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Charity Trustees breach land disposal rules

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On 30 March 2017, the Charity Commission published a report on its inquiry into the Spiritualist Association of Great Britain Limited. The regulator carried out a detailed investigation into the charity trustees’ decision to dispose of the charity’s leasehold interest in a property to a company registered in the British Virgin Islands for £6 million. The purchaser immediately sold the property on to another BVI registered company for over £21 million. The charity trustees failed to demonstrate to the Commission that the steps they had taken and their decision-making in relation to the disposal were in the interests of the charity.

The regulator found that the charity trustees had failed to comply with the restrictions on disposals of charity land imposed by sections 117 to 122 of the Charities Act 2011 (ChA 2011) when entering into three separate agreements relating to the sale of the land (including an agreement locking the charity into the terms of an anticipated disposal). These were not minor or technical breaches, they amounted to basic and serious mismanagement by the charity trustees.
In addition to these breaches, the charity trustees had failed to:
• Conduct proper (or any) due diligence on the prospective purchaser (a shell company) to satisfy themselves that the offer for the property was sound and that the charity would not be unnecessarily exposed to risk by contracting with it.
• Obtain specialist and independent advice about how to achieve maximum return on a property disposal where the post-disposal value was likely to appreciate considerably.
• Obtain, follow, or take proper account of, appropriate professional advice.
In particular, the charity trustees initially instructed solicitors who were not charity law specialists, as well as a surveyor who did not meet the statutory qualification criteria and who prepared two valuation reports that did not comply with the Charities (Qualified Surveyors’ Reports) Regulations 1992 (SI 1992/2980).
When the first firm of solicitors expressed serious concerns about proceeding with the transaction in breach of the statutory requirements, the charity trustees dispensed with their services. An alternative firm of solicitors was then appointed, who were happy to proceed with the transaction without investigating the first solicitors’ concerns.
Despite its finding of mismanagement by the charity trustees, the Commission decided against further regulatory action on the basis that the disposal was completed in 2010 and the likelihood of being able to unpick the transaction was remote, as it would require demonstrating bad faith on the part of the purchaser who otherwise could rely on the saving provision in section 122(6) of ChA 2011.
Also, the regulator found no evidence of any charity trustee (or anyone connected to them) having derived an unauthorised private benefit from the disposal of the property.
As well as reinforcing the importance of complying with the statutory rules on disposals of charity land, the report illustrates that, however difficult the financial situation may appear, charity trustees must remain clear headed when evaluating the risks and benefits of any offer to purchase the charity’s assets. Their duty is to:
“…act with reasonable diligence and to conduct [the charity’s] affairs in the same manner as an ordinary prudent man of business would conduct his own affairs, save that he must consider that he is acting for the benefit of the charity’s objects which usually excludes speculative transactions which he might occasionally make for himself.”
(Mountstar (PTC) Limited v Charity Commission England and Wales).
In this case, the charity trustees should have carried out a thorough inspection of the “gift horse”, with the aid of specialist professional advice, to carefully probe the complexities and commerciality of the deal.
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