the value of the land could be enhanced).

7.55     Consultees said that the 1992 Regulations were not well known amongst RICS surveyors, but that when non-compliant reports are returned to surveyors their re-draft “very rarely [adds] anything to the substance of the advice”.[488] Sustrans and Railway Paths said “I have sometimes had to decide whether to return a perfectly satisfactory report, and risk delaying the transaction, simply because it was not in the format specified by the 1992 Regulations despite this format being unsuitable for the transaction in question”.

(5) The stage at which advice is obtained

7.56     In the Consultation Paper, we said that, strictly speaking, Part 7 requires charities to obtain advice on marketing, and then advice on the terms of the proposed disposition. We said that the CLA had reported that “trustees often adopt the more pragmatic approach of instructing surveyors only at the later stage”. Some consultees thought advice at two stages was unnecessary, and agreed that in practice a report is often only obtained during the conveyancing process.

(6) The nature of advice on value

7.57     Sustrans and Railway Paths said that a valuation was unnecessary:

The current requirements misunderstand the purpose and nature of a valuation. A formal valuation is usually only required when the valuation figure has to be relied on without being tested in the market – for example, for reporting on a company's asset values, or for taxation purposes. In my 30 years' experience in the private sector it was unusual to obtain a formal valuation for an open market sale or letting which had been properly exposed to the market, although advice would be taken on the appropriate price or rental level to expect.

By insisting on formal valuation reports in all situations the charitable sector is often being asked to pay for a higher level of professional advice than is really necessary. What is actually required is a marketing report, which costs less than a formal valuation, and will often be included in the fee for achieving the disposition at no extra cost.

(7) Inconsistencies

7.58     In the Consultation Paper, we highlighted two inconsistencies that arise as a result of the Part 7 regime.

(1)        Acquisition and disposal. The Part 7 regime does not apply to the acquisition of land.[489] Consultees commented that the risk to charity funds is similar when charities are acquiring land and disposing of land; just as they may sell land at an undervalue, they may pay too much when purchasing land. As a result, the Charity Commission “strongly recommends” that trustees follow the Part 7 procedure when acquiring land to ensure compliance with their duties.[490]

(2)        Different types of asset. Part 7 imposes detailed requirements on the disposal of charity land, but there is no equivalent regime for the disposal of other charity assets, such as shares, artwork, jewellery, or intellectual property.[491] Nor is there a regime regulating purely contractual arrangements that do not involve land; if the charity enters into a contract and then defaults on its obligations, the outcome could well be an award of damages enforced by a charging order over charity land.

(8) Legacy cases

7.59     The Institute of Legacy Management, Cancer Research UK and the National Trust explained the difficulties that arise under Part 7 in the disposal of land left to a charity by will. Initial confusion stems from the fact that such land is usually sold by the personal representatives, without the charity becoming the legal owner,[492] so the charity’s interest is not recorded on the register of title by a restriction and the purchaser (and often the personal representatives) are unaware of the need to comply with Part 7.

7.60     But even when the parties are aware of Part 7, the application of the regime in different cases is uncertain and inconsistent. When land forms part of the residue of an estate and the residue has been left to a charity, it can be sold by the personal representatives without having to comply with Part 7. By contrast, if the land has been “appropriated” to a charity by the personal representatives[493] the land will be “held by or in trust for a charity” within the meaning of section 117(1) of the 2011 Act. Part 7 will therefore apply to any disposal and the charity trustees must comply with the regime.[494] Similarly, some consultees suggested that property that has been specifically devised to a charity in a will falls within the regime. The property will be sold by the personal representatives (as legal owners) but the charity trustees must provide the certificate of compliance with the Part 7 requirements.

7.61     There can be a “deemed appropriation” of property once the residue of the estate is ascertained.[495] Cancer Research UK said that “a sale of the property after this point may take place without any steps being taken by the [personal representatives] to comply with [Part 7], but this is something which we are not able to control. Indeed, we may not be advised of a sale until long after it has completed” so charities are “in a position of non-compliance without them even being aware of it until much later in the administration”.

7.62     Further confusion arises if the land has been specifically devised to, or appropriated to, more than one charity. The problem of land held by or in trust for multiple charities applies more widely than the legacy context and is therefore addressed separately below.

(9) Multiple beneficiary cases

7.63     There is some confusion regarding the application of Part 7 in cases where land is held by or in trust for multiple charities. This issue arises primarily in the legacy context but is not confined to such cases. There are three potential problems.

(1)        A surveyor providing advice under Part 7 is required to be acting “exclusively for the charity”. This arguably requires, in a case where land is held by or for multiple charities, each charity to obtain separate advice from a surveyor.[496]

(2)        Charity trustees must be satisfied, having obtained and considered a surveyor’s report, that the proposed terms are the best that can reasonably be obtained for the charity. There might be a conflict in the case of multiple charities, whereby the best terms for one charity are not the best terms for another.

(3)        The decision to make a disposal of the land lies with the trustee(s) of the land, not the multiple charities as beneficiaries under that trust. It is odd to require those charities to comply with Part 7 when they are not controlling the disposition.

7.64     In the legacy context, it has been suggested that in such a case the Part 7 requirements fall not on the charity trustees of the individual charities, but instead on the personal representatives.[497] And when property is held on trust for a charity (or charities) and another non-charitable beneficiary, it would appear that Part 7 is not engaged.[498] However, it is not clear what the true legal position is.

(10) Compliance in practice

7.65     In the Consultation Paper, we reported that the Institute of Legacy Management had suggested that legal advice on Part 7 is inconsistent, that many charities are unaware of Part 7 and that Part 7 is sometimes ignored because it is too complicated.[499] It has been suggested that there is confusion as to when it applies and that Part 7 is “often honoured in the breach”.[500] In addition, there can be uncertainty as to whether land falls within the definition of charity land such that the Part 7 limitations apply.[501]

(11) Uncertainties

7.66     Consultees[502] criticised various other points of detail in Part 7, saying that they led to uncertainties in the law.

(1)        There is often an assumption that it requires “best price” rather than “best terms”.

(2)        There can be confusion over whether a party is a “connected person”, for example, as to the status of a wholly-owned subsidiary.

(3)        There is uncertainty as to the meaning of “disposition”, which is undefined.

(4)        It is unclear whether rentcharges fall within the disposal or mortgages regime.

(5)        There are doubts as to whether certain duties can be delegated by trustees, for example obtaining and considering reports and giving a certificate of compliance with Part 7.

Support for the Part 7 regime

7.67     By contrast, some consultees strongly supported the Part 7 regime. Bates Wells Braithwaite argued that there would be a “significant risk for charity trustees, and cost to the third sector as a whole, if these provisions are removed”. Consultees’ comments fell into three broad categories.

(1) Protecting charitable assets

7.68     The regime protects charities from imprudent (or even reckless or dishonest) decisions of trustees by ensuring that charities obtain the best terms when they dispose of land (and that they can afford the obligations undertaken in mortgages). Consultees said that charity trustees are often insufficiently experienced to deal with property transactions, which can be complex. They might not realise that a small strip of land has ransom value, that the grant of an easement might diminish the value of the land by thwarting future development, that division and sale in parts might be preferable, or that the value of the land could be enhanced by improvements to the land or a change of planning use. The National Trust added that property transactions are often fast-paced and exciting, with a risk that objectivity is lost; Part 7 ensures that “hearts have been ruled by heads”.

7.69     Consultees gave various examples of cases where advice from a RICS surveyor prevented a charity from selling land at below market value. A fellow of the Central Association of Agricultural Valuers (“CAAV”) gave the following example. A charity held a lease of land at a nominal rent, but the land was surplus to its requirements and was seen as a liability since it was disused, overgrown and insecure. The landlord wanted the land back for redevelopment. “The trustees had reached a careful and duly considered position and the disposal appeared eminently sensible in their minds, but in my view they were not aware of the strength of their position”. The surveyor’s involvement secured the charity a better deal.

7.70     Consultees were also concerned about potential exploitation of charities, particularly small charities. Cluttons LLP said that many buyers see charities as “a soft touch” and “the rigour of the current regime is a very powerful negotiating tool to rebut such views and to obtain best value”. Professor Gareth Morgan (Sheffield Hallam University) said that it was “important to protect smaller charities with limited expertise from being hoodwinked by a developer”.

7.71     Some consultees supported the 1992 Regulations; they cover “the basics” that should be considered in every case.[503] Gerald Eve LLP disagreed with our statement in the Consultation Paper that “the matters to be considered when disposing of a one-bedroom flat will be different from those to be considered when disposing of a 100-acre field with development potential”. They said that, no matter the type of property, the 1992 Regulations ensure that all matters have been investigated and considered in calculating the value of the land.

(2) Stage at which advice is obtained

7.72     Gerald Eve LLP said that it was important to obtain advice on marketing and then advice on value and gave examples of cases where charities had approached them late in the day with a proposed transaction that would not have achieved full value for the charity. They said that the “more pragmatic” approach described by the CLA of obtaining advice on the terms of a proposed disposition (see paragraph 7.56 above) was “fundamentally flawed”.

(3) Framework for decision-making

7.73     The regime provides a helpful framework for trustees, particularly when they are inexperienced or cautious about entering into high-value transactions. A statutory structure for the decision-making process can reassure trustees that they are unlikely to be found to have breached their duties.

7.74     By contrast, Bircham Dyson Bell LLP said that compliance with Part 7 “does not necessarily equate with compliance with the charity trustees’ duties. The current regime may, therefore, give rise to false confidence”. Stone King LLP, whilst cautious about de-regulation, said that they always advised charities that “the ‘techie’ regulation is just a reminder mechanic – to check and validate all is well – as all fiduciary duties should already have meant the trustees have done the key thinking so as to do the right thing”.

Conclusion

7.75     The Part 7 regime is loved by some and loathed by others. Stone King LLP summarised the position neatly; there are “numerous examples both of very significant help from the current regime plus examples of its clumsiness and disproportionality”. Part 7 undoubtedly saves charities from bad bargains in some cases, but does that justify a universal top-quality advice requirement?

Our Proposals for reform of the advice requirement

7.76     In the Consultation Paper, we said that it was necessary to strike a sensible balance between protecting charities’ assets and avoiding unnecessary expense and bureaucracy. We suggested that a better approach to the regulation of disposals of charity land (including mortgages) might be to require trustees to obtain advice, but to leave to them the decision as to what advice would be appropriate for a particular transaction. This would give the trustees the flexibility to decide:

(1)        at what stage the advice is required (advice on a marketing strategy, advice on the proposed sale price, or both);

(2)        the level of detail that is required (it may be a detailed formal report, or it may be oral advice); and

(3)        who should give the advice (it may be a qualified surveyor, an estate agent, or another professional).

7.77     We also suggested that trustees should be given the power to dispense with the requirement to obtain advice if they reasonably considered that it was unnecessary to do so.[504]

7.78     We therefore provisionally proposed that:

(1)        the default prohibition[505] on the disposal of charity land should be removed;

(2)        in its place should be a duty on trustees, before disposing of charity land, to obtain and consider advice in respect of the disposition from a person who they reasonably believe has the ability and experience to provide them with advice in respect of the disposal; but

(3)        the duty to obtain advice should not apply if the trustees reasonably believe that it is unnecessary to do so.[506]

7.79     We said that this flexible requirement to obtain advice would go a long way to ensuring that charities’ assets are protected from disposal at an undervalue, but acknowledged that the protection would perhaps not be as extensive as that under the current regime. We said that it would avoid the straightjacket, and unnecessary costs, of the current regime, and recognise that the law should defer to trustees’ good judgement. We said that trustees would continue to be reassured by the provision of advice, and that that reassurance would be further bolstered by guidance from the Charity Commission, which would be an essential part of ensuring that trustees complied with their duties when disposing of charity land.

7.80     Before summarising consultees’ responses to our proposal, and making recommendations for reform, we consider a preliminary point about the current regime that was raised by many consultees.

Restrictions on the register

7.81     We described the special conveyancing procedures designed to protect purchasers in paragraphs 7.37 to 7.45 above. In the Consultation Paper, we said that whether those conveyancing procedures should change would depend upon whether we went on to recommend the maintenance of a regime under which non-compliance renders a transaction void. We had proposed a new regime that would not have the effect of rendering the transaction void in the event of non-compliance.[507] We said, therefore, that the special conveyancing rules would become unnecessary.[508]

7.82     Many consultees argued strongly in favour of retaining the existing restriction in the register of title, and the certification procedure in Part 7, as a simple, cheap, efficient and effective mechanism to enforce trustees’ duties (whatever they may be) in respect of land disposals. Stone King LLP said that land registration permitted a “very helpful protection mechanism”; the restriction on title allows policing of the Part 7 requirements by the buyer, or mortgagee, of land in the conveyancing process. They said that the same protection mechanism is not available in respect of land acquisition, or the disposal or acquisition of other assets, which might explain why the law does not include protective measures for those transactions. Like other consultees, Stone King LLP was keen that the mechanics of restrictions be “used as much as can be to steer the trustees to whatever the duties are so that they are given every chance to do the right thing”.

7.83     So whilst we had said in the Consultation Paper that the conveyancing procedures should depend on the advice requirements, these consultees approached the question from the opposite direction and said that the advice requirements (with, or without, some modification) should be fitted into the existing conveyancing procedures. In the light of consultation, we see the practical advantage of the restriction in the register, and the Part 7 certificate, and we recommend its retention in any new regime.

7.84     A restriction can be entered on the register to prevent “invalidity or unlawfulness” in a transaction.[509] The restriction is currently entered on the register owing to the general prohibition on the disposal of charity land which would, in the event of non-compliance, render the transaction void.[510] It is not necessary to retain the general prohibition in order to retain the restriction and certification regime; if a new regime imposed duties on trustees, non-compliance with which would not render the transaction void (as we proposed), a restriction could still be entered on the register requiring certification by the trustees that they had complied with the duties.[511] Some consultees who favoured retention of the restriction mechanism wanted to remove the general prohibition (and to go further by conferring a general power to dispose of land). Given consultees’ satisfaction that the current restriction and certification regime works well as a policing mechanism it is unclear what amending the framework within which it operates – namely the general prohibition on disposing of charity land – would achieve.

What should the advice requirements be?

The problem: competing considerations

7.85     Part 7 requires charities to obtain advice from a RICS surveyor for most land disposals. Whilst there are some exceptions,[512] it is a fairly blanket requirement. Similarly, the 1992 Regulations set out in detail the matters on which a RICS surveyor must provide advice. The regime is largely a “one size fits all” approach.

7.86     But a regime for land disposals should be suitable for:

(1)        a wide range of charities, including:

(a)        large charities, such as Cancer Research UK;

(b)        small charities, such as local village hall charities or small religious orders;

(c)        charities with no property expertise; and

(d)        charities with significant property expertise, such as the Landmark Trust or National Trust.

(2)        a wide range of land transactions, including:

(a)        the sale of different types of land such as an office, agricultural land, a brownfield development site, a residential property, and a small strip of land along a boundary.

(b)        the sale of land that is held for different reasons, such as:

(i)          land owned by a charity purely as an investment;

(ii)         land left to charity by will;

(iii)        land that is used by the charity to pursue its purposes, known as “functional land”;[513] and

(iv)       land that is surplus to the charity’s requirements.

(c)        different types of disposals, such as transfer of a freehold, transfer of a long lease, granting a short lease, or granting an easement.

(d)        the sale of land intentionally at less than market value, or for nominal consideration, in pursuit of the charity’s purposes.

(e)        disposal of a valuable asset and disposal of what is, in effect, a liability (such as the assignment, or surrender, of an office lease where the passing rent is above the market rent).

(f)         granting a lease of a residential property to an employee of the charity.

7.87     In devising our recommendations for reform, we have tried to:

(1)        establish the best default rule;

(2)        ascertain whether and how the regime might apply different rules in different cases by adopting categorisations that reflect different levels of risk in a transaction, for which tailored and proportionate rules can be devised (for example, creating categories according to the nature of the transaction, or the size of the charity);

(3)        decide whether the exceptions to the default rule should be the same, reduced or expanded; and

(4)        keep the regime as simple as possible.

7.88     We have also sought to achieve an appropriate balance between the various competing policy aims underpinning the project more widely, namely:

(1)        giving charities flexibility and autonomy in how they are run;

(2)        removing inefficient and unduly complex regulation of charities;

(3)        ensuring adequate protection of charity assets; and

(4)        maintaining public trust and confidence in the charity sector though proper oversight and accountability.

Consultees’ views

7.89     Consultees expressed a wide range of views on our proposal to make the advice requirement more flexible, from suggesting complete de-regulation through to advocating retention of the existing regime. The majority of consultees thought that the regime should be reformed; less than 15 per cent of consultees wanted to retain the current regime (with or without minor modification).

7.90     The following themes emerged from consultation responses.

General duties versus specific duties

7.91     Some consultees thought that the general duties on trustees, or the investment duties on trustees under the Trustee Act 2000, were adequate to guard against the risk of charity land being sold at an undervalue.

Land and other assets

7.92     Some consultees saw no reason to treat the disposal of land differently from the acquisition of land, nor any reason to treat land differently from other assets. Conversely, it was suggested that land was a unique asset and should be treated differently. It has also been suggested to us that there is commonly some familiarity with land but not with other assets such as shares; trustees who (for example) own their homes may have misplaced confidence in their ability to make decisions concerning land whereas they may be more cautious to make the same decisions concerning shares.

7.93     Whilst land is a different asset class, we do not think that there is a principled reason why land should always be treated differently from other assets in terms of the advice requirements, since other assets can be equally if not more valuable and complex (for example, intellectual property rights). But we must acknowledge that there is historic protection of land transactions which, consultation has revealed, does prevent charities from selling land at an undervalue in some cases. And as Stone King LLP said, restrictions on the land register of title, and the Part 7 certification procedure, do provide a unique mechanism to enforce trustees’ duties when they dispose of land, as well as a helpful steer for trustees towards doing the right thing.

Large and small charities

7.94     There is a notable difference between large and small charities, and the extent to which they can be trusted to make appropriate decisions and the extent to which they benefit from a framework for decision-making. The charities that responded to our consultation tended to be large charities which have less need for regulation of their land transactions, but as Stone King LLP emphasised it is the smaller charities with less experienced trustees that are likely “to get the real benefit of the protections against accidentally going astray”.

Choice of adviser and stage at which advice is obtained

7.95     Some consultees thought it would be helpful to have flexibility to choose an appropriate adviser, based on the nature of the land and the stage at which advice is obtained. Others said that trustees cannot be expected to choose an appropriate adviser, or the appropriate point at which to obtain advice, when they are not experts in property matters.

Deciding not to obtain advice

7.96     There were mixed views as to whether trustees should be permitted to decide not to obtain advice. Some thought it would allow trustees to avoid unnecessary and disproportionate costs. Others said they should always obtain advice from someone, even if not a RICS surveyor; “in some cases charity trustees do not know what they do not know; i.e. they need professional advice to understand the value of the land”.[514] Some consultees thought it was important that if charities decide not to obtain advice, they should formally record the reasons for their decision.

The 1992 Regulations

7.97     Some consultees criticised the 1992 Regulations, saying that they should be simplified or repealed; others supported them, saying that they should be retained.

Response to our proposal

7.98     Those who disagreed with our proposal did so for the following reasons:

(1)        It would result in insufficient protection of charitable assets; advice should only ever be obtained from RICS surveyors who have appropriate expertise, supported by professional indemnity insurance.

(2)        Trustees cannot be expected to know who to approach for advice.

(3)        Trustees, often being risk-averse, would obtain advice anyway; the flexible duty would “turn into a duty always to obtain advice”.[515]

(4)        The benefits of advice go beyond just valuing the land; advice can assist charity trustees to take a broader view about how they can use the charity’s land to achieve the charity’s purposes.

Importance of guidance

7.99     Many consultees commented on the importance of Charity Commission guidance, particularly for smaller charities and inexperienced trustees. Guidance was said to be important regardless of whether the Part 7 regime is reformed, but particularly if trustees are to be given the flexibility to choose their type of adviser or to choose not to obtain advice. For example, Veale Wasbrough Vizards LLP said that guidance should emphasise the need for advice in the case of the sale of part of land, or the grant of rights over charity land which can have “major consequences for the value of the charity’s land on any future disposal”. Stone King LLP said that, without useful guidance, “trustees will start spending as much on checking with their lawyers as they did on surveyors”.

Conclusion

7.100  While a clear majority of consultees considered that Part 7 was in need of reform, there was no consensus amongst consultees as to what form the reform should take. The arguments for and against the different options are finely balanced. We started this section by setting out the competing considerations. It is not possible to legislate for all eventualities, and nor is it possible to solve all the potential problems with charity land transactions. Similarly, imposing a universal regime on all land transactions cannot provide an answer that is well suited to every situation. It is for these reasons that the current regime, with its almost universal requirement for a RICS surveyor’s report, has been criticised by consultees; its reach is too wide and its requirements too prescriptive.

7.101  We turn now to consider the various options for reform as well as our recommendations for reform. We have set out in paragraphs 7.87 and 7.88 above what we consider to be the appropriate aims in devising those recommendations.

Options for reform of the advice requirements

7.102  We think that the following options are available. Some could be adopted in combination.

Option (1): no change

7.103  There was a strong, but minority, voice in consultation that favoured retention of the existing regime. In our view, however, the criticisms of the regime set out above justify reform.

Option (2): distinguish between large and small charities

7.104  Many consultees noted the difference between large and small charities. It would be possible to create categories to reflect different levels of risk. Regulation could be tailored to the category of charity. It would be possible to categorise charities into large and small (based on whether the charity’s income was above or below, say, £1 million), and extend a more flexible advice requirement to larger charities.

7.105  We think that such categorisation would be a crude approach. The impact of a more onerous advice requirement would be greater (proportionally) on small charities than on large charities. Further, there is no necessary correlation between the size of a charity and the expertise the charity has in respect of property. A small charity may in fact have expertise, while a large charity might not. Furthermore, large charities potentially have more valuable assets to lose with greater reputational consequences than small charities if they do not have suitable expertise.

Option (3): distinguish further between different categories of disposal

7.106  Rather than distinguishing between charities on the basis of their size (the approach in option (2)), a distinction could be drawn based on the type of transaction. The requirements imposed on a charities could then be tailored to reflect the risks involved in particular transactions. The current law is already tailored to particular transactions by imposing different advice requirements for:

(1)        mortgages (see paragraph 7.31 to 7.36);

(2)        leases of up to seven years (see paragraph 7.23); and

(3)        all other disposals (see paragraphs 7.19 to 7.22).

7.107  It would be possible to remove further categories of disposal from (3). Three consultees suggested changing the transactions to which the detailed advice requirements applied.[516] The advice requirements could apply, for example, only in the case of freehold transfers and long leases (thereby excluding the grant of easements and certain leases). Or the sale of residential property could be excluded from the advice requirements.

7.108  We do not favour such an approach. Just because property is residential does not mean that it is easier to value; for example, it might have development value. And the grant of an easement might have a significant effect on the value of the charity’s land, for example, by hindering future development.

Option (4): a de minimis threshold

7.109  Some consultees thought that transactions below a certain value (suggestions ranged from £5,000 to £50,000) should be excluded from the requirement to obtain advice. Others disagreed; a small strip of apparently insignificant land might have unknown ransom value, or an easement granted for nominal consideration might significantly reduce the value of the land.

7.110  We do not think that a de minimis threshold would work in practice; it depends on charities themselves first valuing the land to establish whether the transaction falls above or below the threshold; in order to do that, they would usually need advice.

Option (5): certification of compliance with trustee duties or with guidance

7.111  Bircham Dyson Bell LLP and some members of the CLA suggested replacing the advice requirements with a certification requirement (similar to the existing Part 7 certificate). Trustees would have to certify that they had power to enter into the transaction and that they had complied with their duties, including their duty to manage conflicts of interests (which would avoid the need for connected persons provisions, on which see further below). The requirement for a certificate would alert trustees and professionals to the existence of trustees’ duties, which would be the subject of guidance from the Charity Commission.

7.112  We can see the attraction of this suggestion, but we think that it is too imprecise to require trustees to certify that they have complied with all of their duties, whatever they may be. We expect that trustees would always say that they have complied with their duties, and we are not convinced that the certification requirement would drive them to obtain advice in appropriate cases.

7.113  As well as being imprecise, we fear that it might concern trustees when they dispose of land. They might ask: what is so special about land transactions that we must certify that we have complied with our duties? And there might be an implication that their duties are therefore different, or more specific, than in other contexts when, in reality, they would not be since this suggestion for reform relies on general trustee duties, and on Charity Commission guidance.

7.114  In a similar vein, Withers LLP suggested replacing the advice requirements with a statutory obligation to consider Charity Commission guidance on the disposal of land. The trustees would be required to provide a certificate confirming that they had complied with the requirement to have regard to the guidance. The guidance would cover the fundamental issues such as disposals to connected persons, obtaining the best terms, and taking account of the charity’s objects.

7.115  We think that this approach would be novel, and potentially unpopular, particularly in the light of other consultees’ concerns about Charity Commission guidance becoming “de facto law” or being given an elevated status. The Commission’s guidance might be unclear or contain inaccuracies, and in those circumstances it would be unfortunate if statute compelled trustees to have regard to it.

7.116  In addition, we think that it would be onerous to require trustees to consider Charity Commission guidance each time they dispose of charity land. If a transaction is straightforward and trustees are happy to obtain professional advice, they should not invariably be required to read guidance about the complexities and nuances of different types of land transaction and the circumstances in which professional advice should be obtained (though, of course, it would usually be prudent to do so).

Option (6): a flexible duty to obtain advice

7.117  As we proposed in the Consultation Paper, it would be possible to replace the requirement to obtain a RICS surveyor’s report with a more flexible requirement that trustees obtain advice from someone they reasonably believe can provide them with advice. The flexible requirement would operate either with, or without, a power for the trustees to decide not to obtain advice, if they reasonably believe that it is unnecessary to do so.

7.118  We note consultees’ concerns about the requirement to obtain advice being too vague; it might be difficult to expect trustees to work out who is the most appropriate professional to provide advice, and at what stage advice should be obtained, when trustees themselves are not experts. We also see the advantage of charities obtaining advice from a property professional, and the advantage of Part 7 explicitly requiring that. Val James said that the default position should be that advice will be obtained from someone professionally qualified in land valuation. We agree.

7.119  That led us to consider a more nuanced approach which would still give charities some flexibility in deciding whether, when and from whom to obtain advice, but retaining the starting point that advice should generally be obtained from a property professional unless the trustees have a reason to do otherwise.

Option (7): permitting charities to dispense with the requirement to obtain advice if they decide that it is unnecessary to do so

7.120  It would be possible to retain the default requirement that trustees obtain advice from a property professional (“a designated adviser”) but to give charities the ability to decide whether or not it is necessary or appropriate to obtain advice. We considered adding a new procedure to Part 7 allowing trustees to decide that the requirement to obtain advice from a designated adviser should not apply to a proposed transaction (a “dispensation power”).

7.121  The proposed dispensation power led to diametrically opposing views from stakeholders (both in consultation responses and at a subsequent meeting with members of the CLA and Charities’ Property Association). In an attempt to reach a compromise we tried to add various qualifications to the power to try to make it more acceptable to those opposing it. For example, we considered including a requirement that trustees have regard to Charity Commission guidance in deciding whether or not to use the dispensing power; the guidance could explain the circumstances in which the procedure might be used and the relevant considerations to be borne in mind when deciding not to obtain advice from a designated adviser. Trustees would need to be satisfied that, having regard to the Charity Commission’s guidance, it is unnecessary or inappropriate to obtain advice from a designated adviser. We also considered a prohibition on blanket decisions to dispense with advice, forcing each transaction to be considered on its facts.

7.122  In deciding not to recommend a dispensation power, we were driven by the following concerns.

(1)        Risk-averse trustees would always obtain advice before invoking the dispensation power because the proposed condition for dispensation – that advice is “unnecessary or inappropriate” – is arguably very vague. If that is the case, trustees will not save time or costs, because they will simply be paying lawyers rather than surveyors. Conversely, reckless trustees could invoke the dispensation power too readily in order to avoid obtaining advice in circumstances when they ought to do so.

(2)        Some consultees who supported relaxing the current advice requirements may have an unrepresentative view of trustee attitudes. For example, solicitors are more likely to be exposed to risk-averse charity trustees who have chosen to seek legal advice than more reckless ones who are less likely to do so.

(3)        There are several examples of cases in which the requirement for charities to obtain advice has avoided bad bargains. We have also explained that some trustees, given the opportunity, might proceed with land transactions without advice just because they think that they understand property and its value.

(4)        We were cautious about relying too heavily on Charity Commission guidance to support a dispensation power. For statute to require trustees to have regard to such guidance means that the guidance effectively has statutory effect. The Charities Act 2006 required the Charity Commission to produce statutory guidance concerning public benefit, which was the subject of much controversy and litigation. Rather than setting out requirements which trustees are required to consider in guidance, we think it might be clearer (and more welcome in the sector) if we simply set out the requirements in legislation.

(5)        Finally, the current regime is, in practice, self-regulatory, with trustees being required to obtain advice from a RICS surveyor to ensure that they comply with their duty to obtain the best terms for the charity. Introducing a dispensation power might increase the burden of regulation for the Charity Commission; it would fall to the Commission to investigate and decide whether trustees have breached their duties in deciding to dispense with the advice requirements. Since that option is not currently available to trustees, it is not something that the Commission has to regulate. The Commission already faces significant resource constraints and we are reluctant to impose further strain on its resources unnecessarily.

7.123  In conclusion, given these concerns and the particularly controversial nature of the proposal, we have decided not to recommend that trustees be given a power to dispense with the Part 7 advice requirements. We do not think that a dispensation power would satisfy either those in favour of the existing Part 7 regime nor those seeking to abolish it. We have instead opted for alternative reforms to the current Part 7 regime to alleviate many of the concerns raised by consultees.

Option (8): change the contents and timing of written advice, and the requirement to follow it

The 1992 Regulations

7.124  Consultees’ comments on the 1992 Regulations, which set out in detail the matters that must be addressed in a RICS surveyor’s report, have been set out in paragraphs 7.54 and 7.55 above. We agree that the 1992 Regulations should be simplified. We agree with the comments of Sustrans and Railway Paths set out in paragraph 7.57; the purpose of the Part 7 advice requirements is to ensure that charities receive advice on marketing land so as to maximise the chances of obtaining the best offer. Designated advisers should be left to decide the matters that are relevant and how best to provide that advice, in reliance on their professional qualifications, standards and experience.

7.125  We therefore think that the 1992 Regulations should be replaced with three principal requirements, namely that the designated adviser should provide:

(1)        advice on what sum to expect (or, if an offer has already been made, whether the offer represents the market value of the land);

(2)        advice on whether (and, if so, how) the value of the land could be enhanced; and

(3)        advice on marketing the land (or, if an offer has already been made, any further marketing that would be desirable).

7.126  These are the key issues on which the trustees should be given advice, without setting out unnecessary levels of detail as to what should be addressed in a report. Our proposed simplification would remove any (actual or perceived) need for a formal valuation of the property, if it has been exposed to the market and the trustees have received advice on what sum to expect.

7.127  We recommend a further requirement. Val James said that “professionals are more aware of the limits of their competency than those instructing them can be”. We agree. We recommend below an expansion of the category of designated advisers under Part 7. We think that that expansion will be controlled by a requirement that advisers provide a self-certification that they have the appropriate expertise and experience to provide the advice that is required.

7.128  Our recommendation would require an additional matter to be covered in the written report but it would reflect existing good practice by RICS surveyors; they are expected to decline work which is outside their expertise. The certification requirement would potentially create liability for advisers who wrongly self-certify their expertise and cause financial loss to the charity. This liability would be determined by reference to the professional standards imposed on designated advisers by their regulatory body, with an expectation that it would be backed up by their professional indemnity insurance. Advisers who wrongly self-certify could also be subject to disciplinary sanctions by their professional regulator.

7.129  In addition, we think that the self-certification should also include confirmation that the designated adviser does not have any interest that conflicts with that of the charity. That would ensure, for example, that the adviser is independent of any prospective purchaser of the land in question. Consultees raised concerns about the possibility of charities obtaining and relying on advice from employees or officers of (for example) a property developer. The designated adviser should be acting to protect the charity’s interests and any conflict with those interests should preclude the adviser from acting.

7.130  We think that the advice requirements should continue to appear in secondary legislation to allow easier amendment in the future, should that be necessary. We therefore make a recommendation that the 1992 Regulations be replaced by new regulations setting out simplified advice requirements, together with the new self-certification requirement.

Timing of advice and following that advice

7.131  We explained above consultees’ concerns about a lack of clarity, and lack of pragmatism, concerning the point at which advice should be obtained. We recommend that the requirement that trustees must advertise the proposed disposition as advised in the surveyor’s report[517] be removed. This requirement is overly prescriptive and unnecessary. Part 7 requires trustees to be satisfied, having considered the report, that the transaction achieves the “best terms”.[518] If the report has recommended advertising (something which the replacement 1992 Regulations will require advisers to address) and the trustees have disregarded this advice, they ought not to be satisfied that they have complied with Part 7. Nor, however, should trustees be compelled by statute to advertise exactly as the adviser recommends, which is what the Act currently requires. In combination with our recommendation to simplify the 1992 Regulations, this recommendation will also address concerns that, under the current regime, trustees who obtain advice early are required to obtain duplicate advice at a later stage.

The result

7.132  Our recommendation to simplify the 1992 Regulation, and to remove the apparent requirement to obtain advice before and after marketing land, would make the Part 7 regime simpler, more coherent and less burdensome for charities. Ideally, trustees would obtain advice early, and they would not be required obtain subsequent advice as to whether an offer represents the market value of the land (though they might choose to do so). But in some cases advice might continue to be sought at a late stage after an offer had been obtained, in which case advice under the simplified 1992 Regulations will cover any further enhancement or marketing that would be desirable and advice as to whether the offer represents the market value of the land.

Option (9): expanding the category of approved advisers

7.133  Part 7 designates those property professionals who are qualified to give advice to trustees, and is currently limited to RICS surveyors. Some consultees wanted to retain the requirement to obtain advice, but expand the category of people permitted to provide advice. There were suggestions that estate agents and fellows of the CAAV should be permitted to provide advice. Some consultees also wanted it to be made clear that in-house expertise (staff or trustees) could be used, subject to managing conflicts of interest.[519]

7.134  In March 2010 the Government consulted on extending the definition of “qualified surveyor” under the Part 7 regime to include fellows of the National Association of Estate Agents (“NAEA”).[520] The consultation gave rise to mixed responses, and raised wider concerns about the statutory framework. The Government concluded that fellows of the NAEA should be included,[521] and stated that it was willing to consider further extension of the definition to include, for example, fellows of the CAAV.[522] However, it decided that the wider statutory framework should first be considered as part of the Hodgson Report, and it has subsequently formed part of our project.

7.135  We agree with Government that there should be more scope for other property professionals to provide advice. In expanding the definition of a “qualified surveyor” in Part 7 we think that there are three key considerations:

(1)        the adviser should have appropriate qualifications and experience to be able to provide advice on enhancing the value of land, marketing land, and the valuation of land;

(2)        the adviser should be regulated by a professional body, requiring advisers to follow professional standards including not acting where there is a conflict of interests; and

(3)        the adviser should hold appropriate professional indemnity insurance.

7.136  We agree with the result of the Government’s consultation that fellows of the NAEA ought to fall into the default category of appropriate advisers on land transactions. All members of the NAEA are regulated by Propertymark (formerly National Federation of Property Professionals) which requires them to maintain professional indemnity insurance, they must not engage in unprofessional or unfair practice, and they are required to have industry-based experience as well as a particular level of qualification.[523] There are several categories of member of the NAEA, the highest of which is a fellow. To become a fellow an individual must pass the level four examination (equivalent to a foundation degree) and have had five years’ experience. Following discussions with the NAEA we think that the expanded list of designated advisers ought to include fellows (but not other categories of member) of the NAEA.

7.137  Similarly, we think that fellows of the CAAV should be designated advisers (many, but not all, of whom are also RICS members in any event). Fellows of the CAAV are property professionals specialising in rural and agricultural land. They must pass an entrance examination, are regulated by the CAAV and must comply with professional conduct standards, including a requirement to maintain indemnity insurance and to manage conflicts of interest.[524]

7.138  We also think that the power to add to the list of authorised advisers by statutory instrument should remain.[525]

7.139  We acknowledge that a fellow of the CAAV, being an expert in rural and agricultural land, might not be the right person to advise on the disposal of an office block in a large city. And a residential estate agent might not be well suited to advise on the sale of agricultural land. But not every member of RICS would be suitable to carry out such valuations either. There is already a requirement in Part 7 that the trustees must reasonably believe the RICS surveyor “to have ability in, and experience of, the valuation of land of the particular kind, and in the particular area, in question”.[526] The same requirement should apply if the trustees decide to instruct an NAEA or CAAV fellow. Moreover, the self-certification requirement that we recommend above (paragraph 7.127) will go a long way to ensure that advice is obtained from a suitable professional.

7.140  It seems that Part 7 already allows charities to use trustees and staff as designated advisers, subject to potential obstacles that go beyond the scope of this project (such as complying with professional indemnity insurance obligations and managing conflicts of interest in accordance with professional standards). Indeed, we have heard in consultation that staff (but rarely trustees) already provide advice. Nevertheless, some consultees said that the current position is unclear, particularly as the Act expressly permits such advice in the case of mortgages, but does not make equivalent provision for other disposals. We are recommending that a new provision be inserted into the Act providing that Part 7 advice can be provided by officers and employees of a charity.

7.141  It is noteworthy that this reform only means that officers and employees are permitted to provide advice. It does not always mean that it will necessarily be appropriate for them to do so. As already noted, conflicts would have to be managed. In addition, when deciding whether to take advice from a trustee or employee, the charity trustees and the adviser must be clear about potential liability if it transpires that the advice was negligent and caused a financial loss to the charity. A trustee would be providing advice in his or her capacity as a RICS surveyor (or other designated adviser) and should expect to be liable for negligent advice, which may involve a call on the adviser’s firm’s professional indemnity insurance. A RICS surveyor (or other designated adviser) who is an employee of a charity, by contrast, might not be personally liable to his or her employer for negligent advice, and the employer charity might not be insured against losses caused by the acts of an employee.[527] The position concerning potential liability should be agreed between the charity and employee at the outset and, if appropriate, insurance arrangements can be made. These considerations should be explained in the Charity Commission’s guidance on selecting designated advisers.

7.142  It is arguable that the potential lack of recourse in the case of advice from an employee is a good reason for excluding employees from the potential pool of designated advisers. Ultimately, the purpose of Part 7 is to ensure that charities obtain accurate and relevant advice; it is not to provide charities with an insurance policy against inappropriate disposals by relying on a designated adviser’s professional indemnity insurance. We do not therefore think that employees should be prevented from acting as designated advisers, simply because the charity might not be able to recover potential financial losses if the advice is negligent. But the existence of that potential recourse, in the event that advice is negligent, is an important consideration for the charity when selecting a designated adviser.

Option (10): applying for dispensation from the advice requirements

7.143  Some consultees thought that charities who found the Part 7 requirements burdensome should seek dispensation from the requirement to comply from the Charity Commission. It is already possible to obtain such dispensation, although very few consultees reported having done so. There appears to be a reluctance on the part of charities to seek authorisation from the Charity Commission, and similarly a reluctance on the part of the Commission to grant authorisation if other options are available.

7.144  We think that the ability to obtain dispensation from the Part 7 advice requirements should continue, particularly since we are not recommending that trustees be given a dispensation power. If a charity experiences a recurring fact pattern that is somehow inconsistent with the regime, then it will be able to apply to the Charity Commission in order to obtain dispensation from the requirements. We would encourage charities who find themselves in this position, particularly those who believe that they have the requisite expertise to manage these transactions in the best interests of the charity without formally complying with Part 7, to apply for dispensation from the Charity Commission.

Discussion

7.145  As we have indicated, in our view, reform should combine Options (8) and (9). We think that the matters on which designated advisers are required to provide advice should be simplified and rationalised (Option (8)). And the range of advisers who are authorised to provide advice under Part 7 should not be limited to RICS surveyors (Option (9)). We also think that charities should make use of the current route to seek dispensation from the advice requirements from the Charity Commission in appropriate cases (Option (10)).

7.146  Under our recommended reforms, there will remain a default requirement that trustees must obtain advice from a property professional. Charitable assets will therefore continue to be protected from potential sale at an undervalue. Trustees will have a greater range of potential advisers to choose from than at present, but they will still be directed to three particular categories of property professionals. Charities will have the additional flexibility of being able to choose an adviser (within the designated list) that is best suited to the disposition in question. Our recommendations therefore recognise that different transactions deserve tailored treatment.

7.147  Our recommendation departs from our provisional proposal in the Consultation Paper that trustees should be able to decide whether they obtain advice, but follows the policy of giving trustees greater flexibility in deciding from whom to obtain that advice. This change of policy is a response to consultees’ concerns regarding the potential risks when charity trustees dispose of land without seeking appropriate advice. Our recommendations also retain the restriction in the register of title as a mechanism to enforce the trustees’ duties.

Mortgages and leases of up to seven years

7.148  As explained above, the advice requirements for mortgages and for leases of up to seven years are different from those for other disposals.

7.149  In the Consultation Paper, we said that the advice requirement for mortgages, to some extent, relates to the internal workings of the charity. Whilst section 124 anticipates advice from just one person,[528] it is arguable that different people are best placed to advise on the three matters identified in paragraph 7.33 above.

(1)        Someone who can advise the trustees on how to achieve the charity’s purposes to provide advice on whether the loan or grant is necessary to pursue the particular course of action for which the loan or grant is sought.

(2)        Someone who understands the lending market to provide advice on whether the terms of the loan or grant are reasonable having regard to the status of the charity as its prospective recipient.

(3)        The charity’s accountant or the charity’s fundraising and finance staff to provide advice on the ability of the charity to repay the loan or grant.

We said that (1) is arguably something the charity trustees themselves are best placed to consider.

7.150  We said that whilst section 124 provides a helpful summary of the matters on which trustees should consider obtaining advice, it may impose an unnecessary straightjacket on trustees. We suggested that the better course would be to leave to trustees the decision as to what type of advice to obtain in relation to a proposed mortgage, with more detailed assistance from Charity Commission guidance, similarly to our proposals concerning disposals. Accordingly we proposed that the new flexible advice requirement should apply to mortgages.

7.151  However, following our departure from our provisional proposal for a new flexible advice requirement for dispositions other than short leases, we are not recommending any change to the current advice requirements for mortgages and leases up to seven years. Our recommendations will therefore retain a different regime for leases under seven years, mortgages and other dispositions, with more prescriptive advice requirements for the latter. There are two reasons for that decision.

7.152  First, the proposed flexible advice requirement would largely have mirrored the existing requirements for short leases, and would therefore have resulted in little change in the regime governing these types of transaction.

7.153  Second, very few consultees commented on the current advice requirements for mortgages and for short leases. Consultees’ criticisms of the Part 7 regime was not aimed at those requirements. Some consultees actively discouraged altering the current requirements which “work well in practice and do not need changing in any way. Any alteration of these would cause confusion instead of focussing the trustees’ attention on the key points to be considered when charging a property”.[529] Bircham Dyson Bell LLP and Stewardship similarly supported the advice requirements for mortgages.

Advice concerning loans and advice concerning grants

7.154  The CLA noted that the advice requirement for mortgages applies irrespective of whether the mortgage is to secure a loan (which is always intended to be repaid) or to secure a grant (which is not intended to be repaid but which becomes repayable in the event that certain conditions of the grant are not satisfied). Some CLA members considered it illogical for the advice requirements to apply to mortgages to secure grants since – unlike a loan – it is assumed that a grant will not be repaid. Others thought the advice requirement was just as important since “the results for the charity of default can be the same as for a loan”. They suggested that the drafting of the statute could be changed to recognise the difference.

7.155  There is clearly a difference between mortgages to secure loans and mortgages to secure grants, but we do not see a particular problem with the advice requirements that apply to both. We think that it is useful, for example, to obtain advice on the charity’s ability to repay the sum secured in both cases. The way in which the trustees consider that advice, and its relevance to the decision to agree the mortgage, will differ in both cases, but the advice remains useful.

Short leases: assignment and surrender

7.156  It was suggested during consultation that it is anomalous that the grant of a short lease is subject to less onerous advice requirements, but that the surrender or assignment of a short lease is not (and is treated in the same way as other disposals). It was suggested that the same advice requirements should apply to a surrender or assignment of a short lease. We can see the strength of that argument; in many cases, the assignment or surrender of a short lease will be no more complicated or valuable than the grant of a short lease. However, we think that there is a distinction between the two types of transaction, and are not persuaded that the reduced advice requirements for the grant of a short lease should apply to the assignment or surrender of a short lease.

7.157  It is important to keep in mind that the reduced advice requirements turn not only on the length of the lease (under seven years) but on whether or not it was granted for a premium.[530] The reduced advice requirements apply when a charity, as landlord, is granting a short lease for a periodic rent (and not for a one-off initial premium). Relevant advice will be on the market rent, which is something on which (for example) an estate agent might be able to provide suitable advice.

7.158  Contrast this with the surrender or assignment of a lease, which involves a charity, as tenant, divesting itself of the lease. This requires identifying the capital value of the charity’s interest in the property, which might be reflected in a premium or reverse premium. This is a more complicated valuation than determining the market rent.

7.159  For example:

(1)        Lease A is granted for a term of six years at an annual rent of £5,000 (the market rent for the property). The reduced advice requirements for short leases apply.

(2)        Lease B is granted for a term of six years, for a premium of £30,000 and a nominal annual rent (or ground rent) which does not represent the market value of the property. The reduced advice requirements do not apply.

7.160  Taking Lease A, despite the lease being granted at market rent and without the payment of a premium, on surrender or assignment a premium might nevertheless be paid. This brings the case closer to Lease B and the associated complexities of having to value the premium. The following scenarios illustrate some potential complexities in valuing a premium.

(1)        There may have been a rise in rental values since the lease was granted so that the market rent at the time of assignment is significantly higher than at the time of the grant. The assignment (on the same terms as the grant) will be beneficial to the assignee, who would otherwise have to pay the higher market rent to obtain the grant of an equivalent new lease. The charity tenant therefore has a valuable asset, and would ordinarily expect the assignee to pay a premium to reflect that fact.

(2)        In the reverse scenario, where there has been a fall in rental values, the lease is a liability to the charity: it is paying more than it would on the grant of an equivalent new lease, as would be any assignee. The charity would therefore ordinarily be expected to pay a reverse premium to the assignee to reflect that fact.

(3)        In either scenario (1) or (2) if the charity wished to surrender its lease a similar premium would be expected to be paid by or to the landlord.

7.161  These are just a few examples of the complexities which could arise on assignment and surrender. Others could include where the charity under the lease has security of tenure under Part II of the Landlord and Tenant Act 1954 which would permit it to request a new lease at the end of the term; or where the lease contains a rent-review clause.

7.162  We think that these potential complexities on assignment and surrender of leases (including short leases) – which do not arise when a charity as landlord grants a short lease – justify application of the default rule that advice from a designated adviser should be obtained.[531]

Legacy cases

7.163  We noted dissatisfaction with the application of Part 7 to land which is left to charities in a will in paragraphs 7.59 to 7.62 above. There was a call from consultees to remove legacy cases from the scope of the Part 7 regime altogether. We heard from the Institute of Legacy Management and Cancer Research UK who impressed on us the importance of encouraging (or at least not discouraging) legacy gifts to charities. They were concerned that an overly burdensome legal regime could make charity legacy donations less attractive to potential donors.

7.164  The concerns expressed by the Institute of Legacy Management and Cancer Research UK led us to consider recommending reform specific to legacy cases. However, we ultimately decided against such tailored reform, concluding that our other recommendations (in particular with regard to multiple beneficiaries, on which see paragraph 7.177 below) would alleviate the majority of concerns. In reaching this conclusion we have tried to balance the concerns raised with us in respect of legacy cases against the need to protect charities from dispositions of land at an undervalue which in themselves pose a reputational risk to the charity sector.

The problem

7.165  We noted above that in legacy cases the beneficiary charities rarely become the legal owners of property left under a will, meaning that their interest does not appear on the register of title. There were four main criticisms of the application of Part 7 to legacy cases.

(1)        We have been told that in practice there is significant non-compliance with Part 7 in legacy cases, sometimes intentionally but also through inadvertence. This stems from the lack of a restriction on the register which would usually prevent completion of a disposition of (registered) charity land without a certificate of compliance with Part 7.

(2)        Part 7 applies inconsistently to legacy cases. Compliance with Part 7 is required where the property being disposed of is “held by or in trust for a charity”. That in turn depends on the form of the gift (whether it is a specific bequest or a residuary gift) and how the personal representatives deal with the property in administering the estate (whether they transfer or “appropriate”[532] the property to the charity before sale).

(3)        Part 7 applies inconsistently in cases where a property (or a residuary gift containing a property) is left to multiple beneficiaries, including a charity or charities. As noted above, while these problems usually arise in legacy cases because property is often left by will to multiple beneficiaries, it is not limited to such cases.

(4)        The Institute of Legacy Management and Cancer Research UK argued that surveyors’ reports obtained to comply with Part 7 provide no added value in the legacy context. The reports are usually sought after the personal representatives have already accepted an offer on the property and the report essentially serves as a rubber stamp on a pre-agreed transaction. This is particularly the case for charities, such as Cancer Research, who have experienced legacy teams in house who verify the terms of proposed sales of legacy property.

Options for reform

7.166  Our discussions with stakeholders revealed two potential reform options to address the issues in legacy cases.

(1)        The Institute of Legacy Management advocated for legacy cases to be exempt from Part 7 altogether. While we can see the strength of this argument, we are not convinced that it would be practical or appropriate.

(a)        First, there is a risk that removing legacy cases from Part 7 would create a lacuna in the legal protection of charity land. A decision to sell before appropriation is made by the personal representatives,[533] so their general duties would apply to ensure that a reasonable price is obtained. However, after appropriation, the decision to sell rests with the charity and the duty to obtain the best terms falls on the charity trustees. Part 7 is designed to ensure that charities comply with that duty. To remove legacy cases from Part 7 would leave disposals of charity land (post-appropriation) unprotected by (1) the duties of personal representatives and (2) the Part 7 duties on charity trustees.

(b)        Second, and related to the first point, not all charities receiving legacies are large charities with dedicated and professional legacy officers. We are conscious that we have heard from the Institute of Legacy Management, which represents the largest legacy-receiving charities, and whose own internal procedures may ensure that legacy property is sold on the best terms. But many charities receiving legacies will be small with inexperienced trustees; to exclude disposals of such property from Part 7 would remove the existing protection of charity land.

(c)        Third, many of the criticisms of Part 7 in the legacy context were made by other consultees in the broader context of dispositions of charity land.[534] It is hard to justify an exemption in the legacy context as distinct from the broader context.

(d)        Fourth, the existing exemptions from Part 7 generally involve cases where there is alternative protection of charity land (for example, a transaction which is authorised by the Minister under the Universities and College Estates Act 1925, or sale by a liquidator who is subject to separate duties which should ensure charity land is not sold at an undervalue).

(2)        We considered creating an exemption from Part 7 in cases where the charity is not the decision maker (because the disposal is being made by the personal representative without the consent of the charity trustees). We foresaw various problems with this approach.

(a)        From a practical perspective, it would be difficult to define when a charity is making the decision to dispose of the property.

(b)        The Institute of Legacy Management told us that, in practice, a charity is involved, or making the decision, in the vast majority of legacy cases. Therefore, a decision-based application of Part 7 risks expanding the regime to cases to which it would not currently apply.

(c)        We also heard from stakeholders that charities want to be involved in the decision to dispose of land left to them in a will. A decision-based approach could encourage personal representatives to exclude charities from decisions in order to avoid the burdens of complying with Part 7.

7.167  For these reasons we do not recommend any statutory exemptions from Part 7 to cater for legacy cases. Instead, we make four responses to the concerns of stakeholders in relation to legacy cases.

(1) Clarifying the legal position: application of Part 7 in legacy cases

7.168  Part 7, in its current form, applies in all situations where land is “held by or in trust for a charity”. In the legacy context, therefore, Part 7 applies in any situation where legal title or a beneficial interest has been transferred to a charity by the personal representatives by conveyance, assent or by appropriation (deemed or express). It has been suggested that Part 7 applies when property has been specifically devised to a charity, even before the personal representatives have assented or appropriated the property to the charity. Since a legatee does not have a beneficial interest in the property until assent or appropriation,[535] we do not consider the land is “held by or in trust for a charity” within the meaning of Part 7. In so far as charities currently seek to comply with Part 7 in such cases, we do not think that they need continue doing so.

7.169  We are not making a recommendation to address deemed appropriation cases where personal representatives sell land without the charities’ knowledge. Following further discussion with Cancer Research UK, who raised this issue, we believe it may be an academic question which rarely arises in practice. Furthermore we do not think these cases will create real practical problems since the charity’s non-compliance is not blameworthy (from the charity’s reputational point of view) and does not invalidate the sale (from the purchaser’s point of view).

(2) Effect of other proposed reforms to Part 7 on legacy cases

7.170  In this chapter, we make various recommendations to reform the Part 7 regime to reduce the burden and expense of compliance, which was a major criticism of the regime in general. We hope that those recommendations will be beneficial in legacy cases. Our recommendations would simplify the Part 7 advice requirements, expand the category of designated advisers, enable charities to rely on in-house expertise (if available) to comply with Part 7, and enable greater delegation of compliance with Part 7.

(3) Tailored dispensation from the Part 7 requirements

7.171  We understand that some large charities receive a large number of legacies and they have internal processes – based on years of experience – to ensure that good value is obtained when those properties are sold. We therefore understand their frustration in having to comply with an additional layer of process in Part 7, which is aimed at ensuring the same outcome. We reject above a power to dispense with the Part 7 advice requirements, as well as other exemptions based on the size of charity or the type or value of the property. We have concluded that the value of Part 7 in protecting inexperienced charities from dispositions at an undervalue outweighs the burden on some charities that do not need this protection. This conclusion applies equally to legacy cases.

7.172  Nonetheless, we mention above the ability of charities to apply to the Charity Commission for dispensation from the Part 7 advice requirements (paragraphs 7.143 and 7.144. We think that this could be beneficial in the legacy context, particularly for larger charities which may be able to demonstrate to the Charity Commission that they have sufficient internal safeguards that can replace the protection provided by Part 7. It might be that a representative group, such as the Institute of Legacy Management, could devise – in conjunction with the Charity Commission – a model application for dispensation which could then be used by Institute of Legacy Management members.

(4) Reform to Part 7 for multiple beneficiary cases

7.173  We set out below our recommendation for reform to Part 7 which will address all cases in which land is held by or in trust for more than one charity, or for both a charity and a non-charity. This recommendation will alleviate a number of concerns which arise in the legacy context.

Recommendations for reform of the advice requirements

7.174  Having analysed numerous criticisms and options for reform we now set out our final recommendations for reforming the Part 7 advice requirements.

Recommendation 14.

7.175  We recommend that:

(1)        the category of designated advisers under Part 7 of the Charities Act 2011 be expanded to include fellows of the National Association of Estate Agents and fellows of the Central Association of Agricultural Valuers;

(2)        qualified charity trustees, officers and employees be able to give advice under sections 119(1)(a), 120(2)(a) and 124(2) of the Charities Act 2011; and

(3)        the Charities (Qualified Surveyors’ Reports) Regulations 1992 be replaced with regulations that require designated advisers to provide:

(a)        advice concerning:

(i)          what sum to expect (or, if an offer has already been made, whether the offer represents the market value of the land);

(ii)         whether (and, if so, how) the value of the land could be enhanced;

(iii)        marketing the land (or, if an offer has already been made, any further marketing that would be desirable);

(iv)       anything else which could be done to ensure that the terms of the transaction are the best than can reasonably be obtained for the charity; and

(b)        a self-certification by the adviser that they:

(i)          have the appropriate expertise and experience to provide the advice that is required;

(ii)         do not have any interest that conflicts, or would appear to conflict, with that of the charity; and

(4)        the statutory requirement that charity trustees advertise the proposed disposition in the manner advised in the surveyor’s report be removed.

 

7.176  Our recommended reforms to the Part 7 advice requirements would be given effect by implementation of:

(1)        clauses 20, 21 and 22 of the draft Bill;

(2)        the draft Charities (Designated Advisers) Regulations at Appendix 5; and

(3)        the draft Charities (Designated Advisers’ Reports) Regulations also at Appendix 5.

Multiple beneficiaries

Policy underlying Part 7

7.177  In considering criticisms of the advice requirements we discussed issues which arise in complying with Part 7 where property is held by or in trust for multiple beneficiaries, one or more of which is a charity (both in the legacy context and otherwise). In considering how to address these issues, it is noteworthy that the policy aim underlying the general prohibition on dispositions of charity land is to protect a particular charity’s assets against a disposition at an undervalue by its own trustee(s).

7.178  This aim is not engaged where land is held by or in trust for several beneficiaries (of which one or more are charities) because it is not any individual charity’s asset that is being disposed of by its charity trustees alone. Several entities have an interest in the property in question which will ultimately be disposed of by the trustee of the land, who must, according to their general duties, act in the best interests of the beneficiaries.

7.179  Furthermore, it seems odd to force charity trustees to seek and consider advice on the terms of a disposition which they do not ultimately have control over because the power of sale lies with the trustee of the land. Even if the charity is the trustee, or one of the trustees, of the land (and therefore has complete, or some, control of the disposal), we do not think that it is appropriate to subject the charity to the Part 7 regime. In such a case, the charity should be making a decision in its capacity as the trustee of the trust of land, not in its capacity as the owner for charitable purposes of part of the beneficial interest under that trust of land. Part 7 is focussed on the best terms for the charity,[536] but where land is held on trust for multiple beneficiaries the disposal decision by the trustee(s) should be about what is in the best interests of all the beneficiaries, not about what is in the best interests of one of those beneficiaries.

Clarifying the definition of “charity land”

7.180  We have therefore concluded that cases where land is held by or in trust for multiple beneficiaries should be excluded from the Part 7 regime altogether. In order to do so, we recommend clarifying the definition of “land held by or in trust for a charity” which is currently subject to conflicting interpretations on this issue. Our recommendation is that the restrictions on dispositions of land should apply only to land (or an interest in land) held beneficially by a charity solely for its own benefit (if it is a corporate charity) or in trust solely for that charity (if it is an unincorporated charity). The Part 7 regime would not, therefore, apply when the land being disposed of is held on trust for two or more beneficiaries, some or all of whom are charities.

7.181  The result of our recommendation would be that:

(1)        Part 7 would continue to apply where:

(a)        a charity owns land both legally and beneficially;

(b)        a trustee holds land on bare trust for a single charity;

(c)        land is left to a charity in a will and the executor has appropriated the land to a charity; or

(d)        a charity owns land as one of several tenants in common and it is disposing of its beneficial interest in the land (that is, its percentage share of the land).

In each of these cases, the charity controls the disposal, and the charity can sensibly be required to comply with Part 7 by obtaining advice on the disposal.

(2)        Part 7 would not apply where:

(a)        a charity is one of several beneficial joint tenants of land and the entirety of the land is being disposed of by the trustee of the land;

(b)        a charity is one several tenants in common of the land and the entirety of the land is being disposed of by the trustee of the land;

(c)        land it left to, and appropriated or assented to, multiple beneficiaries in the execution of a will, one or more of which is a charity; or

(d)        a trustee holds land on trust for multiple beneficiaries, one or more of which is a charity.

In each of these cases, the charity does not (alone, at least) control the disposal, and it is not appropriate to require the charity to obtain advice under Part 7 on the disposal.

7.182  Our recommendation would remove the concern that an adviser must act “exclusively for the charity” because Part 7 will only be engaged in cases where the property or interest in a property being disposed of is held solely by or in trust for a single charity. Similarly, it removes potential problems where the best terms for one charity are not the best terms for another. Such issues will now fall to be addressed by the general law governing trusts of land which is better suited to resolving such disputes.[537]

Recommendation 15.

7.183  We recommend that Part 7 of the Charities Act 2011 only apply where land is solely held by, or held in trust solely for, a single charity.

 

7.184  Clause 17 of the draft Bill would give effect to this recommendation.

Connected persons

Should the provisions concerning connected persons be retained?

7.185  Part 7 prohibits the disposal of charity land to any person falling within the definition of “connected person”, without the consent of the Charity Commission (or the court).[538] There is no similar prohibition on the creation of a mortgage in favour of a connected person.

7.186  In the Consultation Paper, we said that the general law already prevents charity trustees from entering into transactions with people with whom they are associated, since to do so would amount to a breach of their fiduciary duties.[539] That is why there is no similar statutory regime for the disposal of other assets such as personal property, shares, or intellectual property to connected persons. Such disposals are prevented by the general law. Disposals in breach of that prohibition are not void, but could be avoided – like any other disposal in breach of trust – if made at an undervalue or otherwise not in the interests of the charity. And if trustees wish to make such disposals, in the absence of an express power in their governing document, they could seek Charity Commission authorisation under section 105 of the Charities Act 2011. The provisions about connected persons in Part 7 are therefore arguably unnecessary.

7.187  Further, we said that the connected persons provisions may be unhelpful since they may encourage a belief that trustees are safe to dispose of property to someone with whom they are associated but who does not fall within the statutory definition of “connected person”. But just because a disposal is not to a “connected person” does not mean that trustees are safe to make the disposal if there would otherwise be a potential conflict of interest. For example, if the disponee is an aunt or uncle, or a person in negotiations with a trustee for a proposed business venture, they would not be a “connected person” but a disposal to such a person may be a breach of fiduciary duty.

7.188  Whilst we acknowledged the benefits of the regime, we said that the Charity Commission already produces general guidance on managing conflicts of interest, which applies to all charity transactions,[540] and that there was no need for a statutory regime governing connected persons in the case of land disposals. We therefore provisionally concluded that the provisions concerning connected persons should be repealed.[541]

7.189  There was a lack of consensus amongst consultees on this question. The CLA effectively summarised the issue:

We think the central question is whether it is considered necessary to have a separate “alert” to charity trustees in particular circumstances and, if so, how such “alert” process should be effected, without detracting from the usual duties applicable to charity trustees.

7.190  Consultees who agreed with our proposal to repeal the provisions pointed to the gaps in the current definition of connected person and to the risks of the regime creating a “tick-box” mentality. Consultees who disagreed were concerned that trustees would not sufficiently understand the general law, pointing to the benefits of clear provisions in statute rather than “having to be aware of the nuances of the general law”.[542] They feared that there would be an increase in the number of transactions where conflicts were not properly managed.

7.191  Consultees did not give examples of the provisions failing to capture transactions where a conflict existed. Consultees’ criticisms of the regime were based on the definition of connected persons being unnecessarily wide and the time that it takes to obtain Charity Commission consent to a transaction with a connected person.

7.192  Some alternative suggestions for reform were made by consultees.

(1)        It was suggested that the trustees should be required to certify in the Part 7 certificate that the transaction did not involve a conflict of interests. This suggestion is similar to the proposal that the advice requirements should be replaced with a Part 7 certificate confirming that the trustees had complied with their duties (see paragraphs 7.111 to 7.113). For the reasons we gave there, we do not agree with the suggestion.

(2)        It was suggested that the trustees should be required to certify in the Part 7 certificate that they had had regard to Charity Commission guidance concerning conflicts of interest. Again, this suggestion is similar to the proposal that the advice requirements should be replaced with a Part 7 certificate that the trustees have had regard to guidance on the disposal of land (see paragraphs 7.114 to 7.116). For the reasons we gave there, we do not agree with the suggestion.

(3)        It was suggested that the list of connected persons could include an additional category of persons, namely anyone with whom a transaction would present a conflict of interests. The difficulty with this approach, in our view, is that it undermines the simplicity of the connected persons definition.

7.193  We have concluded that the connected persons provisions in Part 7 should be retained. The requirement for Charity Commission consent provides a statutory scheme to manage conflicts of interest by capturing a wide range of transactions where a conflict might arise. It ensures that, in those defined cases, the charity obtains the best terms in respect of such transactions. The provisions are a helpful alert and they slot neatly into the general prohibition on land disposals, enforced by the mechanism of the restriction on the register. The provisions are not a complete statement of the law; they round some corners. But they are simple, they are generally easy to apply, and they draw attention to the importance of managing conflicts of interest. We think it important, however, for the Charity Commission’s guidance to emphasise that, just because the person to whom a proposed disposition is to be made is not on the statutory list of connected persons does not mean that there is no conflict of interest.

7.194  There is no equivalent regime for mortgages to connected persons, or the acquisition of land from connected persons. A mainstream mortgage with a commercial lender is unlikely to present conflict issues. A mortgage with a connected person would be rare and trustees are likely already to appreciate that it would be an unusual transaction. We therefore think that mortgages with connected persons are sufficiently covered by trustees’ general duties without the need to extend the connected persons provisions; creating connected persons provisions for mortgages would be disproportionate regulation to cater for a very rare occurrence. As for the acquisition of land, there is no mechanism equivalent to the restriction on the register to which connected persons provisions could be attached; we think that the acquisition of land from connected persons should, like all other transactions, be left to the general law and to existing Charity Commission guidance on conflicts of interest.

7.195  In conclusion, we are not inclined to extend the connected persons regime to mortgages, but on balance we favour retention of the existing provisions. While we do not think that we would include the connected persons provisions if we were designing Part 7 from scratch, we are concerned that removing them now might suggest that there has been a change in the law and that dispositions to such persons are permitted. We are also conscious that smaller charities may find it useful to have a statutory list of persons to whom transactions are prohibited as an alert to potential conflicts of interest.

The definition of connected persons

7.196  In the event the connected persons provisions were retained, the Consultation Paper proposed that the definition should be changed in two ways. As a preliminary point, we should emphasise that transactions with connected persons are not completely prohibited. Rather, they require Charity Commission consent.

Wholly-owned subsidiaries

7.197  Where a charity makes a disposal to a wholly-owned trading subsidiary, the subsidiary seems to fall within the definition of “connected person” and the Charity Commission’s consent to the disposal is therefore required (although Bircham Dyson Bell LLP did not interpret the existing definition as including a wholly-owned subsidiary). Such disposals could occur during a restructuring process, or where a charity owns a retail unit and wishes to grant a lease to its trading subsidiary which will operate a retail business from the unit.

7.198  In the Consultation Paper, we said that including a wholly-owned subsidiary within the definition seemed unnecessary, given that any benefit to the subsidiary from a disposal will be enjoyed by the charity as its owner.[543] We proposed that wholly-owned subsidiaries should not fall within the definition of “connected persons”.[544]

7.199  Almost all consultees agreed. Some raised concerns, which fall into two broad categories. First, Stone King LLP noted the possibility of land being transferred to a wholly-owned subsidiary and then the subsidiary becoming a development vehicle or its shares being sold. They added that the directors of a subsidiary are often officers and not trustees, so the trustees can lose sight of the subsidiary’s activities. We acknowledge this concern, which ought to be given careful consideration by trustees when they are deciding whether it would be in the charity’s interests to transfer land away from the charity into a subsidiary company. The trustees would have to weigh these and other risks against the benefits of operating a trading subsidiary.[545] But ultimately, in our view, the connected persons provisions in Part 7 are not intended to guard against such future risks, but rather to prevent persons with interests that potentially conflict with the interests of the charity from acquiring charity land on unsuitable terms.

7.200  Second, some consultees emphasised that transactions with subsidiaries should still be for market value. The Charity Commission told us that there can be a lack of understanding about the distinction between charities and their trading subsidiaries, with the result that those making the decision to dispose of the charity’s land sometimes consider the subsidiary’s interests in place of the charity’s, or fail to manage conflicts of interest appropriately.[546] The requirement for Charity Commission consent can therefore prevent disposals of charity land to subsidiaries on terms that are not the best that can be obtained by the charity. In addition, the requirement for consent can allow the Commission to identify the minority of disposals that are illegitimate.

7.201  The effect of the current regime is that charities must seek the consent of the Charity Commission to all disposals to subsidiaries, which takes time and therefore delays transactions, even though the majority of such disposals are unexceptionable and so are ultimately approved by the Commission. We think it is disproportionate to require all disposals to subsidiaries to be delayed pending a Charity Commission decision for the sake of capturing the minority of transactions which are problematic. We have concluded that disposals of land to wholly-owned subsidiaries should not require Charity Commission consent, but that trustees should instead be required to notify the Commission of such disposals after they have taken place (and within 14 days of taking place). As we go on to explain, we think that this approach is a more proportionate way of seeking to prevent inappropriate transactions.

7.202  Removing wholly-owned subsidiaries from the definition of connected persons would leave in place the requirement under Part 7 to obtain advice on the value of the land from a designated adviser. Moreover, there would remain a requirement for the charity trustees to be satisfied that the terms of the disposition “are the best that can reasonably be obtained for the charity”.[547] We think that both the Charity Commission’s guidance for trustees disposing of land,[548] and guidance for designated advisers issued by their professional regulators,[549] should include an explanation that this general requirement still applies, even if a disposal is to a wholly-owned subsidiary.

7.203  We think that, by requiring charities to notify the Charity Commission of disposals to wholly-owned subsidiaries, charities will be incentivised to ensure that transactions with subsidiaries are at arm’s length because they will know that the transaction is subject to potential scrutiny by the Commission. And if disposals are somehow inappropriate or disadvantageous for the charity, the Charity Commission could exercise its regulatory powers in respect of the charity, which could include steps to seek to reverse the transaction.

Employees of a charity

7.204  Some consultees commented that the inclusion of employees of a charity caused problems, particularly when a charity wishes to provide an employee with accommodation by way of an assured shorthold tenancy.[550] We agree that the provision of accommodation, including at below market rent, might be in the interests of the charity by facilitating the employee’s work. But there are equally potential situations when an overbearing senior employee of a charity might seek to persuade the trustees to dispose of land to him or her (or a family member) at an undervalue.

7.205  We do not therefore think that employees should be excluded from the definition. Instead, we recommend that an exception be made in respect of residential tenancies granted to employees for a term of one year or less. For situations not falling within this exception we would encourage charities that find themselves routinely providing staff accommodation (or making other disposals to employees of the charity) to seek general authorisation from the Charity Commission within appropriate limits, such as:

(1)        authorisation in respect of particular properties;

(2)        authorisation in respect of particular transactions (for example, leases of up to a certain length); and/or

(3)        a requirement for a decision to be made by non-conflicted trustees that the disposal is in the interests of the charity.

Family members

7.206  The CLA pointed out that, whilst step-children were included, step-siblings were not. We were inclined to expand the definition of connected persons to include step-relationships. However, in exploring this issue further we discovered that the Charities Act is silent as to whether a step-relationship must be by marriage (or civil partnership) or includes by cohabitation. We also discovered some inconsistencies in the current list of connected persons in that some relationships are included but the reciprocal relationship is not, for example, a sibling’s spouse is a connected person, but a spouse’s sibling is not. There are also some arguably close family relationships that are not included in the list: cousins, aunts, uncles, nieces and nephews.

7.207  Various other Acts include inconsistent statutory definitions of connected persons. We have concluded that there are inherent difficulties in setting out a comprehensive list of close family relationships in primary legislation. Family structures vary enormously and while in one case a trustee’s step-grandchild-in-law might be very close to them, raising conflict of interest issues, in another they may be completely estranged and far less likely to cause a conflict of interest than a disposal to, say, a close friend.

7.208  As we explained above, the connected persons provisions contained in the Charities Act are not an exhaustive list of all persons to whom disposing of property may constitute a breach of trust. The list is useful as an alert to trustees of certain cases where they will need to justify the disposition to the Charity Commission and the general law governing trustees’ duties exists to fill in any gaps.

7.209  We do however recommend that the connected persons provisions be capable of amendment by secondary legislation.[551] We hope that this will be a more suitable vehicle for making changes; if particular problems arise, the definition can be amended to address them, or it would be possible to undertake a focussed review in order to try to produce a more comprehensive, modern list of relevant family relationships.

7.210  Finally, the connected persons provisions currently refer to an “illegitimate child”.[552] This language is outdated and no longer necessary as section 1 of the Family Law Reform Act 1987 provides that all statutory references to a relationship between two persons shall be construed without reference to whether or not the father and mother of either of them have ever been married. We therefore recommend that it be omitted.

Other suggestions

7.211  Two further suggestions to amend the definition of connected persons were made by consultees.

7.212  First, some consultees wanted to remove donors of land from the definition. We think that conflicts of interest, and a risk of disposals at an undervalue, arise in the case of disposals to donors (and their families) and we think that Charity Commission oversight of such transactions should continue.

7.213  Second, the definition includes “a trustee for the charity” who is not also a “charity trustee”.[553] We said in the Consultation Paper that this wording includes a holding trustee and others who hold legal title to property, but must comply with the directions given to them by another such as the charity trustees. We said that where a third party holds legal title for a charity subject to the direction of the charity trustees, the risk is minimal, and they should be excluded from the definition. Whilst most consultees agreed, some pointed out that a trustee for the charity could have significant influence and there was therefore potential for land to be sold to such a person at an undervalue. For example, Bates Wells Braithwaite said that a national charity that acts as a holding trustee for properties of local charities should be covered by the connected person provisions since it might have significant influence over the operations of those local charities. We agree that in such cases there is a real risk of conflicts of interest resulting in transactions at an undervalue and we therefore recommend retention of “a trustee for the charity” in the definition of connected persons.

Recommendation 16.

7.214  We recommend that:

(1)        the connected persons regime in Part 7 of the Charities Act 2011 be retained;

(2)        the definition of connected persons should:

(a)        exclude employees where the disposal is the grant of a short residential tenancy;

(b)        exclude wholly-owned subsidiaries;

(c)        be capable of amendment by secondary legislation; and

(d)        omit the reference to “illegitimate child”;

(3)        disposals of land to wholly-owned subsidiaries should be notified to the Charity Commission; and

(4)        the Charity Commission’s guidance for trustees disposing of land, and guidance for designated advisers, should make clear that disposals to wholly-owned subsidiaries should be for the best terms that can reasonably be obtained for the charity.

 

7.215  Clauses 25, 42, and 43 of the draft Bill would give effect to this recommendation.

Delegation

Obligations on the charity trustees

7.216  Part 7 imposes various requirements on transactions involving charity land. For small charities, the requirements will be complied with by the charity trustees personally. For larger charities, many requirements can be complied with by the charity’s staff. For example, the obligation on the charity trustees to advertise a disposition in accordance with a RICS surveyor’s advice[554] can be satisfied by the charity’s staff ensuring that the advertising is carried out. Other obligations might suggest that they must be performed by the charity trustees personally:

(1)        the charity trustees must obtain “and consider” a report from a RICS surveyor;[555]

(2)        the charity trustees must “reasonably believe” that the RICS surveyor has the appropriate ability and experience to value the land;[556]

(3)        the charity trustees must “decide that they are satisfied” that the terms of the disposal are the best that can reasonably be obtained;[557] and

(4)        the charity trustees “must certify” in the conveyance that the Part 7 requirements have been complied with.[558]

7.217  Some consultees commented that these decisions should be capable of delegation by the charity trustees to a sub-committee of trustees or to employees of the charity. Trowers and Hamlins LLP said that some charities with large land holdings are routinely acquiring and disposing of land; “smaller, routine transactions ought to be capable of delegation in order to permit the trustees to remain focussed on matters of strategic importance”. The Institute of Legacy Management reported that 86% of respondents to its survey of its members thought that legacy officers were better placed than trustees to make decisions about the sale of legacy property, and 98% of respondents said that trustees should be able to delegate all decisions relating to the sale of legacy property.[559] Most respondents said that, in practice, decisions were already delegated and “the involvement of trustees in property disposals is kept to a minimum”.

7.218  We agree that charity trustees should have the flexibility to delegate the four matters set out in paragraph 7.216. We do not think that the Charities Act currently requires trustees to comply with those matters personally. We appreciate consultees’ concerns that the position is currently unclear, but inserting a provision to address the point would be difficult. As we consider that delegation is already possible, we would not want reform to cast doubt on the validity of delegations which have already taken place. We are also aware of many other instances, outside Part 7, where the Act imposes duties on trustees, some of which require them to comply personally, and others which would allow for delegation. Any express provision addressing the point risks casting doubt on the permissibility of delegation in these other contexts.

7.219  We do not think that statutory reform is necessary to allow trustees to delegate the decisions in para 7.216 above; they can already be delegated.

The Part 7 certificate

7.220  A related point raised by consultees was uncertainty as to who was required, or permitted, to give the Part 7 certificate both in respect of corporate and unincorporated charities.

7.221  Bircham Dyson Bell LLP noted an inconsistency under the current regime in the case of disposals by corporate charities. The charity as vendor must execute the conveyance, but Part 7 requires the charity trustees to give the certificate. In practice, that might not matter if the trustees can delegate the giving of the Part 7 certificate to two trustees under the general delegation power in section 333 of the Charities Act 2011. This would mean that the two directors of the charity who sign the conveyance on behalf of the charity[560] can also be authorised to sign the Part 7 certificate. But there is some uncertainty as to whether the provision of a Part 7 certificate can be delegated under section 333.[561] There is further uncertainty as to whether the provision of a Part 7 certificate can be delegated under normal company law rules.[562]

7.222  We agree that, in the case of a corporate charity, the Part 7 certificate should be given by the charity and not by the charity trustees. And as explained above, we think that the execution of a Part 7 certificate, whether by a corporate or unincorporated charity, should be capable of being delegated.

7.223  Our recommendations in relation to Part 7 certificates below resolve this issue by removing the phrase “the charity trustees must certify” from the relevant provisions in Part 7; instead, a statement of compliance would be included in the conveyance, which would be executed in the usual way by the charity, the charity trusteed, or their delegates. We therefore make no specific recommendation here. We hope that our recommendations below will alleviate much of the concern regarding delegation more generally as the question of who must provide a Part 7 certificate is one of the instances in which the lack of clarity causes the most difficulties in practice.

Part 7 certificates

The “Bayoumi gap”

7.224  The question in Bayoumi v Women’s Total Abstinence Educational Union Ltd (“Bayoumi”),[563] in brief, was whether a purchaser in good faith under a contract for the sale of land had the benefit of the protection in section 122(6) of the Charities Act (see paragraph 7.44) when the charity trustees had not complied with the statutory requirements. The answer was that the purchaser was not protected. So whilst purchasers are protected in the case of dispositions (that is, the actual sale of land),[564] the effect of the decision in Bayoumi is that there is no equivalent protection for contracts for sale.

7.225  The precise facts in Bayoumi cannot arise again because the relevant statutory provisions (which made a contract unenforceable) have been amended. But the fact remains that if the requirements of Part 7 have not been complied with by the time a contract is made, a purchaser will not be able to enforce it. Essentially the contract will be frustrated because of the failure to comply with the Part 7 requirements. The statute does not provide for a certificate to be given in the contract and any such certificate is not deemed to be correct. Accordingly purchasers who contract to buy, or to take a lease of, land from a charity have to check that the statutory requirements have been complied with. This is onerous, and causes delay and expense.

7.226  We have recommended above the retention of the general prohibition on disposing of charity land such that non-compliance will render a transaction void. The Consultation Paper proposed that, under such a regime, a purchaser should be protected by a certificate, deemed conclusively to be correct, in the contract that the statutory requirements have been complied with.[565] No consultee disagreed. We remain of the view that a purchaser should be protected by a certificate in a contract as well as in a disposition. There is an existing requirement on charities to include certain statements in contracts,[566] and we think that there should be an additional requirement to include a statement that the Part 7 requirements have been complied with.[567] Part 7 should then include equivalent protections for purchasers (a) when such statements are included in contracts, and (b) when such statements are not included but the purchaser has acted in good faith.[568] We agree with those consultees who said that such a statement in a contract should be capable of being given by the person who is authorised by the charity to sign the contract on its behalf: similarly to the provision of a statement in a conveyance; see paragraph 7.233 above.

Recommendation 17.

7.227  We recommend that:

(1)        charities be required to include in a contract for a disposition of charity land a statement that the requirements of Part 7 of the Charities Act 2011 have been complied with; and

(2)        a contract for a disposition of charity land should be enforceable by a purchaser if:

(a)        such a certificate has been given in the contract; or

(b)        such a certificate has not been given but the purchaser has acted in good faith.

 

7.228  Clause 24 of the draft Bill would give effect to this recommendation.

Designated land

7.229  We explained the requirements for public consultation for dispositions of designated land in paragraph 7.25 and following above. The consultation requirements for designated land seek to ensure that local public opinion is taken into account by trustees before they dispose of such land and ensure some transparency in their dealings. In the Consultation Paper, we said that the requirement was arguably unnecessary since a charity should be considering how its land can best be used to serve its charitable purposes, rather than public opinion about how it should deal with its land (although we noted that the latter may be relevant to the former). We acknowledged that disposal of designated land could be controversial and that consultation could have a valuable role, but we thought that trustees should be left to decide whether to consult as part of their decision-making process rather than being required to do so by statute. We therefore proposed that the consultation requirements concerning designated land in section 121 be repealed.[569]

7.230  The majority of consultees agreed. Some noted that advertising rarely elicits any response, let alone any response that changes the trustees’ decision. It was also criticised for being an additional administrative cost, indiscriminate, toothless, and “more honoured in the breach”.[570] Conversely, some consultees strongly defended the requirement emphasising the importance of public consultation concerning community assets. We acknowledge those concerns, as well as the benefits of public consultation in some cases, but we remain of the view that a general statutory requirement to consult is unnecessary and burdensome for charities. As part of trustees’ decision about whether and how to dispose of designated land (like any disposal of land) they should consider whether they should consult with the community or other interested people, but we do not think that should be a statutory requirement.

Recommendation 18.

7.231  We recommend that the requirements in section 121 of the Charities Act 2011 concerning advertising proposed disposals of designated land and considering any responses received should be abolished.

 

7.232  Clause 19 of the draft Bill would give effect to this recommendation.

Acquisition of land

7.233  In the Consultation Paper, we asked whether the Part 7 advice requirements should be extended to the acquisition of land, since charities are just as much at risk of purchasing land at an overvalue as they are of selling land at an undervalue. Indeed, some consultees commented that the risks on acquisition were potentially more significant since acquiring land will often involve an ongoing liability to maintain the property. We pointed out that the Charity Commission already strongly recommends charities to follow the Part 7 regime when acquiring land. We asked consultees whether a flexible advice requirement, as we proposed (but have now ultimately rejected) for the disposal of land should apply to the acquisition of land.[571]

7.234  The majority of consultees said that if a flexible advice requirement was introduced for disposals of land, they supported the same being applied to acquisitions of land for consistency. Some, however, emphasised that they did not support the extension of the existing advice requirements in Part 7 to the acquisition of land, on the basis that they are too burdensome.

7.235  Some consultees commented that the existing prohibition (subject to obtaining appropriate advice) on dispositions could be enforced easily by the current practice of restrictions being entered on the register of title, whereas there is no similar practical means to enforce a prohibition (subject to dispensation following obtaining appropriate advice) on the acquisition of land by charities. That very practical consideration led them to conclude that advice requirements should not be imposed in respect of the acquisition of land. For example, Withers LLP said that, whilst it would be “simple … to mirror the certification requirements … so that they have to appear in the transaction documents”, in the absence of the restriction mechanisms, it would not be such a practical safeguard.

7.236  Despite the logic of extending the regime to acquisitions, the Charities’ Property Association doubted it was appropriate owing to the risks of charities’ offers being declined if the transaction will take longer; if a vendor wishes to sell land quickly and knows that a disposal to a charity will take longer, the vendor might instead choose to transact with an alternative buyer. In addition, they raised concerns about how advice could be obtained if property was being purchased at auction; the cost of commissioning a report in advance would be wasted if the charity was then outbid. Whilst a light-touch regime for acquisitions would not affect most members of the Charities’ Property Association, “if a new regime were so light-touch that charity trustees generally could decide not to take external advice as a matter of course, would there be any point in having such a requirement at all?”

7.237  We agree with consultees’ comments about the practicality of enforcing an advice requirement in respect of the acquisition of land in the absence of the restriction in the register as an enforcement mechanism. We also accept concerns about charities facing difficulties in bidding against other potential purchasers who are not subject to advice requirements.

7.238  We have recommended retention of the Part 7 regime for disposals, rejecting a new procedure for trustees to decide not to take advice, and we note the strong opposition of some consultees’ to extending the existing Part 7 regime to acquisition. Those consultees would not, we think, be comforted by the other changes to Part 7 that we are recommending (expanding the category of designated advisers and simplifying the 1992 Regulations) were the regime to be extended to the acquisition of land.

7.239  We have concluded that the advice requirements in Part 7, even as amended in accordance with our recommendations above, should not be extended to the acquisition of land.

7.240  We acknowledge the inconsistency that is created by the current regime between acquisition and disposal of land. But merely extending the Part 7 regime to the acquisition of land would still leave inconsistencies in the law since land transactions would be treated differently from transactions involving other assets (such as intellectual property, shares, or artwork). And trustees remain subject to their general duties when acquiring land just as when deciding on any other transaction; the difference is simply that trustees’ duties are enforced in a particular way by statute in the case of the disposal of land.

7.241  Some consultees criticised the Charity Commission’s guidance[572] for its strong recommendation that charities should comply with Part 7 in the case of land acquisition since it is not always appropriate or necessary to do so. We think that the Charity Commission’s guidance concerning acquisition should highlight considerations in the context of the acquisition of land that might make advice unnecessary. For example, the charity might have sufficient in-house expertise or it might deliberately purchase land in excess of market value in pursuit of its charitable purposes. In addition, the expansion of the category of designated advisers and simplification of the 1992 Regulations that we recommend above should equally apply to the Charity Commission’s guidance on the acquisition of land.

7.242  The Charity Commission’s guidance also recommends that trustees ensure that the RICS surveyor’s report includes “a positive recommendation (with reasons) that it is in the interests of the charity to purchase the land”.[573] In our view, it is very difficult for a RICS surveyor (or any designated adviser) to be expected to make such a recommendation, since decisions about what is in the interests of the charity are properly for the trustees. The equivalent requirement in Part 7 concerning the disposal of land is for the trustees to be satisfied that the terms of the disposition are the best that can reasonably be obtained for the charity.[574]

Recommendation 19.

7.243  We recommend that the Charity Commission amend its guidance Acquiring Land (CC33) as follows.

(1)        The guidance should reflect our recommendations to reform the regime governing the disposal of land, for example, suggesting that advice could be obtained from a fellow of the National Association of Estate Agents or fellow of the Central Association of Agricultural Valuers as well as a member of the Royal Institution of Chartered Surveyors.

(2)        The guidance should explain that trustees might decide not to obtain advice from those advisers, or from any advisers, with examples of when the trustees might make such a decision.

(3)        The suggestion that trustees seek advice on whether the proposed acquisition is in the interests of the charity should be removed.

 

Existing Exceptions to the advice requirements in Part 7

Exempt charities

7.244  Exempt charities are not required to comply with Part 7. In the Consultation Paper, we asked whether our proposed flexible advice requirement should apply to exempt charities.[575] Most consultees thought that the advice requirements should apply to exempt charities for the sake of consistency in the regulation of land transactions. Disagreement was based on a desire to avoid the duplication of regulation. Consultees pointed out that exempt charities are usually subject to tailored regulation which includes regulation of land transactions.

7.245  Land disposals by many exempt charities are indeed subject to regulation. Such land transactions are regulated by statute[576] and by contractual agreements between exempt charities and their principal regulator. Some exempt charities face prescriptive requirements similar to the existing Part 7 requirements;[577] others are subject to more flexible requirements.[578]

7.246  We do not wish to duplicate and confuse the regulation of exempt charities’ land disposals by imposing the Part 7 advice requirements in addition to existing regulation. This is particularly the case now that we have rejected the introduction of a dispensation power. We do think, however, that there is some scope for harmonisation of the regulation of land transactions by exempt charities. As the Association for Church Accounts and Treasurers suggested, principal regulators could relax their own requirements in the knowledge that exempt charities were complying with the Part 7 regime. Similarly, Stone King LLP thought that some exempt charities might prefer our proposed duties to the existing regulation of their land transactions. We think that Part 7, as amended in accordance with our recommendations above, should provide a model on the basis of which principal regulators can set their regulatory requirements for exempt charities.

Church of England land

7.247  The regime in Part 7 does not apply to certain dispositions of church land. Section 10(2) of the Charities Act 2011 excludes the following from the definition of “charity”:

(1)        ecclesiastical corporations, in respect of corporate property of the corporation;[579]

(2)        a diocesan board of finance, in respect of diocesan glebe land;[580] and

(3)        “any trust of property for purposes for which the property has been consecrated”.

7.248  Ecclesiastical law will apply to disposals of such land, rather than Part 7. Ecclesiastical law imposes restrictions which, in many ways, mirror those in Part 7.[581] It may be, therefore, that the Church of England will wish to consider amending the relevant ecclesiastical legislation to bring it into line with the amended regime in Part 7, for example, by expanding the category of designated advisers.

Sales by liquidators, administrators, receivers and mortgagees

7.249  There is an existing exception from Part 7 in the case of “any disposition for which general or special authority is expressly given … by any statutory provision contained in or having effect under an Act …”.[582]

7.250  There is uncertainty as to whether the disposal of land by the liquidator or administrator of a charitable company would fall under this exception.[583] Similarly, there is uncertainty as to whether the sale of property by a receiver or mortgagee under their statutory powers of sale falls within the exception.[584] If such transactions fall within the Part 7 regime, various difficulties and uncertainties arise:

(1)        It is uncertain whether the administrator (or liquidator, receiver or mortgagee) is the “charity trustee” for the purposes of obtaining and considering a RICS surveyor’s report, and deciding to proceed with the transaction.

(2)        The surveyor must act “exclusively” for the charity. If administrators want to take advice to discharge their own duties, it is unclear whether they too can instruct the RICS surveyor or whether they must obtain (duplicate) advice from a different professional.

(3)        A recommendation for a lengthy marketing period might be incompatible with a proposed sale of the charity’s operations by an administrator.[585]

7.251  Whether or not such transactions fall within the section 117(3)(a) exception, there is still a requirement for the charity trustees to provide a Part 7 certificate. It is unclear whether administrators and liquidators are permitted to provide a certificate, and Val James’ experience was that administrators would have been very nervous if they were treated as the charity trustees for the purposes of the Charities Act 2011. But she said that requiring the charity trustees, who are no longer in control of the charity, to provide the certificate complicates an administration “to no real purpose”.

7.252  There is no policy reason why liquidators (including provisional liquidators), administrators, receivers and mortgagees should be required to comply with the advice requirements in Part 7. Their objective is to dispose of the charity’s operations, including its land, in order to obtain the best result for the creditor(s). For those purposes, they already have duties to ensure that they obtain a reasonable price (which might already result in them obtaining professional advice). But we do not think that they, or the charity trustees, should be required by statute to obtain such a report when land is being disposed of by an administrator, liquidator, receiver or mortgagee.

Disposals to other charities

7.253  A disposal to another charity is currently excluded from the Part 7 requirements under section 117(3)(c) if it is:

(1)        “otherwise than for the best price that can reasonably be obtained” (“the first limb”); and

(2)        “authorised to be so made by the trusts of the [transferor] charity” (“the second limb”).[586]

7.254  At first blush, the exception appears to be an example of a social investment within the meaning of section 292A of the Charities Act 2011: a charity enters into a transaction using its property (in this case the disposal of land) with a view to obtaining some financial return (albeit not the best price) and also to further its purposes.

7.255  We do not think that social investments ought to be automatically excluded from Part 7 by virtue of the section 117(3)(c) exemption. The decision to dispose of land as part of a social investment will very often require the trustees to have some idea of its market value in order to weigh up (broadly) whether the furtherance of the charity’s purposes justifies the disposal. Seeking such advice might in itself satisfy trustees’ additional duties, when making social investments, to “consider whether in all the circumstances any advice about the proposed social investment ought to be obtained”.[587]

7.256  During our discussions with the CLA and Charities’ Property Association, we therefore suggested repeal of the section 117(3)(c) exception (alongside the creation of the new procedure for dispensing with advice requirements which we have ultimately rejected). We received strong representations that the existing exception should remain because, in practice, it has a different scope and is not used for the type of social investments that its wording would suggest. Rather, we were told that the exception is meant for disposals – usually at nominal consideration – which are intended purely to further the transferor charity’s purposes, and not transactions which are intended to achieve any financial benefit for the transferor charity. It permits, in effect, a change of trustee; one charity is holding property for a particular charitable purpose, and it transfers the property to another charity to hold it for the same charitable purpose. We accept that such a transaction warrants different treatment; it is not a social investment, and being required to obtain advice under Part 7 would be unnecessary.

7.257  But the wording of the section 117(3)(c) exception is not limited to disposals which are motivated purely by the pursuit of the charity’s purposes. In our view, the words “otherwise than for the best price” in the first limb mean that the exception would apply if the trustees were obtaining (and motivated by) receiving a financial return of some sort from the transaction, and perhaps a financial return very close to the market value. The exception would, therefore, apply to the social investments that we discussed above.

7.258  In addition, the first limb raises the question of how a charity can know whether a disposition is “otherwise than for the best price” unless it has sought advice as to what the best price is. We think that the exception should turn instead on the intention of the trustees in making the disposition in question:

(1)        if it is in any way financially motivated (for example, a social investment), then the charity ought to seek advice as to the value of the property;

(2)        if it is not in any way financially motivated (as in the example set out in paragraph 7.256 above) then the charity ought not to be forced to seek advice.

7.259  Further, the second limb of the test – which, according to our discussions mentioned above, is intended to make clear that the disposal must be in pursuit of the transferor charity’s purposes – is either unnecessary or confusing. First, charities are only able to take action which is in pursuit of their purposes, so if that is all the second limb is intended to achieve, it is unnecessary. Alternatively, the second limb could be read as suggesting that some express authority is required, for example an express provision in the charity’s governing document. On that interpretation, the second limb is confusing and seems undesirable as a matter of policy. The CLA and Bircham Dyson Bell LLP thought this limb should be replaced with a requirement that the trustees “consider the disposal to be in furtherance of the purposes of the (disposing) charity”. However, for the reasons given, we do not think that this limb serves any useful or desirable purpose and should therefore be removed.

7.260  In summary, in so far as section 117(3)(c) can currently be used to exclude social investments from the Part 7 advice requirements, we do not think that it should. But nor do we think that disposals which are intended purely to further the transferor’s purposes should be covered by the Part 7 advice requirements. We have therefore concluded that the section 117(3)(c) exception should be reformulated (1) to make clear that it does not apply to social investments (within the meaning of section 292A); (2) to make clear that it does apply to disposals which are purely intended to further the transferor charity’s purposes; and (3) to address the other uncertainties discussed above.

Leases to beneficiaries

7.261  There is an existing exception from the Part 7 advice requirements in section 117(3)(d) for leases to beneficiaries of a charity “granted otherwise than for the best rent that can reasonably be obtained” and intended to enable the premises to be occupied for the charity’s purposes.[588]

7.262  Such a transaction is likely to amount to a social investment, being a transaction using a charity’s property that is motivated by the pursuit of the charity’s purposes and by the financial return.[589] For the reasons given above, we think that advice on the market rent from a property would often be a relevant consideration for a charity that is granting a lease to a beneficiary and trustees would need to consider whether to obtain such advice in accordance with their duties under section 292C of the Charities Act 2011. However, unlike the exception in section 117(3)(c), consultees made no comments or criticisms regarding this provision or its application in practice. We believe that this exception only applies in a small number of cases; to very specific charities; and in situations where the risk of depletion of charity assets is low. We therefore think that to repeal the exception and force the few charities who rely on it to comply with Part 7 would be to increase the burden of regulation unnecessarily and without support from consultees.

Recommendation 20.

7.263  We recommend that:

(1)        disposals of land by liquidators, provisional liquidators, administrators, receivers and mortgagees be excluded from Part 7 of the Charities Act 2011; and

(2)        the exception in section 117(3)(c) of the Charities Act 2011 be reformulated such that it applies only to disposals that are solely intended to further the transferor charity’s purposes.

 

7.264  Clause 18(2)(a), (2)(c) and (3)(a) of the draft Bill would give effect to this recommendation.

The Universities and College Estates Acts

7.265  The regime in Part 7 of the Charities Act 2011 does not apply to dispositions and mortgages “for which the authorisation of the Secretary of State is required under the Universities and College Estates Act 1925”.[590] We refer to this as “the UCEA exception”.

Historical background to the Universities and College Estates Acts 1925 and 1964

7.266  The Universities and College Estates Act 1925 (“the UCEA 1925”) applies to:

(1)        the Universities of Oxford, Cambridge and Durham (“the universities”);

(2)        the colleges and halls of Oxford, Cambridge and Durham (“the colleges”);

(3)        Winchester College (“Winchester”); and

(4)        Eton College (“Eton”).[591]

We refer to these bodies as “the UCEA institutions”.

7.267  The UCEA 1925 was a power-conferring Act.[592] A series of “disabling statutes” had prevented the colleges (but not the universities), Winchester and Eton from disposing of land.[593] The UCEA 1925 conferred on the UCEA institutions numerous powers to deal with land subject to conditions and, in respect of some powers, subject to the Minister’s consent (“the Listed Powers”).[594] Section 21 conferred a general power to enter into any other unlisted transaction provided that the UCEA institution concerned obtained the Minister’s consent (“the General Power”).

7.268  The Universities and College Estates Act 1964 (“the UCEA 1964”):

(1)        repealed the “disabling statutes”, but only in respect of the colleges;

(2)        removed the requirement for Ministerial consent to the exercise of the Listed Powers, but only in respect of the colleges and universities;

(3)        left unchanged the need for Ministerial consent to the exercise of the General Power; and

(4)        left the UCEA 1925 unchanged in respect of Winchester and Eton.

The universities and colleges

7.269  Although the matter is not free from doubt, it seems that the UCEA 1925 supplemented the existing powers of the universities and colleges.[595] Following the repeal of the disabling statutes by the UCEA 1964, the colleges could exercise the UCEA 1925 powers or the powers in their governing documents. And the universities were never subject to the disabling statutes, so could always exercise the UCEA 1925 powers or the powers in their governing documents.

7.270  The universities and colleges, therefore, only need the Minister’s consent to a disposal of land if they need to rely on the General Power. If they have the necessary power in their governing documents, or if the transaction falls within the Listed Powers, they do not need Ministerial consent, and the UCEA exception will not apply.[596]

Winchester and Eton

7.271  As with the universities and colleges, it seems that the UCEA 1925 supplemented any existing powers of Winchester and Eton. Whilst the UCEA 1964 did not repeal the disabling statutes as far as the Winchester and Eton were concerned, the Statute Law (Repeals) Act 1998 did.[597] Winchester and Eton can therefore now rely on the UCEA 1925 powers and the powers in their governing documents.[598] The exercise of some of the Listed Powers under the UCEA 1925 remains subject to Ministerial consent, since the UCEA 1964 did not remove that requirement for Winchester and Eton.

7.272  Winchester and Eton, therefore, only need the Minister’s consent to a disposal of land if they need to rely on the General Power or certain Listed Powers. If they have the necessary power in their governing documents, or if the Listed Power does not require the Minister’s consent, they do not need Ministerial consent, and the UCEA exception will not apply.[599]

Application of Part 7 of the Charities Act 2011

7.273  Part 7 does not apply if a transaction must be authorised by the Minister under the UCEA 1925. As far as the universities and colleges are concerned, therefore, all other things being equal, the requirements in Part 7 would not apply if (and only if) they were using the General Power (which requires the Minister’s consent).[600] As far as Winchester and Eton are concerned, the requirements in Part 7 would not apply if they were using the General Power or certain Listed Powers (which require the Minister’s consent).[601]

The Consultation Paper

7.274  The UCEA 1925 sets out certain matters that the Minister must consider when deciding whether to give consent. In the Consultation Paper, we said that trustees should be under the same obligation to obtain advice whether or not they are obtaining Ministerial consent to the disposition and we proposed that the UCEA exception be repealed so that that the Part 7 advice requirements apply even if the transaction must be authorised by the Minister under the UCEA 1925.[602]

7.275  We also asked a more general question about the UCEA 1925. The Act is long and complicated. We questioned whether the UCEA 1925 was helpful to the institutions to which it applied. When they need to rely on the UCEA 1925 powers (rather than on their governing document), they must sometimes obtain Ministerial consent to enter into transactions that other charities can enter without restriction. Many charities will enjoy the benefit of the default powers conferred by the Trusts of Land and Appointment of Trustees Act 1996 and by the Trustee Act 2000, but those powers appear not to apply to the universities, the colleges, Winchester and Eton.[603] We asked consultees whether the UCEA 1925 should be repealed and replaced by general powers which are not subject to Ministerial consent.[604]

Consultation responses

7.276  Some consultees did not agree that the Part 7 advice requirements should apply if the Minister’s consent was required to exercise a power under the UCEA 1925 since that would involve double regulation. The considerations of the Minister under the UCEA should ensure that a fair price is obtained[605] and there is no need to overlay the Charities Act 2011 advice requirements which are intended to achieve the same thing. We accept those comments.

7.277  Consultees were also cautiously optimistic about replacing the UCEA 1925 with general powers in order to avoid the complexity of the provisions in the Act and also to remove the requirement for Ministerial consent to land transactions (where the charities concerned seek to rely on a UCEA power that requires Ministerial consent, rather than on other UCEA powers or powers in their governing documents).

7.278  Our discussions with the officials from the Department for Environment, Food and Rural Affairs (“Defra") who administer the Minister’s consent function under the UCEA 1925 have confirmed that there is no longer a policy need for Defra to provide the UCEA institutions with consent to land transactions under the UCEA 1925. Other colleges and universities are not subject to such restrictions. Furthermore, there is a risk for Defra that giving consent to a particular transaction could be viewed as granting planning permission or consenting to a development when that decision lays elsewhere. Defra indicated agreement with replacing the UCEA 1925 with general powers for the institutions concerned, or with an amendment to the UCEA 1925 under which the requirement for Ministerial consent (where it exists) is removed.

Discussion

7.279  In our view, the UCEA 1925 is a complicated Act and those who rely on it would benefit from a consolidated general statutory power in respect of land transactions, similar to the general power in the Trusts of Land and Appointment of Trustees Act 1996. Moreover, we do not think that the requirement to obtain the Minister’s consent (where it applies) is appropriate since Defra does not have the relevant policy interest concerning land transactions by charities and it is anomalous that a Minister should have special functions in respect of a handful of particular institutions. We therefore recommend that the many complicated provisions of the UCEA 1925 be replaced with a general power for the charities concerned to enter into any land transaction.

7.280  That leaves the question of whether charities using the new replacement power should be required to comply with the Part 7 advice requirements. At present, the universities are exempt in any event, and the colleges (as we understand it) say that Part 7 does not apply to transactions undertaken pursuant to the UCEA 1925 (whether with or without Ministerial consent) since such transactions are authorised by a statutory provision and so are excluded by section 117(3)(a). We further understand that the Oxford and Cambridge colleges say that Part 7 does not apply to transactions made using powers in their governing documents (their “statutes”), since the statutes were made under the Universities of Oxford and Cambridge Act 1923 and therefore fall within the same section 117(3)(a) exception as dispositions for which general or special authority is expressly given by a statutory provision.[606] At present, therefore, the only oversight of land transactions by the UCEA institutions arises where the institution relies on a UCEA power for which the Minister’s consent is required and that oversight is by means of the conditions in the UCEA and not by means of the Charities Act 2011.

7.281  Our view is that the Part 7 requirements should apply when the UCEA institutions exercise the replacement general power, since the conditions currently incorporated into the UCEA 1925 governing the exercise of those powers (and therefore providing some safeguard of charitable assets) would not be replicated. The alternative would be to permit the UCEA institutions to rely on the replacement general power, but not to require compliance with the Part 7 advice requirements, but we do not see a principled basis for that approach. The origin of the power being used by a charity – whether the new UCEA power or the general powers under the Trusts of Land and Appointment of Trustees Act 1996 – is irrelevant to the objective of Part 7, namely the protection of charitable assets.

7.282  Having discussed this issue further with the UCEA institutions, we have concluded that the UCEA exception from Part 7 should be repealed. In reality, we suspect that the colleges will not wish to comply with the Part 7 requirements and will therefore more commonly exercise the powers in their statutes, relying on the argument set out above, namely that the exercise of such powers falls within the section 117(3)(a) exception on the basis that their statutes are made under the authority of an Act of Parliament.

Recommendation 21.

7.283  We recommend that:

(1)        the detailed provisions in the Universities and College Estates Act 1925 be repealed and the institutions to which it applies be given the general powers of an owner similarly to trustees under the Trusts of Land and Appointment of Trustees Act 1996 and the Trustee Act 2000; and

(2)        the exercise of that replacement power should not, of itself, engage the exception from the Part 7 advice requirements in section 117(3)(a) of the Charities Act 2011.

 

7.284  Clause 26 of the draft Bill would give effect to this recommendation. Clause 18(2)(b) and (3)(b) also repeals the UCEA exception.

Chapter 8: Permanent endowment

Introduction

8.1        This chapter considers the law relating to the use of permanent endowment. Broadly speaking, permanent endowment is property belonging to a charity that cannot be spent and falls into the following two categories.

(1)        It can be a fund of assets, such as shares, that produce an income to fund the charity’s activities. The charity can sell an investment in the fund to purchase another, but it cannot sell an investment and spend the proceeds to further its purposes. This is known as “investment permanent endowment”.

(2)        It can be property that does not produce an income but is used by the charity to pursue its purposes, for example a village hall or a recreational ground. The charity might be able to sell the property and purchase other property that performs the same function,[607] but it cannot spend the proceeds of any sale on its day-to-day activities. This is known as “functional permanent endowment”.

8.2        The focus of this chapter is on investment permanent endowment.

8.3        In Chapter 9 of the Consultation Paper we examined the law relating to the use of permanent endowment, in particular the law regulating the release of the restrictions on its being spent. Our review was precipitated by our work on social investment by charities.[608] Several of those who responded to the consultation on social investment expressed dissatisfaction with the current procedures for releasing the restrictions on spending permanent endowment. They complained that the current law inhibits the use of permanent endowment funds to make social investments with an expected negative financial return[609] but which were nevertheless in the interests of the charity because of the expected benefit they would deliver to the charity’s mission.

8.4        We made a number of provisional proposals to change aspects of the regime governing the release of permanent endowment restrictions, which were largely supported by consultees. We make recommendations below for the expansion and rationalisation of the existing regime.

8.5        We also asked consultees whether there should be a new regime, which we suggested be called “preserved endowment”, whereby trustees would be free to spend the capital of the endowment fund subject to a duty to seek to maintain the real value of the fund in the long term. This was met with caution in consultation. We do not recommend that a new regime be created. Instead, we make two more limited recommendations that would permit charities, first, to borrow from permanent endowment, and second, to use permanent endowment to make social investments with a negative financial return within the existing framework for total return investment.

8.6        This chapter deals with complex law and we use various technical terms throughout. Figure 13 gathers together and explains the meaning of those terms.

Figure 13: terminology in this chapter

Permanent endowment: property that is held by, or on behalf of, a charity subject to a restriction on being spent;[610] see paragraphs 8.7 to 8.25. The default position is that the trustees cannot spend the capital.

Expendable endowment: property which is subject to a restriction on being spent, unless and until the trustees decide to do so; the trustees have a discretion to spend the capital.

Special trust: a fund that is held subject to a requirement that it be used for particular purposes within the wider purposes of the charity.[611]

Spending permanent endowment: using permanent endowment in a way that is inconsistent with the restriction on expenditure; see paragraphs 8.35 to 8.37.

Converting permanent endowment: selling permanent endowment and using the proceeds to purchase replacement property to be used in the same way.[612]

Total return investment (“TRI”): investing assets with a view to optimising the overall investment return, no matter whether that takes the form of capital or income; see paragraphs 8.50 to 8.54, 8.117 (and figure 18) and 8.121.

Social investment: a transaction that is entered into with a view to both (a) directly furthering the charity’s purposes, and (b) achieving a financial return for the charity. The term is defined in section 292A of the Charities Act 2011. A social investment can have a positive or negative financial return.[613]

Portfolio offsetting: using investment permanent endowment to make social investments that are expected to lose money (that is, pay back less than the initial outlay) in circumstances where the trustees expect to offset any losses by gains elsewhere in the portfolio; see paragraphs 8.57, 8.116 to 8.117, and 8.137 to 8.141.

Positive financial return: a return that is greater than the amount initially invested, for example, investing £100 in shares and at the end of the year those shares are worth £105 and/or have yielded an income of £5.

Negative financial return: a return that is less than the amount initially invested, for example, using £100 to purchase an asset which, at the end of the year, is worth £90. This term is used in the context of social investment by charities; the charity is promoting a charitable purpose through investment as well as seeking a financial return (which might be a positive or a negative financial return).

 

What is permanent endowment?

8.7        Consultation revealed that “permanent endowment” can mean different things to different people. The term is not always used to mean “permanent endowment” as defined by statute. As we explain in paragraph 8.11 below, some consultees thought that permanent endowment had universal characteristics, but whether that is true depends on what they mean by “permanent endowment”. Some consultees thought that there ought to be clear rules setting out how permanent endowment can be used, but again that depends on what they mean by “permanent endowment”. We consider these assumptions in more detail below, alongside the effect that they had on consultees’ responses, and their relevance to the application of the current law and our recommendations for reform.

Statutory definition 

8.8        The statutory definition of permanent endowment was first introduced in the Charities Act 1960[614] and now appears in section 353(3) of the Charities Act 2011:

A charity is to be treated for the purposes of this Act as having a permanent endowment unless all property held for the purposes of the charity may be expended for those purposes without distinction between—

(a)      capital, and

(b)      income;

and in this Act “permanent endowment” means, in relation to any charity, property held subject to a restriction on its being expended for the purposes of the charity.

8.9        The distinction between functional and investment permanent endowment (set out in paragraph 8.1 above) does not appear in the statutory definition.

8.10     Whether property is permanent endowment is a matter of interpretation of the governing document and, where relevant, other documents such as conveyances, wills and historical evidence of how property has been used.[615] We set out some examples of permanent endowment in Figure 14.

Figure 14: examples of permanent endowment

In its operational guidance the Charity Commission gives several examples of what may be found in a charity’s governing document or other instrument to indicate that property is permanent endowment.[616]

The following are examples of property that is likely to be permanent endowment:

(1)        land and buildings held for a specific charitable purpose with no power for them to be sold;

(2)        money donated on the condition that it is to be invested and the income received from the investment is to be spent on the purposes of the charity;

(3)        property that is to be held “forever” or “in perpetuity”; and

(4)        surplus income that is set aside by the trustees pursuant to a power of accumulation and invested to increase the income of the charity.

The following are examples of property that is unlikely to be permanent endowment:

(1)        money to be spent by the trustees in furtherance of the purposes of the charity in such manner as they see fit; and

(2)        money donated to be invested but which can be spent if the trustees so decide.

 

The nature of permanent endowment

8.11     Consultation revealed various assumptions and uncertainties about permanent endowment.

(1)        It is widely believed that, when a company or CIO holds permanent endowment, it is always held on trust.

(2)        It is widely believed that, when a company or CIO holds permanent endowment (and, it follows from (1) that it does so as trustee), the permanent endowment is a distinct charity.[617]

(3)        Consultees reported uncertainty as to whether permanent endowment can be mortgaged by a charity.

(4)        Consultees reported uncertainty as to whether charities can “self-endow” (that is, create permanent endowment from their unrestricted funds).

8.12     There is no direct authority on these points. Underlying them is an assumption that, if property is “permanent endowment”, then certain features must always exist. It is assumed that, because property is permanent endowment, (1) it is held on trust, (2) it is a distinct charity, (3) there ought to be a clear rule that it can (or cannot) be mortgaged, and (4) there ought to be a clear rule that it can (or cannot) be created by a charity.

8.13     In fact, the only universal feature of permanent endowment (as defined in statute) is that it is subject to some sort of restriction on being spent. “Permanent endowment” is simply a label for a range of possible restrictions that might apply.[618]

8.14     Put another way, it is not because property is labelled “permanent endowment” that it is subject to a particular restriction on being spent; rather, it is because there is a restriction on spending that the property is labelled “permanent endowment”.

8.15     The term “permanent endowment" is used for five purposes under the Charities Act 2011:[619]

(1)        charities can resolve to invest their permanent endowment on a total return basis;[620]

(2)        unincorporated charities have a power to transfer their assets to another charity and special provision is made for permanent endowment;[621]

(3)        unincorporated charities have a power to release permanent endowment from the restrictions on its being spent;[622]

(4)        the statutory power to make social investments can only be used in respect of permanent endowment in so far as the transaction is consistent with the permanent endowment restriction;[623] and

(5)        special provision is made for permanent endowment in the case of registered charity mergers.[624]

Aside from these provisions, statute does not make general provision about what can, and cannot, be done with permanent endowment.

8.16     The mere fact that property falls within the statutory definition of permanent endowment – and therefore that these statutory provisions apply – does not, itself, lead to the propositions (or answer the questions) in paragraph 8.11 above. Our conclusion is that it is neither necessary, nor possible, to provide universal and comprehensive answers to those points. The answers will, in our view, always depend on the terms of the restriction itself. It may be possible to identify the most common answer, but it is not possible to be definitive for all cases.

Is permanent endowment always held on trust?

8.17     In the Consultation Paper, we suggested that permanent endowment is always held on trust.[625] In the light of our analysis above – that the correct approach is to ask (1) what is the restriction on this property and then (2) does that restriction fall within the statutory definition of permanent endowment – our view has changed. The fact that property falls within the statutory definition of permanent endowment will not necessarily mean that the property is always held on trust. In order to determine whether property is held on trust it is necessary to look at the terms of the instrument giving rise to the endowment and the manner in which it is managed. Nonetheless, the existence of a restriction on spending the property (making it permanent endowment for the purposes of the statutory definition) is often a circumstance from which to infer the existence of a trust.

8.18     A company might own property that is subject to a restriction on expenditure that appears in its articles of association, such that the property falls within the statutory definition of permanent endowment, without the property being subject to a trust. It has been suggested to us that the fact a company can be dissolved (or that its articles can be amended) means that it cannot hold permanent endowment beneficially. We do not agree that that necessarily follows from the statutory definition of permanent endowment; the prospect of dissolution (or a change to the company’s articles) at a future date does not prevent property that is beneficially owned by a company from being subject to a restriction on being spent. As William Henderson (a barrister) pointed out, the statutory definition does not state that the restriction must be “an irremovable restriction”.

8.19     It has also been suggested to us, in reliance on Re Faraker and subsequent case law,[626] that a permanently endowed charity can never disappear, even if subject to a scheme, so a company cannot own permanent endowment beneficially. That case law concerned the concept of “perpetual” or “endowed” charities, not the statutory definition of permanent endowment.[627] The cases established that such a charity cannot disappear, for the purposes of ensuring that certain gifts by will did not fail. The idea that these charities cannot disappear did not concern the particular mechanism through which the charity’s purposes were pursued (for example, a trust or a company) but rather concerned an abstract concept of a “charity” continuing, for the purpose of collecting legacies in wills. So whilst a “perpetual” or “endowed” charity might never disappear (and so will effectively collect charitable gifts by will that might otherwise have failed), it does not follow that property within the statutory definition of permanent endowment can never disappear and must therefore always be held on trust.

Is permanent endowment a distinct charity?

8.20     Where permanent endowment is held by human trustees it will usually be a separate trust (since the terms of the trust will impose some sort of spending restriction that applies to the property in question). However, there is no reason why the permanent endowment should be treated as a separate charity. Similarly, where permanent endowment is held by a corporate trustee (that is, it is held on trust by a corporate body), it will be a stand-alone trust (and the corporation’s unrestricted property will be owned beneficially). Again there is no reason in principle why the permanent endowment should be treated as a separate charity, but that is the long-standing belief and practice of the Charity Commission and the charity sector. The result is that, when a trust wishes to incorporate, the unrestricted assets will be transferred to the company and the company will be appointed trustee of the permanent endowment assets (which will continue to be held on trust). The company and the permanent endowment will then be treated by the Charity Commission as two different charities.

8.21     This “separate charities” analysis creates an anomaly under the provisions providing for the release of permanent endowment since the gateways to those powers refer to the income of “the charity”. Whether “the charity” is the permanent endowment itself or the charity holding it will depend on how the fund is held. This anomaly is explored further in paragraphs 8.70 to 8.73 below.

Conclusion

8.22     Beyond demarcating the availability of the Charities Act 2011 powers in paragraph 8.15 above, it is unhelpful to assert that permanent endowment can, or cannot, always be used in a particular way. Rather, the relevant question in any particular case is whether this specific property, which is subject to this specific restriction, can be used in a particular way.

8.23     Suggestions by consultees that statute should provide the answers to the questions identified in paragraph 8.11(3) and (4) above, or that permanent endowment always has particular characteristics (such as those in paragraph 8.11(1) and (2) above), overestimate the purpose and scope of the statutory definition of permanent endowment. The permitted use of property cannot, and should not, be codified by reference to its statutory label in the Charities Act 2011; rather, it is regulated by trust and company law applicable to the property in question.

8.24     Nor do we agree with the suggestion that a wide statutory definition of permanent endowment is necessarily problematic.[628] As the permanent endowment label is the gateway into the powers identified in paragraph 8.15(1) to (3) above, it is helpful for the statutory definition to be broad because it ensures that those powers have a wide application. It is only if one tries to make the statutory definition do more than it is meant to do (such as provide universal answers to the points in paragraph 8.11 above) that difficulties would arise from its broad scope.

8.25     We have drawn the following conclusions.

(1)        The phrase “permanent endowment” means different things to different people.

(2)        There is a dearth of authority on the statutory definition of “permanent endowment”.

(3)        The only universal characteristic of “permanent endowment”, as defined in statute, is that there is some sort of restriction on spending the capital.

(4)        The purpose of the statutory definition of permanent endowment is to demarcate the availability of some facilitative powers under the Charities Act 2011, and, in the case of transfers of assets to another charity, to provide a tailored regime for the treatment of permanent endowment, but nothing more.

(5)        The assertions that “permanent endowment is always held on trust” and that “a company cannot hold permanent endowment beneficially” do not reflect the statutory definition but rather involve a different concept of “permanent endowment” as property that must be held in perpetuity or as a separate identifiable entity that will always exist.

(6)        Nevertheless, property that falls within the statutory definition will very often be held on trust as a matter of trust law; it may be established explicitly as a trust,[629] or it might simply be the best interpretation of an ambiguous gift. But, crucially, if property is held on trust, that is not by reason of the fact that it falls within the statutory definition of permanent endowment.

Effect on the current law and on our recommendations

8.26     The assumptions in paragraph 8.11(1) and (2) above pervaded consultees’ responses and are relevant to the operation of the current law in three ways.

(1)        Various powers are available to a “charity” with an income below a certain threshold.[630] If (as consultees assumed) permanent endowment is a separate charity, these powers can be used in respect of the permanent endowment, and the financial limits apply only to the permanent endowment (and not the charity as a whole).

(2)        The power to release permanent endowment restrictions in sections 281 and 282 apply to a charity “which is not a company or other body corporate”.[631] However, if (as consultees assume) permanent endowment is always held on trust and is a separate charity, then the power is available even though the holding charity is a company or other body corporate.

(3)        Certain assumptions are made about the availability of permanent endowment to creditors on insolvency; as we discuss in Chapter 12, the availability of charity property to creditors on insolvency depends on whether or not it is held on trust and whether the liability was incurred on behalf of that trust, not whether the property is “permanent endowment”.

8.27     We discuss the relevance of these points to our recommendations for reform below.

Reformulating the definition of permanent endowment

8.28     Some consultees criticised the definition of permanent endowment in section 353 as being unclear; others said that it created an unhelpful presumption that charities hold permanent endowment by treating charities as having permanent endowment “unless” particular conditions are satisfied. We have concluded that the definition is unclear and would benefit from amendment.

8.29     The definition is set out in paragraph 8.8 above. There are two limbs to the definition. The first sets out when a charity is to be treated as having permanent endowment.[632] The second defines permanent endowment.[633] Criticisms can be made of both limbs.

(1)        The first limb would appear to be redundant, since the Act no longer refers to charities that are treated as holding permanent endowment.[634] In addition, the first limb is intended to capture only charities holding property which is subject to rules on expenditure which distinguish between capital and income, but that is not what it achieves. Strictly, the words “without distinction between capital and income” are otiose; the existence of any restriction on expenditure of property means that “all property held for the purpose of the charity” may not “be expended for those purposes” (regardless of whether the restriction distinguishes between capital and income).

(2)        The second limb makes no reference to a distinction between capital and income, making it potentially wider than the first limb. Strictly, therefore, the second limb could capture “special trusts”, which comprise property held for specific purposes, narrower than the purposes of the charity (see Figure 13), because such a fund is subject to a restriction on its being expended for the purposes of the charity.

8.30     There is no consistency or clarity in the Act, where it refers to permanent endowment, as to whether it requires the first, second or both limbs of the test to be satisfied. For example, section 281 applies to “permanent endowment” (which is defined in the second limb), but it also refers throughout to “capital” which forms part of the first limb. Furthermore, the potentially wider scope of the second limb is not followed through elsewhere in the Act; other provisions assume that where the term “permanent endowment” is used, the restriction does distinguish between capital and income, and will only restrict the expenditure of capital.[635] It seems that, in practice, the words “without distinction between (a) capital and (b) income” from the first limb are read into the second limb, but that is a strained interpretation. Following further discussion with consultees on this issue we think that the statutory definition of permanent endowment should only capture funds where there is a restriction distinguishing between capital and income.

8.31     Consultees’ criticisms of the definition went further than these technical inconsistencies, but we did not consult on changing the meaning of permanent endowment in the Charities Act 2011 and we have already explained the purpose and scope of the definition above. Nevertheless, we think that the lack of clarity and technical inconsistencies in the definition could be resolved. In our view, the first limb of the definition can be removed and its reference to a restriction distinguishing between capital and income built into a single definition, based on the second limb. We recommend a reformulated definition below.

8.32     Our reformulated statutory definition of permanent endowment aims to capture any fund held subject to a restriction that the capital cannot be expended by any means. For example, a gift of shares subject to a restriction that only the income from the shares (namely, dividends) can be spent to further the purposes of the charity. It would not capture (1) special trust property, whereby a fund is held subject to a restriction that it can only be expended on a specific purpose; or (2) a fund held subject to a general restriction that only a certain percentage of it (whether capital or income) can be spent each year.

Recommendation 22.

8.33     We recommend that the definition of permanent endowment in section 353 of the Charities Act 2011 be reformulated to remove its inconsistencies and lack of clarity.

 

8.34     Clause 9 of the draft Bill would give effect to this recommendation.

Spending permanent endowment

8.35     Permanent endowment restrictions will often involve a complete prohibition on spending the funds, but they need not do so; they might only impose a limitation on how the fund can be spent.[636] A charity might wish to use its permanent endowment in a way that is inconsistent with the restriction on expenditure. We refer to this as “spending” permanent endowment. The charity might wish to spend its permanent endowment on its purposes over a period of time (referred to as “spending out”), or it might want to borrow from its permanent endowment by spending the capital but replenishing it over time.

8.36     Spending permanent endowment will usually involve spending its liquidated value, in other words (where the permanent endowment is not held as money) the proceeds of any sale of the property. Spending is to be distinguished from “converting” permanent endowment, which involves the sale of permanent endowment and using the proceeds to purchase replacement property to be used in the same way.[637]

8.37     We set out some of the reasons that charities might want to spend permanent endowment in Figure 15.

Figure 15: why might charities want to spend their permanent endowment?

(1)        The fund might be so small that the costs of administering it are disproportionate to the income it yields, so it would be better to spend the fund or combine it with other funds. This was the purpose behind the original provisions in the Charities Act 1985 permitting trustees to release permanent endowment restrictions.

(2)        The charity’s overwhelming need might be current, not future, leading the trustees to the view that the charity’s purposes would be better served by spending part or all of the permanent endowment on its purposes now. For example:

­    a charity might need to carry out major works, such as repairs to a village hall roof, and might wish to use permanent endowment with the intention of replenishing the fund over a period of time afterwards; or

­    a charity for the relief of sickness from a particular disease for which a cure becomes available might wish to spend its permanent endowment to eradicate the disease.[638]

(3)        As part of a total return approach to investment,[639] charities might wish to spend capital in years of low income yield.

(4)        Charities might wish to make a social investment that is expected to yield a negative financial return, and to invest the remainder of the permanent endowment in such a way that any loss on the social investment is offset by expected gains elsewhere.

 

The current law

8.38     There are three mechanisms by which charities can release the restrictions on spending permanent endowment.

(1) Charity Commission order or scheme

8.39     The Charity Commission can make a scheme or order that permits a charity to spend permanent endowment.[640] Permission will often be granted subject to a requirement that the charity recoups that sum over a period of time to replenish the permanent endowment, in which case the charity is, in effect, borrowing from its permanent endowment rather than spending it. Recoupment is not always required.[641]

(2) Resolution under section 281 or 282 of the Charities Act 2011

8.40     The Charities Act 1985 conferred a very limited power on charities to release the spending restrictions on their permanent endowment if they were of the opinion that the endowment was too small for any useful purpose to be achieved by the expenditure of income alone. The power was available to charities with an annual income of up to £5 and only in respect of permanent endowment valued at up to £25.[642] The Charities Act 1992 extended that power to charities with an annual income of up to £1,000 and removed the cap on the value of endowment that could be freed.[643] The Charities Act 2006 introduced major reforms to the power,[644] which is now contained in sections 281 to 285, and 288 to 291, of the Charities Act 2011.[645]

8.41     Sections 281 and 282 set out two mutually exclusive frameworks for charities to release the restrictions on spending their permanent endowment.[646] Each section allows the trustees of “any available endowment fund[647] of a charity which is not a company or other body corporate” to resolve to release the fund, or any portion of it, from the spending restrictions that apply to it. Before exercising the power, the charity trustees have to be satisfied that the purposes set out in the trusts to which the fund was subject could be carried out more effectively if the capital, or the relevant portion of the capital, could be spent.[648]

8.42     Resolutions can be passed under section 281 if (a) the charity has an annual income of up to £1,000, or (b) the value of the “available endowment fund” is up to £10,000, or (c) the fund is not entirely given by one person, or two or more persons in pursuit of a common purpose.[649] Resolutions under section 281 take immediate effect and do not require the concurrence of the Charity Commission or any public consultation.[650]

8.43     If a resolution cannot be passed under section 281, the charity must instead follow the procedure in section 282. This will only be the case where:

(1)        the charity’s annual income is over £1,000; and

(2)        the value of the “available endowment fund” is over £10,000; and

(3)        the fund is “entirely given”.[651]

8.44     If any one (or more) of those conditions does not apply, the trustees can pass the resolution under section 281 instead.

8.45     A resolution passed under section 282 may not be implemented by the trustees unless the Charity Commission has concurred with it.[652] The trustees must send a copy of the resolution to the Charity Commission, which has three months to decide whether to concur with it. The Commission can direct the trustees to provide further information or give public notice of the resolution. If public notice is required, the three-month period starts when that notice is given. The resolution takes effect when the Commission concurs with it, or if the three-month period passes without the Commission responding.[653]

8.46     In deciding whether to concur with a section 282 resolution, the Charity Commission must consider the wishes of the donors and any changes in the charity’s circumstances since the gifts were made.[654] The Commission can only concur with a resolution if it is satisfied that its implementation would accord with the spirit of the gifts.[655]

8.47     The financial thresholds under sections 281 and 282 can be amended by order of the Secretary of State, although that power has not been exercised.[656]

8.48     There is a parallel regime in sections 288 and 289 of the Charities Act 2011 for releasing the spending restrictions on permanent endowment held on “special trust” (see Figure 13 above).

8.49     Sections 288 and 289 apply when, as the result of a direction under section 12(1) of the Charities Act 2011, the special trust is to be treated as a separate charity for the purposes of these sections. Section 288 is the equivalent of section 281: the trustees of permanent endowment held on special trust may resolve to release the spending restrictions that apply to it without needing authorisation from the Charity Commission, but only if the value of the fund is £10,000 or less or if it has not been entirely given.[657] If the value of the fund exceeds £10,000 and it is entirely given then the power in section 289 must be used. Section 289 is the equivalent of section 282: any resolution passed under section 289 is only effective with the concurrence of the Charity Commission.

(3) Total return investment

8.50     Permanently-endowed charities that adopt a traditional investment approach are constrained by the classification of investment returns (as capital or income) as to how they can apply those receipts. Capital returns have to be added to the endowment; income returns must be spent on the charity’s purposes. The trustees must balance the interests of their present and future beneficiaries by pursuing an investment strategy which balances capital and income returns.[658] Striking this balance has in many cases proved to be difficult and has led to sub-optimal investing (according to the nature of the return rather than its risk-adjusted value).[659]

8.51     By contrast, total return investment (“TRI”) permits charities to invest with a view to optimising the overall investment return, no matter whether that takes the form of capital or income. All investment returns are designated as “unapplied total return”. The charity then decides whether to allocate unapplied total return to the “trust for investment” (that is, treat it as capital and add it to the endowment) or to the “trust for application” (that is, treat it as income to be spent on its charitable purposes).

8.52     In 2001, the Charity Commission issued guidance[660] stating that the Commission would authorise individual charities with permanent endowment to undertake total return investment using its power under what is now section 105 of the Charities Act 2011. The guidance did not permit trustees to spend endowment capital where there was no unapplied total return; it emphasised that charity trustees would have to obtain separate authority to do that.

8.53     The Trusts (Capital and Income) Act 2013 and the Charities (Total Return) Regulations 2013 (“the TRI Regulations”) implemented the Law Commission’s recommendations to facilitate total return investment by permanently endowed charities.[661] They permit trustees to resolve that their permanent endowment be freed from restrictions with respect to expenditure of capital in order to invest on a total return basis, without having to seek authorisation from the Charity Commission. The trustees must attempt to value the original gift or gifts, which become the “trust for investment”, and the remainder of the fund is the “unapplied total return”. Each year, the trustees can (1) allocate some or all of the unapplied total return to the trust for application (to be spent), (2) allocate – subject to an inflation-based cap – some or all of the unapplied total return to the trust for investment, which will then be treated as part of the original gift, or (3) decide to carry forward the unapplied total return, in which case it will continue to be invested along with the trust for investment. The trustees’ decision is to be made in line with their duty of even-handedness between the current and future beneficiaries of the charity.[662]

8.54     Regulation 4 of the TRI Regulations[663] enables trustees to spend up to 10% of the trust for investment, subject to recoupment. The power is intended to facilitate total return investment by permitting charities to spend capital in years when investment returns are low (so there is a small, or no, unapplied total return) and replenish the capital in later years.[664] There is no express condition that this spending power can only be used for this purpose, and therefore nothing that expressly prevents its use for the purposes outlined in Figure 15 above. We appreciate, however, that charities would be reluctant to do so, particularly as the Charity Commission’s guidance suggests that regulation 4 cannot be used for such a purpose.[665]

The Consultation Paper and our earlier work on social investment

8.55     Our consultation on permanent endowment in the Consultation Paper followed our earlier review of social investment by charities,[666] in which we gave detailed consideration to the social investment of permanent endowment. In that earlier work on social investment, we concluded that, all other things being equal, charities were already permitted to use permanent endowment to make social investments, other than social investments that are expected to generate a negative financial return, since this would amount to spending the permanent endowment.[667] If a charity wished to make such a social investment then it would first have to release the spending restrictions that applied to the relevant portion of its permanent endowment using one of the three mechanisms outlined above.

8.56     In the course of our earlier consultation on social investment, several consultees expressed dissatisfaction with the current procedures for releasing the spending restrictions. Some felt uncomfortable with the connotations of releasing the spending restrictions, likening it to “selling the family silver”. They questioned whether it ought to be necessary to take this step where all that is being sought is to “borrow” from permanent endowment to make a social investment (and to replenish any losses). Alternatively a charity may wish to make a social investment that will exist within a portfolio structured in such a way that any capital losses from the investment are expected to be offset by gains elsewhere (“portfolio offsetting”).[668]

8.57     We agree that the current position is unsatisfactory. In general,[669] trustees can invest a £10,000 permanent endowment fund in a social investment that is expected to preserve its capital value and yield an income of £1. But they cannot – without releasing the spending restrictions – invest £5,000 in a social investment that is expected to be sold the following year for £4,900 even if they expect to offset that loss through another £5,000 investment[670] that is expected to be sold the following year for £6,000.

8.58     In our report on social investment, we declined to recommend a specific power for charities to use permanent endowment to make social investments with an expected negative financial return.[671] Such a power would be complex,[672] and we were not satisfied that it would necessarily represent an improvement to the law. Moreover, we considered that the problems identified by consultees would be better addressed in a general review of the law relating to the use of permanent endowment. We undertook that more general review of the use of permanent endowment in the Consultation Paper.

8.59     Our consideration of permanent endowment in the Consultation Paper was split into two parts. First, we made proposals to expand and rationalise the regime governing the release of permanent endowment under the Charities Act 2011. Second, we asked whether a new regime should be created that would provide trustees with more flexibility in how permanent endowment could be used.

Releasing the restrictions on spending permanent endowment

Sections 281 and 282 of the Charities Act 2011

8.60     The operation of sections 281 and 282 is explained in paragraphs 8.40 to 8.47 above. We consulted on various proposals to reform those sections.

The exclusion of corporate charities from sections 281 and 282

8.61     Sections 281 and 282 only apply to the permanent endowment “of a charity which is not a company or other body corporate”. The Charity Commission’s view is that companies can still use sections 281 and 282 in respect of their permanent endowment because (1) permanent endowment is always held on trust, and (2) the permanent endowment is a separate unincorporated charity that falls within sections 281 and 282; see paragraphs 8.11 to 8.21, and 8.26(2) above.

8.62     In the Consultation Paper, we said that, on the Charity Commission’s view, the words excluding corporate charities from sections 281 and 282 are redundant. Moreover, even if the words are not redundant – so companies which hold permanent endowment are excluded from sections 281 and 282 – there is no policy reason why they should be so excluded.[673]

8.63     Consultees agreed with our proposal[674] that sections 281 and 282 should be amended to make clear that they apply to permanent endowment held by a corporate charity.

8.64     We are not convinced that the wording that excludes corporate charities is redundant since (1) we do not agree that permanent endowment is necessarily held on trust,[675] and (2) the wording of section 281 does not suggest that the permanent endowment is “the charity” for the purposes of section 281.[676] Nevertheless, following consultation we remain of the view that the section 281 and 282 powers should be available to corporate charities in the same way that they are available to unincorporated charities.

8.65     We recommend below that sections 281 and 282 be amended to clarify that they apply to permanent endowment held by a corporate charity. This recommendation includes consequential amendments to sections 281 and 282 (and other related provisions) to confirm that references to “the charity” are to the permanent endowment fund. This ensures that there is no inconsistency between the application of these sections to permanent endowment held by corporate and unincorporated charities. The focus will always be on the permanent endowment fund in question regardless of the nature of the charity holding it.

The financial thresholds in sections 281 and 282

Purpose

8.66     Many consultees pointed out that the ratio in the financial thresholds between capital (£10,000) and income (£1,000) was inappropriate; a fund of £50,000 might yield an income of under £1,000, so could fall within section 281 despite the capital value far exceeding the £10,000 threshold.

8.67     If the two thresholds are alternative ways of seeking to identify the same sort of small permanent endowments that can properly fall within the more permissive section 281 power,[677] then we agree that the ratio of 10:1 is inappropriate. However, the income and capital thresholds do not focus exclusively on the permanent endowment fund to be released. The capital threshold is based on the size of the fund, whereas the income threshold is based on the size of the charity. Often, the two will not be the same thing.[678]