Selling charity land – a cautionary tale
On 30 March 2017, the Charity Commission published its inquiry report into The Spiritualist Association of Great Britain’s (SAGB) disposal of charity property. They concluded that trustees’ failure to comply with their statutory and more general charity law duties when disposing of their leasehold property amounted to serious mismanagement of the charity and its assets. What were the pitfalls the trustees fell into, and what lessons can we learn?
The charity owned a leasehold property in Belgrave Square in central London, on a term which had started in 1956 and was due to expire in 2047. Although the rent was low, the property was in need of substantial repair, which was too expensive for the charity to complete, and so the decision was taken to sell and find alternative premises. This could have been a straightforward proposition, especially given the location of the building, but was complicated by the lease including a particularly restrictive covenant in respect of use – the property could only be used as the headquarters of a non-profit learned or charitable or cultural association or society, or as an embassy. The Charity Commission decided to launch an inquiry into the eventual sale after reports came out in the media that immediately after the charity sold the property to a British Virgin Islands company for £6 million, it was sold on to another BVI company for over £21 million.
The report itself makes for interesting reading. No unauthorised private benefit was found on the part of the trustees, but the Commission concluded that the ‘failures and breaches were not minor or technical in nature, which could be ignored or passed over in light of an apparently successful outcome. They amount to basic and serious mismanagement by the charity trustees.’ So what went wrong?
Restrictions on disposals of charity land are imposed by sections 117 to 122 of the Charities Act (CA) 2011, and the Charity Commission publishes a comprehensive guidance note which is essential reading for all trustees looking to sell property. The legislation starts with the idea that the disposal must be in the charity’s best interests, and a Charity Commission or court order is required to authorise the sale or letting of charity property, but goes on to set out exceptions and actions that trustees may take in order to avoid the need for formal authorisation. This includes instructing a surveyor (with the credentials specified in the statute) to produce a report (containing the information specified in the guidance) and confirm that the proposed sale is on the best terms reasonably available. The trustees in the SAGB case sought to make use of these practical methods of proceeding, but fell into a number of pitfalls along the way:
- In the early part of the transaction, SAGB entered into an agreement to sell its property to a prospective buyer for £8 million. Though it sought advice from a consultant in charity law, the trustees did not follow the advice to obtain the required surveyor’s report prior to entering into the agreement. The Charity Commission held this to be a breach of both fiduciary duty of care and statutory requirement.
- The reports that were eventually produced for the charity were not in compliance with the Charities (Qualified Surveyors’ Reports) Regulations 1992, nor did the charity’s surveyor or its firm meet the statutory qualification criteria. In particular, the reports did not address how the property should be marketed. The trustees of SAGB said they had assumed the surveyor was properly qualified as he had been introduced by the charity law consultant, but the report makes it clear that trustees are responsible for the administration of the charity and “they (and they alone) must be satisfied that the person to be instructed is suitably knowledgeable about the matter in hand and qualified so to act”.
- SAGB subsequently rescinded the £8 million contract and entered into and completed a contract selling the property for the lower sum of £6 million. The trustees said one of the reasons they did this was that they could not proceed with the original £8 million sale because they had not complied with statutory requirements. However, the report found that the trustees proceeded with this course of action without acting upon the advice of SAGB’s solicitor and charity law consultant. They had suggested that the problems with the £8 million contract could be remedied by applying for a Charity Commission order, but the trustees instead appointed a new solicitor who proceeded with the new, lower value transaction without investigating the first solicitor’s concerns. Again this was found to be both a breach of fiduciary duty of care to the charity and the statutory requirement on the part of the trustees.
- In respect of the subsequent sale of the property by the buyer at more than three times the price received by the charity, the trustees were held to have failed to have obtained specialist independent advice about how to achieve maximum return on a property disposal where the post-sale value would be likely to appreciate significantly. SAGB had been advised by its consultant that with change of use, the property could increase in value to around £20-£22 million, but it seemed that no serious attempt was made to try and secure a share of that benefit for the charity. Whilst the trustees pointed out advice from their surveyor that any such attempt would be unsuccessful, the Commission implied that the charity should have sought advice from experienced property professionals, who would be able to suggest a structure which would at least have given the charity a chance to share in the uplift.
- SAGB was also criticised for the unclear payment arrangements of its advisors, some of whom it turned out were paid by the prospective buyer, with resulting queries over who those advisors were acting for.
What can we learn from the plight of the trustees in this case?
- The timing of the surveyor’s report is important – it should be obtained and considered BEFORE a contractual arrangement is entered into. This would include a ‘lock out’ agreement where the charity agrees to only deal with one potential buyer for a period of time.
- The surveyor’s report should address all the matters required by the statutory guidance – including marketing, even if a buyer has already been found – or state why these requirements are not necessary, considering the best interests of the charity.
- It is important to be aware of and check required credentials of your professional advisors. Recommendations are great, but when appointing professionals, trustees must be diligent in confirming credentials and appropriate expertise.
- Whilst it is definitely desirable for a charity to negotiate payment or part payment of its legal and professional fees as part of the transaction as a whole, it is crucial that all advisors understand that their client is only the charity and that their advice is for the benefit of the trustees: the best interests of the charity are paramount.
- Property is likely to be the most valuable asset on a charity’s books, possibly involving significant sums, particularly in the London and the South-East. Obtaining bespoke expert advice from professionals experienced in dealing with property in that location, with good knowledge of the charitable sector, is not only essential in discharging your trustee duties, but could also result in a significant cash injection for the charity which will take it into its next phase with a much healthier outlook. Where the sums involved are so significant, it must be in the best interests of the charity to fully explore these options in order to maximise return.
To discuss your specific situation, including your obligations and requirements in selling, leasing or financing property held by your charity, please do contact Nicola Paffard from our charities team.