Stephen Claus: Charity Act 2022 Phase 2 Implementation – Spring 2023

In my first article on the new law, I outlined what was coming and roughly when, this article considers the second phase of implementation due this spring.

This is a further article is focused on some more technical changes introduced by the Charities Act 2022 (the new law), which was made law in February 2022, but to be introduced over time.  It is intended to provide some help in considering the changes and implications for Charities.

In short, this phase of implementation involves:

• The Act makes a number of changes to the requirements to follow when disposing of charity land, and in particular the requirement to obtain advice (from surveyors) in relation to a proposed disposal.
• Introduced is additional flexibility in terms of who can provide (formerly surveyors) advice, what the advice should now cover, the form it should take and the requirements on advertising.  It is a more relaxed approach and that is welcomed by those who deal in land but represent new rules to learn!
• Changes in the way the rules apply to property held by multiple beneficiaries, charity-to-charity disposals, and the definition of “connected persons” (such cases requiring an order of the Charity Commission).
• These changes will be brought into force in spring 2023.

The current rules (law) regarding charity and disposal interests in land is to be found in Part 7 of the Charities Act 2011 (part 7).  Many people struggled with that law, which had a number of complex requirements.  The Courts have referred to it as having several tripwires within the regime.

One thing, which is widely acknowledged, is the difficulty of providing for a huge range of types of transaction within a single regime: Part 7 can apply to the sale of an entire block of flats, all together or one at a time to the disposal of a simple wayleave for the maintenance of electronic equipment, and to a straightforward freehold sale.  It covers a lot of ground.

Many charities have struggled to shoehorn more sophisticated property transactions into the requirements of the 2011 Act.  If you do not regularly deal in land, you may not even have heard of Part 7.

The new law provides for a number of changes which are aimed at addressing shortcomings of the existing regime and introducing greater flexibility into the procedure which charities are obliged to follow when they wish to dispose of an interest in land.

What then are the changes and are they welcome?

Changes to the requirement to obtain advice Under part 7 trustees looking at some type of disposal must:

• obtain and consider a written report on the proposed disposition from a suitably qualified surveyor (which of itself must contain prescribed elements),
• advertise the disposition in whatever manner the surveyor advises, and
• 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.

The new law makes changes to (a) in terms of who can provide the advice, what the advice should cover and the form it may take, and (b) removes the automatic requirement to advertise a proposed disposal in the manner advised by the surveyor.

The question of when to obtain the advice is a perennially difficult one under the current regime, and one which is not resolved by the new law.

Some (including myself) have interpreted Part 7 as requiring trustees to obtain advice both before and after marketing, that is before in order to understand how to market the property, and after in order to comment on the terms of the proposed transaction.  This could be additional advice on an offer or a conditional offer for example.

In the report that led to the new law, the Law Commission indicated it expected that trustees would obtain advice at an early stage in planning a transaction, and that they may not need that advice to be refreshed or supplemented at a later point. However, it seems likely to remain the case that, for complex transactions, advice as to the means of disposal will be needed both at the outset (in order to inform the marketing strategy) and once any offers have been received.  There is reassurance in advice confirming that the final terms negotiated are, in the adviser’s view, the best that can reasonably be obtained for the charity, if for example a subsequent regulatory question arises.

Who can now provide the necessary advice?

At present, a “qualified surveyor” is a fellow or professional associate of the Royal Institution of Chartered Surveyors who is reasonably believed by the trustees to have ability in, and experience of, the valuation of land of the particular kind, and in the particular area, in question. Please note this did not apply to say a short lease when local experienced people for example the trustees if so qualified could be relied upon.

The Act proposes that trustees should be able to seek advice from a broader range of “designated advisers”: it is expected that, in addition to RICS surveyors, regulations will allow fellows of the National Association of Estate Agents and fellows of the Central Association of Agricultural Valuers to provide advice, as will (in a helpful clarification in the Act) appropriately qualified charity trustees, officers and employees – including where the report is provided in the course of employment.

The expansion of the pool of potential advisers will be coupled with a requirement for the adviser to certify that they:

• have the appropriate expertise and experience to provide the advice that is required, and
• do not have any interest that conflicts, or would appear to conflict, with that of the charity.

Trustees will be well advised to check carefully any person they instruct to advise them.  This should include being satisfied as to that person’s integrity.  We are all aware that some estate agents for example have been involved in matters of concern from time to time.  We are also well aware of the virtues of Zoopla!!

The changes will give trustees greater flexibility to select the most appropriate adviser for the transaction in question; however, unsuspecting Trustees may find the new choice creates potential for uncertainty as to which type of adviser (and who) to instruct.

While for routine disposals it might be attractive to seek advice from an employee rather than an external professional, trustees will want to give careful thought to the potential implications of doing so, including the position in relation to professional indemnity insurance, and whether the convenience of sourcing reports internally might be outweighed by the potential lack of recourse in the event of advice being found to be negligent.

Where a trustee is instructed to provide a report, consideration will need to be given to any trustee benefits (if they are to be paid) and management of any conflict of interest.

What should the advice now cover?

At present, trustees are required to obtain a written report covering the matters specified in the Charities (Qualified Surveyors’ Reports) Regulations 1992 (the Regulations). The Regulations are prescriptive in certain respects and broad in others and can be challenging to map onto more complex transactions.

The new advice requirement is significantly simplified. New regulations, to be made under the new law, will require trustees to obtain a report which deals with the following matters:

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

On the one hand, this should give advisers greater flexibility to advise on the matters which they regard as most significant to the transaction in question; on the other hand, there is a risk that potentially important matters (such as the existence of unhelpful restrictive covenants, which are at present flagged in the Regulations) may be overlooked by a less experienced adviser, which will reduce the potential price of the land.

The new law does not specifically say you must obtain a written report, so in theory a report could be give verbally at a meeting and recorded in minutes; however, this is only likely to be appropriate in very limited circumstances, and a practice I would advise against, because if a problem arises you do not want to be faced with a denial of the accuracy of the minutes because something has gone wrong!

Must you still advertise?

The new law takes away statutory requirement to advertise a proposed disposal as advised in the surveyor’s report.

It proposes instead that the charity must consider any advice on advertising that is given by the adviser, but there is no longer a statutory requirement for the charity to follow that advice.  Consider however, how can you be certain you did obtain the best price if you do not go to the market?

Other changes Include:

Multiple beneficiaries

This can apply where the land is given in a Will between several charities. The new law clarifies that Part 7 will no longer apply where land is held by or in trust for multiple beneficiaries such as the Will case. In these circumstances no one charity cannot usually control the disposal of the property in question to ensure compliance with Part 7 in relation to it, so a knotty problem goes away.

Part 7 will however continue to apply where an executor has appropriated the land to the charity, and where the charity is one of a number of tenants in common and wishes to dispose of only its share.  This can happen if the land has risen in value between death and disposal and so the executor would face a charge to capital gains tax, and it therefore makes sense to pass the land to the charity(ies) to avoid that and potentially save a lot of money.

Charity to charity disposals

At present, charity-to-charity transactions for less than best price are generally excluded from the scope of Part 7.

The Act recognises that in certain cases this “lighter touch” approach is not appropriate, particularly where a charity is making social investments using property where the financial return generated by a transaction may still be a motivating factor, in addition to a charitable return. An example might be where a property is sold to another charity for a below-market price, in recognition that the purchasing charity intends to use it for charitable purposes which align with those of the seller. Where this is the case, it is recommended that Part 7 should still apply, so that trustees have a clear sense of the value of the land in question and can make an informed choice as to any level of discount that should be made to reflect the charitable return.

This brings the current regime into alignment with trustees’ statutory duties in making social investments, which require them to satisfy themselves that it is in the interests of the charity to make the social investment, having regard to the benefit they expect it to achieve for the charity in both financial and charitable terms.  Not many charitys are currently making use of these provisions however.

Connected persons

The Act removes employees from the definition of “connected persons”, where a disposal is the grant of a short residential tenancy, on the basis that this is sensible to facilitate the charity’s work.  When you could not meet all of the part 7 requirements then a Charity Commission order is necessary.  That will no longer be required.

Please note that wholly-owned trading subsidiaries are not excluded from the definition of connected party. This means that such disposals will continue to require an order of the Charity Commission to proceed.

Statements: protecting purchasers of charity land

In future there is a new requirement for charities to include in the contract for sale (not just in the transfer instrument) a certificate stating that Part 7 has been complied with, and that a contract for sale 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.  This reflects cases before the Courts in recent years. This closes a loophole whereby it was possible for a transaction to be frustrated due to a charity’s failure to comply with Part 7.

This article should not be taken as a substitute for formal advice which I always recommend.  It is general advice only.

Stephen Claus.

These are the views of Stephen Claus, and therefore does not constitute individual legal or financial advice, this article is for information only. If you require guidance or advice, please get in touch.

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