UK: Breaking News… On The 14th September, The Law Commission Published Its Report On Technical Issues In Charity Law

Last Updated: 5 December 2017
Article by Sylvie Nunn

At 484 pages, it is quite a read, so we have summarised some of the key points below.

If you have an interest in charity law, the full report is worth reading: if its 43 recommendations are implemented and the draft Bill is enacted, the changes to technical aspects of charity law will be wide-reaching.  The Law Commission has also provided an authoritative analysis of various aspects of charity law that have been challenging the sector, which is helpful.

It is not clear when the Bill might be laid before Parliament, but we hope that it is: the Bill addresses a wide number of issues that have been frustrating the charity sector for some time.

So what are the main proposed changes?

 The main recommendations cover:

Changes to governing documents

The process will potentially change for all types of charity, including CIOs, companies, unincorporated charities, charities established by Royal Charter and by statute – but not charitable Community Benefit Societies:

  • The Law Commission propose changes to regulated alterations for companies at s198 (with mirroring provisions for CIOs).
  • A new section 280A will be added (for unincorporated charities), which gives much wider powers of amendment but introduces the concept of regulated alterations for unincorporated charities for the first time.
  • Sections 267 to 280 (the power to make transfers of property from unincorporated charities, resolutions to replace the purposes of such charities or amend their powers and procedures) will be repealed as a result.
  • All regulated alterations will require CC consent and there is a new requirement for the Commission to consider certain matters before consenting, which seeks to mirror the considerations on cy-près occasions.  This is one area which we think may attract comment: new section 198(2A)(a), which refers to the Charity Commission being required to have regard to the purposes of the charity 'when established', might be challenging, given that not all charitable companies start out as charities and many change their objects multiple times. 
  • Legislation is also proposed to make amending charities established by Royal Charter and statute easier, which can only be welcomed.

Land

A number of changes are being proposed, to simplify the process, so care will be required when disposing of charity property.

  • The proposed changes to part 7 of the Charities Act 2011 allow more flexibility on who trustees can seek advice from and the contents of the reports: persons connected to the charity such as trustees and employees will be able to provide the advice, provided they can certify that they have the necessary expertise and experience.
  • The Bill removes the proposed requirement for public notices in some cases, such as for disposals of 'designated' land (i.e. land required to be used for stipulated purposes of the charity).
  • The Bill also provides for certificates from trustees on exchange of contract (not just on completion), to avoid the issues arising from the Bayoumi case, where the contract was held to be unenforceable.
  • The Bill also provides some much needed clarity, by amending part 7 to clarify that it only applies where land is held by or on trust for a single charity.
  • The connected persons rules are to change, so there will no longer be a need to get Charity Commission consent to a disposal of land to a trading company; but the Charity Commission must be informed and sent a copy of the advice.  It is not immediately clear what the implications are for charities if they fail to inform the Commission in this way – it does not look as though that would invalidate the disposal.
  • Certain tenancies to employees would not need Charity Commission consent. Note true service occupancy agreements (i.e. a requirement to reside as a term of the employment contract) have always been outside this regime.
  • Administrators, Liquidators etc. are to be excluded from the application of Part 7 (disposals and mortgages of land), which we are sure will come as a relief to them, as well as providing clarity about who is and is not a charity trustee for these purposes.
  • The Bill also gives more powers related to land to Universities and Colleges (repealing the detailed provisions of the University and College Estate Act 1925 and mirroring Trusts of Land and Appointment of Trustees Act 1996 and the Trustee Act 2000 powers).

Permanent endowment

There is to be a new, clearer definition: a fund or asset will be deemed to be permanent endowment "if it is subject to a restriction on being expended which distinguishes between income and capital".  The sections on permanent endowment in the report are very much worth reading, if this is something you deal with, or your charity has permanent endowment.  In addition to the new definition:

  • Charities will be able to 'borrow' against permanent endowment (like under the old Charity Commission 'recoupment' orders, but by trustees' resolution), but only up to 25% of the permanent endowment.
  • The power to lift the restriction on spending capital will be changed – income levels will become irrelevant to whether Charity Commission consent is needed and only the capital value will be taken into account, so that if the capital value is over £25,000, Charity Commission consent will be required for the resolution to be valid.  The timings for that consent have been changed (60 days from 3 months).

Cy-près

There are a number of proposed changes, to simplify the process of dealing with failed appeals, which can only be welcomed.

  • It includes a de minimis threshold, where, if donations are under £120, you can generally apply the funds cy-près without needing to contact the donors.
  • Trustees will be able to pass a cy-près resolution instead of getting a scheme in some cases, although Charity Commission input will still be required in some cases (such as where funds are over £1000).

Trustee payments

A number of changes are proposed which relate to payments to trustees (a notoriously difficult area for some charities):

  • Section 185, which allows trustee payments in some cases, is to be amended to include goods.  This was excluded before, unless those goods were connected to services also being provided.
  • The Charity Commission will also be able to require a charity to remunerate a trustee for work done or allow that trustee to keep money paid – in some circumstances.  The points the Charity Commission has to consider in making such an order may well mean that they do not do this often in practice, however.

Ex Gratia payments

There are to be new rules on the power to make non-charitable payments where trustees feel a moral obligation to someone (for example a family member where a legacy has been left to the charity), including:

  • proposed permitted de minimis amounts that increase on a sliding scale according to the size of the charities, from £1,000 to £20,000 – provided the trustees have a 'moral obligation' to make the payment.  This could be helpful in settling disputes.
  • The decision to make ex gratia payments will be delegable and will includes statutory charities.

Mergers / incorporations

A number of recommendations to make mergers and incorporations easier are proposed:

  • Vesting declaration provisions are to change: some exclusions have been removed
  • Section 268 is to be repealed (the power to transfer all property of unincorporated charity), because of the changes to section 280 (the power to make changes to the constitutions of unincorporated charities – see above).
  • The register of mergers 'problem' is resolved, so shell charities should not be required to 'save' legacies once the legislation has been implemented.  We would recommend reading this section of the full report if this is of interest.
  • Trust corporation status is to be granted automatically to a charitable corporation in respect of any charitable trust of which the corporation is (or in the future becomes) a trustee, which is great news.  This will be without limitation, so it includes companies, CIOs, statutory corporations and those established by Royal Charter, and some CBSs and there will be no need (necessarily) for the Charity Commission to appoint or to get a declaration from the Secretary of State (except to take out grants of representation).
  • Regulation 61 of the CIO (General) Regulations 2012 is revoked as it will no longer be required.

Names

The Charity Commission sometimes has to deal with disputes about charity names.  The recommendations will increase their powers:

  • The Charity Commission will be able to force charities to change a working name (and not just their official name) in an amendment to s42.
  • This also allows the Commission to delay registration or filing the change of name.

Trustee appointments

The Charity Commission will have a new power to ratify appointments to trustees and ratify prior decisions, which could be helpful if a trustee was inadvertently not appointed properly.

Charity proceedings

This relates to certain 'internal' proceedings (for example conflicts between members of a charity and its trustees, where the Charity Commission must consent to the proceedings before the court can hear the case).  It is proposed that the court will have the power to authorise if the Charity Commission has a conflict of interests.

Authorisation of costs in proceedings

Whether charity trustees can properly incur litigation costs is a constant area of anxiety for trustees, especially where a charity in unincorporated.  The proposed changes will help:

  • There will be something like a Re Beddoe order, which the Charity Tribunal can grant in order to provide protection on costs to trustees in litigation.
  • It covers costs incurred, future proceeding costs and costs ordered if the charity does not win

References to the Tribunal

It is proposed that the Charity Commission should be able to make references, to develop the law, without going to the Attorney General (but each must notify the other four weeks before if they intend to).

This is a very brief overview, but we hope it gives a taste of what might be to come! 

Navigating the report

If this is something you are interested in and you are short of time, we recommend reading the separate summary first, then starting on page 355 with the 43 recommendations.  There is a tracked version of the Charities Act 2011 on the website, here: https://www.lawcom.gov.uk/project/charity-law-technical-issues-in-charity-law/, which may make easier reading than the Bill does and the explanatory note (page 422 et seq) is also helpful.

In relation to the proposals for charity land, see chapter 7 (page 129 et seq), pages 395 et seq of the bill, and pages 442 et seq of the explanatory note.

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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