If a charity is considering selling or developing land in order to raise funds, there are various ways of structuring the transaction to enable the charity to get the best deal possible in the circumstances. We have set out below a brief overview of the different ways of structuring such a transaction, together with the advantages and disadvantages of each method.
Selling land for development requires a balance between the charity wanting to maximise its revenue and the developer wishing to pursue a commercial venture. As a charity land seller, there are specific procedures that must be followed pursuant to sections 117 to 122 of the Act 2011 ("the 2011 Act"). Furthermore, with certain types of arrangement with a developer there will be tax and trading considerations and it may be necessary to route the transaction through a trading subsidiary.
Types of Land Transactions
Option Agreement or Conditional Contract?
A developer will want to minimise the risk of purchasing land that cannot be used for its intended purpose. In order to spread the risk, the developer may suggest the charity enters into a conditional contract or an option agreement.
- Option Agreement
An option agreement gives a developer the opportunity to purchase land within a specified period of time, usually after obtaining planning permission. However, the developer would not be contractually obliged to do so, even if acceptable planning permission was granted. This is often favoured by developers if they are unsure about the success of the development.
An option agreement enables the charity to determine the purchase price of the property, once planning permission has been granted. This will generally be based on the open market land value and will usually be higher once planning permission is in place. However, there can be much negotiation as to how this is calculated.
Although an option agreement benefits the charity as the developer will incur the costs of obtaining planning, it leaves considerable uncertainty. There is no guarantee that the developer will buy the site once planning permission has been obtained, and the charity won't be able to deal with the site for the period agreed.
- Conditional Contract
An alternative to an option agreement would be for the charity to enter into an agreement with the developer agreeing to sell the property to the developer, if satisfactory planning permission can be obtained. The developer would usually be obliged to apply for planning permission at their own cost. Completion of the sale would be triggered by the grant of satisfactory planning permission.
The charity would still be able to require the purchase price for the property to be determined on the value of the property, once appropriate planning permission has been obtained. This would allow the charity to benefit from the increased value of the property whilst the cost of obtaining planning permission is paid for by the developer.
Although a conditional contract should give the charity more certainty than an option agreement, there are often disagreements between the parties as to what amounts to â€Üsatisfactory' planning permission. The wording of this definition can be the cause of considerable negotiation. â€ÜUnsatisfactory' planning permission could result in the developer being able to pull out of the transaction on a technicality with no significant penalty. Again, this can leave the charity without a guaranteed sale and will tie up the land until resolution of the planning permission.
If it is important for the charity to have a guaranteed sale, even for a lower price, rather than enter into a conditional contract, the trustees may want to consider including overage provisions in the sale documents.
An overage agreement is an agreement whereby a land owner is entitled to receive a further payment after completion if and when certain events occur, such as the grant of planning permission, completion of a development or the construction of more than a specified amount of dwellings. Typically, the land will be sold to a developer and the charity land owner will have the right to benefit in any further uplift in the value of the land once the overage provisions have been triggered.
In theory overage arrangements would in many cases be attractive to charity land owners as they guarantee the charity an outright sale at an originally agreed price, as well as the possibility of receiving additional funds if planning permission is obtained for the site in the future or if the property is developed. However, overage agreements are notoriously complicated to draft and unless care is taken could result in the charity never receiving the benefit or uplift. There are also tax and trading considerations, which are set out in more detail below.
With all of the above mentioned arrangements, the charity will have no control over the development of the land (unless specific restrictions are imposed in the transfer of the property) and therefore the value that can be achieved. As an alternative to selling land to a developer, there are a number of different joint venture agreements that could be entered into by a charity land seller. These are agreements in which the parties agree to act together because their combination of expertise and resources enables transactions to be made that otherwise might not be possible, leading to increased profit and hopefully risk is shared and therefore reduced. The timing and basis on which the parties participate in sale proceeds or uplifted price is a matter for negotiation.
An example of such a joint venture agreement is a land promotion agreement. This is an agreement between the charity land owner and a developer where the developer agrees to promote the land for development. The developer will apply for planning permission and once secured will market the property for sale on the open market. In return for this the developer will receive a fee of a proportion of all of the net sale proceeds after various costs, such as planning costs and the costs of promoting the property, have been deducted and reimbursed to the developer.
The advantage of this type of agreement for the charity land owner is that it doesn't require the land to be sold to the developer. It is also less likely that the developer would agree unreasonable planning obligations with the local authority as this will impact on its share of the proceeds of sale. However, this type of agreement will tie the land up for the period of the agreement and there is no guaranteed buyer at the end. The developer may also want to split the initial costs with the land owner which will require significant outlay from the start. Charities should proceed with this type of transaction with caution. There are also tax and trading considerations with such arrangements. Again, please see below.
Charity law considerations
Duties and Responsibilities of Charity Trustees
Charity trustees have various duties and responsibilities pursuant to charity law (and company law if the charity is constituted as a company). These duties are wide ranging and we will not rehearse them in full here but those that will be relevant for these purposes include:
- applying the assets of the charity for the objects set out in the charity's constitution;
- acting within the powers set out in the charity's constitution or the law (this will include, but not be limited to, the power to sell);
- acting at all times in good faith and in the best interests of the charity;
- exercising proper stewardship over the assets of the charity;
- avoiding, or dealing appropriately, with conflicts of interest.
It must be remembered that charity trustees could be jointly and severally personally liable for any losses arising to their charity as a result of a breach of any of their duties.
The charity trustees must ascertain at the outset whether or not the land to be disposed of is held as permanent endowment. Basically, land will be held as such if the governing document(s) of the charity provides that only the income from the land in question can be expended: the capital will then be deemed to be permanent endowment and must be preserved. The Charities Act 2006 introduced provisions which allow charities to expend their permanent endowment, subject to certain conditions. This is by no means a straightforward topic and we have produced a separate note on this which can be downloaded from following this link. Please click here.
Sections 117 to 122 of the 2011 Act
So that charity trustees can be satisfied that they will be disposing of their charity's land on terms that are the best that can be reasonably obtained for the charity they must, pursuant to section 119 of the 2011 Act, obtain and consider a written report on the proposed disposition from a qualified surveyor acting exclusively for the charity. The report must cover specific issues including the market value of the land and advice on how the land should be advertised (unless the surveyor advises that it would not be in the best interests of the charity to advertise the proposed disposition - but this is generally the exception rather than the norm). The charity must then advertise the proposed disposition for such period and in such manner as advised by the surveyor in his report. If the land in question is designated land in that the that governing document(s) of the charity provide that the land must be use for the purposes, or any particular purposes, of the charity (ie that land is to be used by a school as school playing fields), pursuant to section 121 of the 2011 Act the charity must give at least one month's public notice of the proposed disposition: a notice attached to the building or boundary to the land in question will usually suffice and if a charity has a website the notice could be posted there too.
The charity trustees must take into consideration any representations made to them within that time about the proposed disposition. They can, however, set aside any representations that are made in the interests of other persons or bodies and not in the interests of the charity. Any decisions made by the trustees in this regard, however, must be carefully minuted. In our experience, local residents generally do feel strongly about the proposed sale and development of land that has been owned by a charity for a considerable period of time. The subject matter of representations can vary enormously and have included concerns about the relocation of wildlife and queries about a charity's legal powers to sell the land in question.
Tax and Trading
There will be tax and trading considerations which must be borne in mind in respect of more complex land transactions, including overage arrangements and joint agreements. In short, property development is not a charitable objective and it will be regarded as trading for which there are no specific tax reliefs under the Income Tax Act 2007 (for unincorporated charities - ie charitable trusts and unincorporated associations) ("the 2007 Act") and the Corporation Tax Act 2010 ("the 2010 Act") for incorporated charities (ie charitable companies). Therefore, any proceeds received from the charity in connection with such transactions are likely to be taxable. Furthermore, there are also tax provisions for land transactions which may apply to land transactions involving overage, pursuant to the 2007 Act and the 2010 Act, and which can apply irrespective of whether the seller is a charity.
As a consequence of the above tax and trading issues, it will usually be advisable to route these more complex property transactions through the charity's trading subsidiary. The relationship between a charity and its trading subsidiary must be at arms' length and in no circumstances can a charity subsidise its trading subsidiary. This means that the charity cannot simply transfer the land in question to the trading subsidiary for it to proceed with the transaction with the developer: the trading subsidiary will need to pay full market value to the charity for the land in question. The difficulty with this is that the trading subsidiary will not usually have the required capital and it will need to raise the purchase monies.
Obtaining external bank funding may well be difficult (especially in these difficult economic times). An alternative may be for the charity to provide a loan to the subsidiary (payment of which may well need to be deferred until the subsidiary has sold the land).
However, the charity trustees must proceed with extreme caution before entering into such a transaction: they would need to satisfy themselves that the proposed loan represents a sound investment. If this were not the case, the loan may be deemed by HMRC to be a speculative investment and there may be adverse tax consequences for the charity. In such circumstances, it may be necessary/advisable to obtain prior clearance from HMRC.
Irrespective of tax issues, it may well be appropriate to route more complex and risky transactions through a trading subsidiary in order to ring fence any risks and thus protect the charity from exposure to such risks. It may also be beneficial to route such transactions through a trading subsidiary for VAT reasons. However, the same arms' length considerations would apply as above.
For further information on tax and trading, please also see the Charity Commission's guidance CC35 entitled Trustees, trading and ta
It will be clear from this paper that there are various legal, financial and practical issues that need to be given careful consideration if charity trustees are thinking of selling land that is ripe for development. Which method of sale would suit a charity's requirements best will vary and will depend on the facts in each case. It is important that charity trustees take expert advice from the outset.
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.