UK: Disposing Of Charity Land – The Requirements And Possible Options

Last Updated: 18 June 2014
Article by Mark Rowden

When a charity disposes of land, regard must be had to the statutory requirements of the Charities Act 2011 and the trustees must be satisfied that the disposal is on the best terms possible for the charity , such that it is in the charity's best interests to complete the transaction. Examples of when a charity may dispose of land include where it finds it has surplus land, perhaps left to it in the Will of a supporter or it wishes to relocate charity premises or release cash proceeds from a sale. In each case, the trustees should consider whether it would be better to retain the land for the longer term. In the meantime income could be produced from the land or the land could be used for the charity's benefit. Therefore trustees must give careful consideration to any proposal to dispose of land which may be useful to the charity in the future.

Charity trustees have duties and responsibilities pursuant to charity law (and company law if the charity is constituted as a company) in terms of both safeguarding the charity's assets and when making decisions to sell, lease or mortgage charity land. Trustees have a duty always to act to protect all property owned by their charity; they must manage, supervise and have overall control of it, including putting in place adequate insurance and taking steps to ensure that it otherwise remains in good condition. Trustees should seek to get the most out of charity property, including, where appropriate, earning additional income from it for the charity.

When it comes to disposing of charity land, the starting point under the Charities Act 2011 is that no interest in land may be conveyed, transferred, leased or otherwise disposed of by a charity without the consent of the court or the Charity Commission. However, in most cases, the trustees will be able to dispose of land and property without having to seek such consent so long as the appropriate procedures under that Act are followed (see below). The risk in not doing so is that the transaction could be rendered void and the trustees could find themselves, in certain circumstances, exposed to personal liability.

Sections 117 to 122 of the Charities Act 2011 contain the core provisions regarding the disposal of land by charities. Essentially, the provisions seek to ensure that the trustees are disposing of the land on terms that are the best that can be reasonably obtained. Most disposals will require the procedure in section 119 to be followed (see below). The grant of a lease for less than seven years will require adherence to section 120 and, for completeness, different requirements/procedures will apply if the disposal is to another charity.

Under section 119, the trustees must:

  • obtain and consider a written report from a qualified surveyor acting exclusively for the charity;
  • advertise the disposal (if required following the advice from the surveyor); and
  • then decide that they are satisfied that the proposed terms are the best that can reasonably be obtained in the circumstances of the disposal.

It is a requirement that the surveyor is "qualified", that is a person who is professionally qualified for example a Member or Fellow of the Royal Institute of Chartered Surveyors (RICS) and the trustees reasonably believe has the ability in and experience of, valuing land of the particular kind and in the particular area in question. The written report must comply with the Charities (Qualified Surveyors Reports) Regulations 1992 and a properly qualified surveyor who deals with charities will know about the 1992 Regulations.

If the land is designated land i.e. the governing documents or title documents provide that the land must be used for the purposes or any particular purposes of the charity (eg the land is to be used by a school, as school playing fields) section 121 provides that where the trustees are disposing of all or some of the charity's designated land and they are not replacing it they must give public notice of the disposal which invites representations. The notice period must be for at least a month and the form and extent of the notice will depend on the type and size of the charity. The purpose of the notice is to reach at reasonable cost as many beneficiaries and other people who may have an interest in the charity as is possible. The trustees must take into consideration any representations made to them within that time about the proposed disposition.

Further requirements apply if a mortgage is involved.

When the prescribed steps above have been taken then, provided that there is power under the trusts of the charity to make the disposal and the transaction is not in favour of a person or entity connected to the charity or the trustees, the land can be disposed of. In all circumstances the trustees should carefully minute their decisions.

If, after proper and careful consideration, it is decided to dispose of the land the trustees will need to consider what method of disposal they will use. For purposes of the rest of this article, we are assuming that the trustees decide to sell the freehold interest in the land as opposed to granting a lease whether short or long term.

The most common method of disposal will be a private treaty sale whereby the land is sold on the open market with contracts being exchanged and the sale being completed within an agreed time period thereafter. An alternative to a private treaty sale which trustees might consider is a sale at auction. By this method the land is entered into an auction and once a buyer has had their bid accepted they are then committed to buy the land with completion taking place normally one month following the date of the auction.

A sale at auction can be a useful way of getting a quick sale or selling land which has been difficult to sell by normal marketing however a reserve must be put on the lot in order to achieve at least the value recommended by the surveyor instructed by the trustees. The trustees however will need to have made sure that they have complied with the statutory duties to which we have already referred in this article before entering the land in the auction otherwise they will not be able to complete the transaction without an Order of the Charity Commission. Further it is advisable to include in the auction conditions a special condition that the sale will be subject to obtaining an Order of the Charity Commission if the proposed buyer turns out to be a "connected person" i.e. anyone closely connected to or associated with the charity.

If the trustees believe the land may have development value they need to think whether another method of disposal is more appropriate and in the best interests of the charity. The trustees might consider making an application to the local planning authority for planning permission themselves as the grant of planning permission should enhance the value of the land. They could then dispose of the land with the benefit of the planning permission.

The trustees might however not wish to be involved in obtaining planning permission as there is of course the possibility that planning might not be granted and therefore the costs incurred would be wasted. Accordingly they might consider a disposal by way of an option agreement or a conditional contract.

An option agreement gives the buyer the opportunity to purchase the land within a set period of time, often after obtaining planning permission. However, the buyer is not contractually obliged to do so, even if they have obtained an acceptable planning permission.

The trustees are able to determine the purchase price of the property, once planning permission has been obtained and normally this would be based on the open market value of the land.

Whilst the buyer will incur the costs of obtaining planning permission there is still uncertainty as the buyer does not have to buy the land once planning permission has been granted. Further the trustees will not be able to deal with the land for the period of time set out in the agreement (the option period).

An alternative is for the trustees to enter into an agreement with a buyer whereby they agree to sell the land to the buyer, if satisfactory planning permission is granted. Such an agreement is called a conditional contract. Normally, the buyer will agree to apply for planning permission at its own cost. Completion of the sale would then be triggered by the grant of a satisfactory planning permission.

The trustees are still able to require the purchase price to be determined on the value of the land, once an appropriate planning permission has been granted. Therefore, the trustees will benefit from the increased value of the land but the cost of obtaining the planning permission will have been met by the buyer.

The trustees will have more certainty from this type of arrangement as opposed to an option however there can be disagreements between the parties as to what amounts to a "satisfactory" planning permission. The definition of what constitutes a "satisfactory" planning permission will often involve a a considerable amount of negotiation. An "unsatisfactory" planning permission could result in the buyer being able to withdraw from the purchase, with no penalty.

If the trustees require a guaranteed sale, perhaps for a lower price then rather than entering into a conditional contract or option agreement, they might want to think about including what are called "overage provisions" in the sale contract.

In an overage agreement a seller is entitled to receive a further payment after completion if and when certain events occur, e.g. the grant of a planning permission. A usual situation is where land is sold to a buyer and the seller will have the right to benefit from any further uplift in the value of the land once the overage provisions have been triggered.

On the face of it such arrangements appear to be attractive as they guarantee a sale at an agreed price, and there is the possibility of receiving additional funds if certain events occur in the future. However, such agreements are notoriously complicated to draft and great care must be taken to ensure that the trustees receive the uplift. In addition there are tax and trading considerations which must be borne in mind when dealing with these more complex land transactions however, such matters are beyond the scope of this article.

There are a number of different joint venture agreements which trustees might consider rather than selling to a buyer. These types of agreement are where the parties agree to act together and their combination of expertise and resources enables the transaction to proceed when otherwise it might not be possible. An example of such an agreement is a Land Promotion Agreement.

As will have been seen from this article, trustees need to give very careful consideration to various legal, financial and practical issues when they are thinking of selling land particularly if the land has development value. The decision as to which method of sale will best suit their requirements in any particular case will depend on the facts of the case. As a result it is important that trustees take expert advice from the outset of any such project.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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