Disposing of Charity Land (continued)
In my last blog post , I wrote generally about the pitfalls to be avoided when disposing of charity land.
This time I look at the special rules that apply where a charity wishes to dispose of Permanent Endowment, Special Trust Land, Designated Land, In Specie Land or Functional Property.
Complying with the Charities Act 2011 (“Act”) when disposing of charity property is complicated enough without being made more difficult by different rules applying to land held in different ways. Added to that is uncertainty over some definitions of some of the terms above and the fact that they can overlap.
The Charity Commission says, in its Guidance: Sales Leases Transfers or Mortgages: what trustees need to know about disposing of charity land, that “Designated land, sometimes referred to as “specie land” and/or “permanent endowment”, is required by the charity’s governing document to be used for a particular purpose of the charity”. Actually, each of those three terms has its own meaning and different rules can apply to each but a particular property might rank as more than one or indeed all three.
The Act defines this as “property held subject to a restriction on its being expended for the purposes of the charity”. To put it another way, if the trusts relating to the property say that the charity can spend only the income and not the capital or, in the case of land, the charity can only use it or enjoy the income from it and has no express power to sell it, then it is Permanent Endowment.
The Charity Commission Guidance note Permanent endowment: rules for charities, refers to Permanent Endowment as “… money or property that was originally meant to be held by a charity forever. This is usually set out in a restriction in the charity’s governing documents”.
If you do have Permanent Endowment, the Commission says you need their consent (subject to limited exceptions) to dispose of it. A “disposition”, by the way, includes not just a sale or a lease but also a mortgage and even the grant of an easement.
We are not convinced that it is always correct that the Commission’s consent to sell Permanent Endowment is required, but, in practice, often it will be. Each case depends upon its facts and specialist legal advice is essential.
Special Trust Property
Special Trust property is property held for special purposes of the charity on separate trusts relating only to that property. For it to be Special Trust property, the trusts relating to the gift of that property to the charity must prevent the trustees from using it for general purposes.
If you have Special Trust property then (subject to limited exceptions) the charity trustees can only resolve to dispose of the property or any interest in it if they consider that the purposes set out in the trust could be carried out more effectively if the capital, or some of it, can be spent or sold. In addition, Charity Commission consent is needed. The Commission may require public notice to be given of the proposed disposal and must take account of any representations. The Commission will not consent to a disposal unless satisfied that it would accord with the spirit of the gift and that the trustees have fully complied with whichever applies of Section 289 or Section 290 of the Act.
In Specie Land
This is where the retention of a piece of land is fundamental to the purposes of the gift of the land to the charity. An example would be where a stately home has been put into a charity to ensure its preservation for the public benefit. A Charity Commission Scheme to replace the purpose of the gift with a new charitable purpose, would be required before sale of the land.
This is land that the charity trusts stipulate is be used for “the purposes, or any particular purposes, of the charity”. This is slightly different wording from the definition of Special Trust land, which refers to land which may only be used for “special” purposes of the charity.
Before entering into any agreement to dispose of Designated Land, public notice must be given to draw the attention of interested members of the public and those interested in the charity, to the proposed disposition and to allow them to make representations to the charity. The charity must take into consideration any representations received.
The Commission’s Guide “Permanent endowment: rules for charities” states that if you want to sell Designated Land without replacing it, you need to get their consent and explain why it will be in your best interests to sell. Although we are not convinced this is always correct, again each case depends on its facts and specialist legal advice is necessary.
Functional Property or Functional Endowment
There is no current statutory definition of this but the Charity Commission says, in Permanent Endowment: rules for charities, that Functional Endowment is land given to a charity on condition that it is used to meet its purposes and goes on to say that it is usually called “designated” land or property or “specie” land or property. However, others see functional land as land a charity holds which it may use for any of its purposes, as it wishes – it is not required by the trusts of that property to be used for specific charitable purposes. What actually needs to be decided is whether the land is Permanent Endowment, Special Trust Land, In Specie Land or Designated Land – in which case the issues raised above could apply.
Getting it wrong can be very costly. The contract and/or the transfer or lease or other disposition could be void and the trustees could be in hot water with the Charity Commission and may have liability to the charity while the charity may itself be subject to legal action. Not getting the Commission’s consent to a disposition which their guidance says needs their consent is not a course of action to be taken lightly.
In practice, every case depends on its facts, so please contact Simon Schipper in our Charities Team, for help.