Change afoot - Technical Issues in Charity Law consultation response

Posted: 25/05/2021

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There’s a common misconception amongst those that don’t work within the charities sector that the law which governs charities must be ‘nice’ and perhaps even a little bit ‘fluffy’. However, those of us who are active in the sector know that charity law is far from ‘fluffy’ and that for a sector which contributes billions in economic value each year, neither should it be. Charity law is complex, highly technical, archaic in parts and, at times, very unclear.

In September 2017 the Law Commission published its report on Technical Issues in Charity Law. The publication followed a public consultation which flagged serious concerns regarding some of the overly complex and resource intensive areas of charity law including:

• amending governing documents;
• land transactions; and
• permanent endowment.

Lord Hodgson of Astley Abbotts, who chaired the 2012 review of the Charities Act, compared these complexities to ‘barnacles on a boat, causing a drag when all should be plain sailing’.

On 22 March 2021, the Government published its long-awaited response.

The Technical Issues in Charity Law report made a number of recommendations aimed at maximising the efficient use of charitable funds whilst ensuring proper safeguards for the public. The Government’s response accepted 36 of the 43 recommendations (one in part). When parliamentary time allows, legislation will be brought forward to implement the recommendations.

The recommendations and the Government’s comments are covered in 12 areas and deal with the following themes:

• financial thresholds for charity registration;
• changing purposes and amending governing documents;
• charities governed by statute or royal charter: changing purposes and amending governing documents;
• cy-pres schemes and the proceeds of fundraising appeals;
• acquisitions, disposals and mortgage of charity land;
• permanent endowment;
• remuneration for the supply of goods and the power to award equitable allowances;
• ex gratia payments out of charity funds;
• charity and trustee insolvency;
• charity names;
• the identity of a charity’s trustees; and
• the Charity Tribunal and the courts.

We recommend reading the sections relevant to your organisation in detail; however, within this article we consider changing purposes and amending governing documents, acquisitions, disposals and mortgage of charity land, cy-pres schemes and permanent endowment in more detail.

Changing charitable purposes and amending governing documents

Charities can take several legal forms; charitable incorporated organisations (CIOs), unincorporated charities, charitable companies, royal charter charities and charities incorporated by an act of Parliament. Regardless of their legal form, all charities have a governing document which, from time to time, will need to be updated. There are a variety of reasons as to why a charity would need to update its governing document, from best practice changes through to fundamental changes to the charitable purposes that it pursues.

The procedures required in order for each type of charity to amend its governing document differ between legal forms eg charities governed by royal charter and by act of Parliament are subject to special (and in some cases extremely rigorous) regimes.

In order to ensure consistency in the treatment of all charities, the Law Commission recommended that there be greater alignment of the amendment regimes applicable to different charities. This recommendation was accepted in the Government’s response. Most significantly, this includes aligning the process for unincorporated charities with the process for charitable companies and CIOs ie changes being made by resolution of the trustees (and, if applicable, the members), with certain regulated amendments being subject to Charity Commission consent.

For charities established by an act of Parliament or royal charter, it is proposed that the convoluted and lengthy processes entailed with any amendment to governing documents will be simplified. For example, it is proposed that a new express amendment power be granted to royal charter charities without such a power, saving the time and expense involved in the supplemental charter procedure.

Linked to changing purposes, a common issue which can arise in relation to fundraising involves cy-pres schemes and the proceeds of fundraising appeals. The Government accepted all of the Law Commission’s recommendations in relation to unlocking restricted funds, including:

• introducing a financial threshold of £120 below which the charity would not have to contact donors if a fundraising campaign to which they had donated had not met its target;
• the introduction of a simplified process for contacting donors, when required. The updated process will remove the often disproportionate and inflexible requirements to make enquiries and advertise. Instead trustees will be required to ‘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’; and
• permitting trustees to resolve to apply a fund cy-pres (ie for another similar charitable purpose) without Charity Commission consent where the fund does not exceed £1,000.

Permanent endowment

Unique to charities, permanent endowment is property of the charity (which includes land, buildings, cash or investments) which cannot be spent ie it must be held permanently. Having assets protected in this way sounds, at first, positive; however, often difficulties arise where permanent endowment property is unhelpfully restricted. For example, the costs of simply administering the permanent endowment could be disproportionate to the income it yields, yet the charity is restricted from spending the permanent endowment.

Furthermore, the legal definition of permanent endowment in section 353 of the Charities Act 2011 is unclear and inconsistent leading to different interpretations of what qualifies as permanent endowment.

The Government accepted all of the Law Commission’s recommendations in relation to permanent endowment and agreed to clarify areas of confusion and, in certain circumstances, make the spending of permanent endowment easier. These include:

• reformulating the definition of permanent endowment in section 353 of the Charities Act 2011 to remove the lack of clarity and inconsistencies and enable charities to make more effective use of their permanent endowment;
• when looking to spend permanent endowment, the financial thresholds that determine whether trustees must obtain Charity Commission consent or not should be clarified and increased to £25,000. The hope here is that larger funds will still receive Charity Commission oversight; however, smaller funds will be released from unnecessary bureaucracy and costs. Similarly, currently this power is only available to unincorporated charities and it will be extended to CIOs and charitable companies; and
• permitting trustees to borrow from their permanent endowment by allowing them to resolve to spend up to 25% of the value of the permanent endowment subject to a requirement that they recoup that expenditure within 20 years.

Acquisitions, disposals and mortgage of charity land

Disposals of land (whether by selling, letting or mortgaging) by charities are subject to certain legal rules. The Law Commission’s consultation included recommendations which would see the simplification of law surrounding the disposal of charity land including ensuring trustees can access the right levels of professional advice in a way which is proportionate and appropriate to their particular circumstances.

Of particular interest here is the fact that the Government rejected two (of eight) of the Law Commission’s recommendations in relation to acquisitions, disposals and mortgages of charity land citing that the way the provisions worked in practice makes them more important safeguards than an analysis of the law alone would suggest. For example, the Law Commission had recommended that the connected person regime also exclude disposals to wholly-owned subsidiaries (provided that the Charity Commission’s guidance made it clear that such disposals should be for the best terms that can reasonably be obtained for the charity) subject to the requirement to notify the Charity Commission of such disposals. The Government rejected this approach because it felt that this would be open to potential abuse and/or mismanagement, particularly as regards conflicts of interests, and that mere notification of such disposals would not give the Charity Commission enough power to prevent improper disposals.

For those charities that have a larger group structure this may be disappointing, such as non-exempt charitable housing providers registered with the Charity Commission which may look to move property around the group in order to make best use of assets.

The second Law Commission recommendation that was not accepted by the Government was the recommendation that the requirements in section 121 of the Charities Act 2011 requiring charities to advertise the proposed disposal of designated land (ie specific land held for the purposes of the charity) should be abolished. The Government rejected the recommendation noting that long standing community assets – including recreation grounds, almshouses and local school, church and/or village hall properties – are typically held as designated land. Proposed disposals of these community assets can be controversial and attract substantial public interest; as such, the Government considered that the requirement to advertise proposed disposals continues to be important in order to ensure all stakeholders can be informed and make representations before assets are sold.

However, the Government did accept the proposals which will resolve gaps in protection for buyers of charity land, gaps which can currently deter buyers or increase the charity’s cost of selling. This includes widening the pool of advisers qualified to provide a valuation report in relation to the sale or letting of charity property and simplifying the surveyors’ reporting requirements. Furthermore, suitably qualified charity trustees, officers and employees will also be able to give advice on property disposals.

The statutory requirement for trustees to advertise a disposal as advised in the surveyor’s report is being removed. Instead, reliance will be placed on trustees to have considered the expert’s advice and act appropriately in the circumstances.

The Law Commission report recommended that 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 that a contract for a disposition of charity land should be enforceable by a purchaser if such a certificate has been given in the contract or a certificate has not been given but the purchaser has acted in good faith. The Government accepted this proposal.

The other proposals which were accepted by the Government will simplify the law about disposing of charity land which has multiple beneficiaries and when it is being disposed of by a liquidator or administrator. Finally, they will simplify the highly technical law around how certain universities and colleges dispose of land, aligning it with broader charity and trust law.

It is proposed that the Charity Commission’s guidance note on Acquiring Land (CC33) will be amended and updated to reflect the accepted recommendations and provide detail regarding when trustees might reasonably decide not to take advice from advisers.

What’s next?

It is positive news for the charities sector that the majority of the proposals were accepted by the Government and the recommendations, once enacted, will go some way to smoothing out a number of the current disparities and complications in charity law.

On 11 May 2021, the Queen’s speech confirmed that a ‘charities bill’ will be introduced to address the range of issues highlighted by these recommendations. Given that this bill will take forward the Law Commission’s recommendations, it may be possible for the charities bill to be fast-tracked through Parliament if all parties see it as non-controversial. In 2021’s choppy waters it may not be too long before all of the barnacles are removed and the charity law framework permits plain sailing. Watch this space…

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