Special Public Bill Committee on the Charities Bill
Call for Evidence – Bates Wells’ submission
1.1 This submission is made by Bates Wells in response to the Special Public Bill Committee on the Charities Bill’s Call for Evidence dated 8 September 2021.
1.2 Bates Wells is a leading charity and social enterprise law firm, advising nearly 25% more charities in the top 3000 (by size) than any other law firm and ranked in the top tier in Legal 500 and Chambers UK. Our lawyers sit on the board of over 60 charities and so we also have experience of seeing legal issues through the eyes of charity trustees.
1.3 Our contribution to the charity law reforms to be implemented by the Charities Bill date back to the independent review of the Charities Act 2006 undertaken by Lord Hodgson of Astley Abbots in 2011/2012, in relation to which this firm made a submission. Since Lord Hodgson’s review, which underpinned part of the Law Commission’s investigation into technical charity law issues, we have:
1.3.1 submitted a detailed response to the Law Commission’s original consultation on technical issues in charity law, issued on 20 March 2015;
1.3.2 submitted a response to the Law Commission’s supplementary consultation issued on 1 September 2016 in relation to two issues arising from the original consultation; and
1.3.3 contributed to the Charity Law Association’s detailed submissions to the Law Commission in response to the consultation as well as its submissions to the Law Commission on drafts of the Charities Bill, including in February 2021.
1.3.4 For more information on any of the issues mentioned in this submission, please contact Laura Soley at l.soley@bateswells.co.uk and Lucy Rhodes at l.rhodes@bateswells.co.uk, who would be pleased to give oral evidence, if helpful.
2.1 We welcome the Charities Bill which is the culmination of a detailed and well-considered project by the Law Commission looking to address complex and inconsistent legal issues and unnecessary regulation affecting charities. Our view is that the Bill will bring about some much-needed changes to charity law and we understand that it is expected to achieve significant savings for the sector[1]. This is particularly welcome at a time when charities continue to respond to and recover from the impact of the Covid-19 pandemic.
2.2 A key objective behind the Charities Bill is to “reduce unnecessary and overly bureaucratic regulation” including by giving “charities wider or additional powers and flexibility”[2] in particular areas of charity law. Although the Bill achieves this objective in relation to many of the proposed reforms, we have identified a number of changes which run counter to it. Our reason for submitting evidence is to draw these changes to the attention of the Special Public Committee and, where possible, suggest solutions. We have focused our submission on what we see as the significant issues given the limited time available and that we have previously provided comprehensive comments on the Law Commission’s recommendations and detailed contributions to the Charity Law Association’s comments on the Charities Bill. We also have comments on drafting points and would be happy to draw up a list of them for the Committee at a later date.
2.3 In this submission, we cover the following aspects of the Charities Bill:
2.3.1 Changing purposes and amending governing documents. In paragraph 4, we comment on inconsistencies between the proposed rules for amending the governing documents of different legal forms which means that the new powers will not be aligned as intended and on aspects of the new regime which will result in increased red tape for many charities. We also advocate for the retention of s267-274 (powers for small charities to transfer property) and s275 (power for small charities to change purposes) on the basis that we do not perceive any advantages to repealing these provisions given the increased bureaucracy and cost that this will add for small charities and funds.
2.3.2 Permanent endowment. In paragraph 5, we make suggestions in relation to how the proposed new definition of permanent endowment in the Charities Bill could be clarified. We also comment on the removal of the income test when determining whether or not s282 Charities Act 2011 applies (and Charity Commission consent is required) in relation to a decision to spend the capital of an investment permanent endowment fund. As we explain in more detail below, our view is that this will result in more endowment funds being brought within the scope of s282, contrary to the intention behind the proposed change.
2.3.3 Working names. While we broadly welcome the new powers in relation to names and working names, we have concerns in relation to how the new rules will be administered in relation to working names, which we comment on in paragraph 6.
2.3.4 Ex gratia payments. At paragraph 7, we make a minor suggestion in relation to the location of the new power for charity trustees to make ex gratia payments so that it is easier for trustees to find (and not miss) the new provision.
2.3.5 Charity land and ‘social disposal’ power. At paragraph 8, we note our agreement with the Government’s rejection of the recommendation to repeal s121 Charities Act 2011 (recommendation 18). In response to the Committee’s offer to consider any other proposals in relation to technical provisions which would assist charities (but have not been suggested so far) we propose a ‘social disposal’ power. This can be achieved by amending the current wording of Clause 18 of the Charities Bill and would allow for real estate to be disposed of for a combination of financial return and advancement of charitable purposes.
2.3.6 Trustee appointments. We welcome the inclusion in the Bill of a new power for the Charity Commission to confirm trustee appointments. At paragraph 9, we comment on difficulties which charities have experienced in relation to the Charity Commission’s willingness to exercise its existing powers to confirm trustee appointments and determine membership. We note that the power to confirm trustee appointments will be most useful if the Charity Commission takes a proportionate approach to its exercise of the new power.
3.1 The Law Commission’s report “Technical Issues in Charity Law” (Law Com No 375)[3] provides, at paragraph 1.19, that its recommendations which have culminated in the Charities Bill seek to meet the following objectives:
3.1.1 to remove unnecessary regulation and bureaucracy in order to maximise the efficient use of charitable funds;
3.1.2 to increase the flexibility of trustees to make decisions in the best interests of their charities;
3.1.3 to confer wider or additional powers on the Charity Commission in order to increase its effectiveness;
3.1.4 to ensure adequate protect of charity property in order to enhance donor confidence and public trust, in particular supporting confidence in the use of donations currently and in the future; and
3.1.5 to remove inconsistencies and complexities in the law making it clearer for charity trustees, staff, volunteers and professional advisers seeking to apply it and comply with it as well as reducing legal and other professional costs.
3.2 The Technical Issues in Charity Law report makes a number of recommendations to maximise the efficient use of charitable funds whilst ensuring proper safeguards for the public. These include, among others:
3.2.1 for charities:
(a) changes to the law to help charities amend their governing documents more easily with Charity Commission oversight where appropriate; and
(b) increased flexibility to use their permanent endowment, with checks in place to ensure its protection in the long term.
3.2.2 for the Charity Commission:
(a) bringing in a single set of criteria to decide changes to a charity’s purposes;
(b) increased powers to prevent charities using misleading names; and
(c) the ability to confirm that trustees were properly appointed.
3.3 We agree with the overarching objectives of the Charities Bill which seek to address a number of technical issues which cause difficulties for charities and to clarify a number of grey areas of the law. We are broadly supportive of the Charities Bill. However, our view is that there a number of areas where we do not think the objectives have been wholly met and, in particular, where our view is that the changes will result in unnecessary increased regulation and bureaucracy and loss of flexibility for charities and where amendments would therefore be helpful.
4.1 As is recognised by the Law Commission in its report, charities need to keep their governing documents under review and should seek to update their governing documents to ensure the charity’s continued effectiveness. It is important to ensure that charities can make changes in an efficient and cost-effective way, subject to suitable safeguards to ensure amendments are appropriate.
4.2 Charities may take a number of different legal forms such as charitable companies, trusts, unincorporated associations, charitable incorporated organisations and so on. As things stand, the ability of charities to change their governing documents and the Charity Commission’s powers, depend on the charity’s legal form. The Law Commission proposes that the processes are aligned for the main different legal forms, so far as possible.
4.3 However, our view is that:
4.3.1 The proposed new regime in the Charities Bill leaves a number of inconsistencies between the different legal forms so that the powers are not aligned; and
4.3.2 More importantly, the perceived benefits of aligning the regimes are in any case outweighed by the increased red tape which will result for many charities under the new regime, and so the proposed regime does not meet the Law Commission’s objective of reducing red tape and cost for charities and does not achieve the goal of helping charities amend their governing documents more easily.
4.4 We set out our particular concerns below.
4.5 Charitable companies – amending purposes
4.6 As things stand, where a charitable company seeks to amend its objects, the Charity Commission’s prior consent is required under s198 Charities Act 2011. When considering whether to give consent, the Charity Commission currently applies the following non-statutory test (see the Charity Commission’s operational guidance here):
4.6.1 The new objects (or provisions for the distribution of assets on dissolution) are exclusively charitable;
4.6.2 The trustees’ decision to make the change is a rational one in the circumstances of the charity; and
4.6.3 The new objects do not undermine or work against the previous objects.
4.7 As noted in the operational guidance, if these three limbs are met, the Charity Commission gives consent even when it involves a major change to the objects.
4.8 However, under the provisions of the Charities Bill, s198 of the Charities Act 2011 is amended to add a new statutory test which the Charity Commission must have regard to in deciding whether to give consent to a change of objects of a charitable company. The test requires the Charity Commission to consider the following:
4.8.1 The purposes of the company when it was established, if and so far as they are reasonably ascertainable;
4.8.2 The desirability of securing that the purposes of the company are, so far as reasonably practicable, similar to the purposes being altered; and
4.8.3 The need for the company to have purposes which are suitable and effective in the light of current social and economic circumstances.
4.9 This brings the test for amending objects broadly in line with the test under current s67(3) Charities Act 2011 (cy-près schemes) which currently only applies to a narrow group of charities, being unincorporated charities which do not have an express power of amendment and which are not small charities which fall within the scope of s275 Charities Act 2011.
4.10 We have the following concerns:
4.10.1 The outcome is that it will become harder for charitable companies to change their purposes and so to adapt and evolve to changing circumstances – so increasing red tape. The new test is narrower than the current non-statutory test applied by the Charity Commission and, given the first and second considerations noted at paragraphs 4.8.1 and 4.8.2 it is likely to be harder to justify a significant departure from the current objects.
4.10.2 Furthermore, the new test aligns the test with the current cy-près test for unincorporated charities, which actually only applies to a minority of unincorporated charities. Most modern (and indeed many older) unincorporated charities have an express power of amendment. Where an unincorporated charity has an express power of amendment which permits amendment of the charity’s objects subject to Charity Commission consent, the Charity Commission currently applies the same test which it currently applies to charitable companies when deciding whether to give consent i.e. that the new objects or dissolution provisions are exclusively charitable, the trustees’ decision to make the change is a rational one in the circumstances of the charity and the new objects do not undermine or work against the previous objects. We have highlighted below that it would be open to the Charity Commission to continue to apply this regime to unincorporated charities with an express power of amendment as they fall outside the new regime. To this end, (a) it is not clear why the new test is thought to be the most suitable given that the test is much stricter than the current test applied by the Charity Commission to almost all charities and (b) it will not lead to alignment of the current regimes which apply to different legal forms as the equivalent new test for unincorporated charities under new s280A(10) (see below) will not apply to the large number of unincorporated charities which have an express power of amendment.
4.10.3 In addition, charitable companies will often update their objects fairly regularly over time. To this end, it is unclear why the new test requires consideration of the objects of the company when it was established, which may have changed considerably over time. Our view is that the test should refer to the current objects.
4.11 Charitable incorporated organisations – amending purposes
4.12 As is the case for a charitable company, where a charitable incorporated organisation amends its objects, the Charity Commission’s prior consent is required under s226 Charities Act 2011. When considering whether to give consent, we understand that the Charity Commission currently applies the same non-statutory test as the test which it applies when considering amendments to the objects of a charitable company (see paragraph 4.6 above and paragraph 4.124 of the Law Commission’s Technical Issues in Charity Law report) (which, as noted, is also the test which the Charity Commission applies when considering whether to give consent to the amendment of the objects of unincorporated charities with an express power of amendment).
4.13 Under the provisions of the Charities Bill, s226 of the Charities Act 2011 is amended to add a new statutory test which the Charity Commission must have regard to in deciding whether to give consent to a change of objects. This test mirrors that for charitable companies outlined at 4.8 above.
4.14 To this end, our comments in relation to charitable companies above similarly apply to charitable incorporated organisations. In particular, under the new test, it will become harder for CIOs to change their purposes and so red tape will be increased.
4.15 Unincorporated charities – amending purposes
4.16 Under the current law, there are three main ways for unincorporated charities (trusts and unincorporated associations) to amend their purposes:
4.16.1 By exercising an express power of amendment (which will usually, but not always, require Charity Commission consent);
4.16.2 For small charities, using the power in s275 Charities Act 2011, subject to Charity Commission consent; or
4.16.3 Where there is no express power and s275 is not available, making a case to the Charity Commission for a cy-près scheme.
4.17 Under the Charities Bill, a new power of amendment is added at new s280A Charities Act 2011 which will allow trustees to decide to change the purposes of their charity subject to Charity Commission consent. This power can be used where the charity has no express power or as an alternative to an express power. In addition, s275 Charities Act 2011 is repealed.
4.18 In considering whether to give consent, the Charity Commission must have regard, under s280A(10) to the following:
4.18.1 The purposes of the charity when it was established, if and so far as they are reasonably ascertainable;
4.18.2 The desirability of securing that the purposes of the charity are, so far as reasonably practicable, similar to the purposes being altered; and
4.18.3 The need for the charity to have purposes which are suitable and effective in the light of current social and economic circumstances.
4.19 This mirrors the new test for charitable companies and CIOs outlined above.
4.20 The advantage of new s280A is that it will no longer be necessary to seek a cy-près scheme – and, in particular, it will no longer be necessary to show that a cy-près occasion has occurred under s62 Charities Act 2011.
4.21 However, in our view, there are a number of disadvantages as outlined below:
4.21.1 As with the new test for charitable companies and CIOs, it is not clear why the test requires regard to be had to the original purposes, which may have changed over time.
4.21.2 The new power can be used as an alternative to an express power to amend objects (but contrast the new power of amendment for Royal Charter bodies which does not apply where there is an express power – see below). Often, when drafting a trust deed for a charitable founder, the founder will take care to craft provisions which best suit their intentions. For example, it is common for a trust deed to provide for amendment of the objects to require a unanimous decision or a higher majority such as 75% of the trustees or for trustees to require consent of a third party. While s280A preserves the requirement to seek consent of a third party where required by the trust deed, any requirements in relation to trustee decision-making such as unanimity will not apply. In contrast, it is possible to entrench such provisions in the Articles of Association of a charitable company and so the new powers and procedures for different legal forms are not aligned.
4.21.3 Where trustees have an express power to amend objects, this power can still be used instead of s280A. Some unincorporated charities have an express power of amendment which allows the trustees to amend the charity’s objects without Charity Commission consent, although more commonly the express power requires the Charity Commission‘s consent to be obtained. As noted above, as things stand, where trustees of unincorporated charities have an express power to amend objects subject to Charity Commission consent, the Charity Commission currently applies the same, relatively light touch, test which it applies for charitable companies in deciding whether to give consent (see section 3.5 of the Charity Commission’s guidance CC36 Changing your charity’s governing document, found here) . We understand, that the new test for consent to changes to charitable objects set out in s280A(10) will not apply where a charity is exercising an express power of amendment (whether the express power requires Charity Commission consent or otherwise) as the test in s280A(10) will only apply where trustees exercise the power contained in s280A. That being so, following implementation of the Charities Bill, unincorporated charities with an express power of amendment may find it easier to change their objects than a charitable company or CIO which does not seem to be in line with the Law Commission’s objectives of the alignment of amending powers for different legal forms. The alternative is that the Charity Commission may, potentially, decide to apply an equivalent test to the s280A(10) test in deciding whether to give consent to a change of objects made using an express power which requires their consent in place of their current non-statutory test but, if so, this will make it much harder for charities with an express power to change their objects – increasing red tape.
4.21.4 As noted, s275 Charities Act 2011 is repealed. S275 confers a flexible and straightforward power on trustees of smaller charities to amend the purposes of their charity. Our view is that repealing this power is unhelpful and will increase red tape on small charities seeking to amend their purposes. We discuss this in more detail below.
4.21.5 We would note that, by removing the requirement to demonstrate that a cy-près occasion has occurred in relation to charities without an express power of amendment, this will make it easier for trustees to change the purposes of larger donations left for restricted purposes for which s275 is not currently available. For example, where a donor leaves a legacy of a house to a care home charity subject to a requirement that the house is retained and used as a care home, assuming there is no express power included for the trustees to change the purposes of the gift (which would often be the case), as things stand, the trustees of the charity would need to seek a cy-près scheme from the Charity Commission in order to change the purposes of the legacy, such as in order to be able to sell the property and use the proceeds for another charitable use. Therefore, it is currently necessary for the trustees to show that a cy-près occasion has occurred under s62 Charities Act 2011 in order to engage the Charity Commission’s scheme making power, the most common occasion being that the purposes have ceased to be a suitable and effective method of using the property. Going forward, trustees will be able to use the new power in s280A to change the purposes which apply to restricted donations without the need to show that a cy-près occasion has occurred. This will make it easier for trustees to change the terms of donor’s gifts. This is no doubt a good thing from the perspective of charities, but will impact on upholding donor intentions.
4.22 Unincorporated charities – power for small charities to amend purposes under Section 275 Charities Act 2011
4.23 Under s275 Charities Act 2011, trustees of small charities (those with income which did not exceed £10,000 in the last financial year) may resolve to amend the purposes of their charity where they are satisfied that:
4.23.1 it is expedient in the interests of the charity for the purposes in question to be replaced; and
4.23.2 so far as is reasonably practicable, the new purposes consist of or include new purposes that are similar in character to those that are to be replaced.
4.24 The process is straightforward. The trustees must send the resolution together with a statement of reasons setting out their reasons for amending the purposes, to the Charity Commission and seek consent. The resolution takes effect 60 days after it is filed with the Charity Commission, unless the Charity Commission objects. In this way, the time period for changing purposes is prescribed and relatively short, enabling trustees of small unincorporated charities to change their purposes quickly and efficiently.
4.25 The current test is relatively broad and light touch (the new purposes need only be similar to the old purposes so far as practicable, and the Charity Commission only has limited powers to object on procedural grounds) and the process is well established.
4.26 This power is also frequently used by trustees of incorporated charities (companies, CIOs etc.) holding small restricted funds (for example a school charity holding prize and bursary funds) in order to update the purposes of restricted funds, many of which will arise from old legacies or donations, where these are out of date.
4.27 As a result of the repeal of s275, trustees of smaller unincorporated charities and trustees of incorporated charities holding restricted funds, will (assuming they have no express power) have to use new s280A which is likely to mean that it is harder for these charities to change purposes – so increasing cost and red tape. In addition, as there is no time period for the Charity Commission to respond to a request for consent to change purposes under s280A and given current general response times of the Charity Commission, it is also likely to take longer for these charities to change purposes than it would if they could use s275.
4.28 We would advocate for the retention of s275. We do not perceive any advantages to repealing it given the red tape and cost this will add for small charities and funds seeking to change purposes.
4.29 Unincorporated charities – power for small charities to merge by transferring property under s268 and s273 Charities Act 2011
4.30 Under s268 Charities Act 2011, trustees of small charities with income which did not exceed £10,000 in the last financial year may resolve to transfer all the property of their charity to another charity or charities (or, where the transfer is to a CIO or CIOs, regardless of the income level of the transferring charity) and wind it up where they are satisfied that:
4.30.1 It is expedient in the interests of furthering the purposes for which the property is held for the property to be transferred; and
4.30.2 The purposes (or any of the purposes) of the transferee charity are substantially similar to the purposes (or any of the purposes) of the transferor charity.
4.31 As with s275, the process is straightforward. The trustees must send the resolution together with a statement of reasons setting out their reasons for the resolution, to the Charity Commission and seek consent. The resolution takes effect 60 days after it is filed with the Charity Commission, unless the Charity Commission objects. In this way, the time period for transferring property is prescribed and relatively short, enabling trustees of small unincorporated charities to transfer their funds and wind up their charity quickly and efficiently.
4.32 The current test is also relatively broad and light touch (the receiving charity need only to have purposes which are substantially similar to any of the purposes of the transferring charity, and the Charity Commission only has limited powers to object on procedural grounds) and the process is well established.
4.33 This power is also frequently used by trustees of incorporated charities (companies, CIOs etc.) holding small restricted funds (for example, a school charity holding prize and bursary funds) in order to transfer and merge restricted funds where they can be better applied together (and the power is often used in conjunction with s275, with the purposes of funds being updated using s275 and funds merged using s268).
4.34 Furthermore, s273 Charities Act 2011 extends the power in s268 to enable the transfer of permanent endowment, which would otherwise usually require an order to be made by the Charity Commission. Where the charity holds permanent endowment, the test outlined above is narrowed – the purposes of the transferee charity must be substantially similar to all the purposes of the transferor charity.
4.35 As a result of the repeal of ss267-274, trustees of smaller unincorporated charities and trustees of incorporated charities holding restricted funds, will (assuming they have no express power) have to use new s280A to transfer property which is likely to involve a number of additional steps; using s280A to amend the charity’s governing document to add a power to transfer property and merge, to add a power to transfer permanent endowment where applicable (which will likely require Charity Commission consent under s280(A)(7) and 280A)(8)(d) although this is not entirely clear from the drafting of 8(d)) and possibly to change purposes in order to align their purposes with those of the transferee charity (which will require Charity Commission consent under s280(A)) which is likely to mean that it is harder for these small charities and funds to transfer their property and wind up – disproportionately increasing cost and red tape. In addition, as there is no time period for the Charity Commission to respond to a request for consent under s280A to amend a governing document to add power to transfer permanent endowment or to change purposes and given current general response times of the Charity Commission, it is also likely to take longer for these charities to transfer property and wind up.
4.36 We would advocate for the retention of s267-274. We do not perceive any advantages to repealing these provisions given the red tape and cost this will add for small charities and funds seeking to transfer property.
4.37 Unincorporated charities – power to amend trusts of an unincorporated charity
4.38 We broadly welcome the introduction of s280A which replaces s280 Charities Act 2011 and confers on the trustees of unincorporated charities a general power of amendment of their governing documents, subject to our comments above in relation to its application to a change of purposes. This new power helpfully clarifies a number of the grey areas in relation to the applicability of s280 Charities Act such as in relation to third party rights to consent to certain changes.
4.39 However, we note that the threshold for exercising the power in s280A is increased from the applicable thresholds under s280 Charities which will increase red tape. In particular, where a charity has a separate membership, a resolution under s280 must be approved by a majority of not less than two-thirds of the members entitled to attend and vote at the meeting who vote on the resolution. This threshold is increased under s280A(5) to 75% of members. While this aligns broadly with the approval threshold for members of a charitable company on amendment of its Articles, the disadvantage is that it will make it more difficult for trustees of unincorporated charities with a separate membership to amend their governing document and so increase red tape and reduce flexibility. We would suggest that the threshold is reduced to two-thirds.
4.40 Royal Charter Bodies – new power of amendment
4.41 We broadly welcome the introduction of s280C which confers on charities established or regulated by Royal charter a new power of amendment where they have no existing express power of amendment. However, we note that where the charity has a separate membership, a resolution under s280C must be approved by a majority of not less 75% of the members entitled to attend and vote at the meeting. In our experience, where a Royal charter body has an express power of amendment, the more usual threshold is two-thirds. While the new power s280C therefore aligns broadly with the approval threshold for members of a charitable company on amendment of its Articles, we would suggest that the threshold is reduced to two-thirds to make it easier for trustees of Royal charter bodies to amend their governing documents.
5.1 New definition
5.2 We agree that the current definition of permanent endowment set out in s353 Charities Act 2011 is unhelpful and confusing and should be replaced.
5.3 However, our view is that the proposed new definition set out in the Charities Bill which provides that For the purposes of this Act, property is “permanent endowment” if it is subject to a restriction on being expended which distinguishes between income and capital does not work as it also captures other property such as expendable endowment. An expendable endowment fund is a fund where the trustees must invest the capital and apply the income and the trustees may, in particular circumstances or as and when the trustees decide, convert the capital into income and spend it. That being so, we think expendable endowment is caught as (a) it distinguishes between capital and income and (b) arguably is subject to a restriction on being expended as the trustees have to make a positive decision to convert capital to income in order to spend it.
5.4 There are two main forms of permanent endowment (a) property which must be held to be used for a particular purpose, such as a house which must be retained and used as a care home and (b) property which must be retained and invested to produce an income and only the income may be spent for particular purposes. The Charity Commission, in its operational guidance, distinguishes between these two types as:
5.4.1 “functional permanent endowment” (which it describes as capital to be used for a specific purpose or purposes of the charity and gives the examples of village halls, recreation grounds, housing, museums and historic buildings and notes that, with this type of permanent endowment the distinction between capital and income often does not apply as there may be no income); and
5.4.2 “investment permanent endowment” (which it describes as capital which is to be used to provide an income for the charity and which cannot be spent as income and notes that the document that directs how the property should be held and used will usually specify that the capital should be invested and the income from the investments spent on specific charitable purposes).
5.5 As the Charity Commission notes, functional permanent endowment will often not produce any income at all. For this reason, any definition which defines permanent endowment by reference to the distinction between capital and income will not clearly capture functional permanent endowment. We favour having a definition which recognises the two types of permanent endowment (functional and investment) which we think would be clearer.
5.6 Secondly, although it is a grey area, we favour the view that permanent endowment is held on trust. Where property is held subject to contractual provisions which provide for restrictions on expenditure of capital, our view is that such property should not be included within the definition of permanent endowment. The restrictions which apply to this property can be varied by contract and the powers in the Charities Act 2011 in relation to permanent endowment, such as the power to spend permanent endowment, should not apply where commitments have been entered into with another party by contract which can be dealt with by varying the contract with the agreement of the other contracting party. That being so, our view is that the definition should expressly refer to permanent endowment as being held on trust and thereby exclude property held subject to equivalent contractual restrictions.
5.7 Please note that we have recently inputted these comments direct to the Law Commission in relation to their re-consideration of the proposed new definition of permanent endowment.
5.8 Power to release permanent endowment restrictions
5.8.1 Under the current law there are two statutory powers which enable trustees to decide to spend the capital of an investment permanent endowment fund:
(a) Section 281 Charities Act 2011 – this power allows the trustee(s) of a smaller permanent endowment fund (income of £1,000 or less or market value of £10,000 or less) to resolve to release the capital or a portion of it from the endowment restrictions without the need to involve the Charity Commission.
(b) Section 282 Charities Act 2011 – where the section 281 power is not available (because the income of the fund is more than £1,000 and the market value is more than £10,000), this power allows the trustee(s) of a larger permanent endowment fund to resolve to release the capital or a portion of it from the endowment restrictions, subject to Charity Commission consent.
5.8.2 The Charities Bill amends s282 Charities Act 2011 to raise the market value of the funds to which the section applies to funds exceeding £25,000 and to remove the income test, so that the income of the fund will no longer be relevant to determining whether the s281 or s282 power can be exercised. In other words, the test for determining whether s282 is triggered (and so Charity Commission consent is required) considers only on the market value of the fund in question.
5.8.3 The stated aim behind this change is to enable more charities to spend permanent endowment without the bureaucracy and cost of seeking Charity Commission consent. Our view is that, on the contrary, removing the income test and introducing a single market value test will mean that more endowment funds will be brought within the scope of s282 (and so subject to Charity Commission consent) than is currently the case. For example, while interest rates are low, a fund of £80,000 might only have an income of £800 per annum. Under the current rules, such a fund would fall within the scope of s281 on the basis that the income is below £1,000. Under the proposed new rules, the fund would fall within s282 on the basis that the market value is above £25,000.
5.8.4 Furthermore, we consider that the proposed market value threshold of £25,000 is too low and ought to be set at £50,000 at least.
6.1 We note that the Charities Bill extends the Charity Commission’s powers in relation to names and, in particular, extends the Charity Commission’s powers to working names.
6.2 Under the new extended powers, the Charity Commission will, among other things, be able to direct a charity to change its name or working name where it is too like the name or working name of another charity (whether registered or not) and refuse registration of a charity where its name is the same as, or too like the name or working name of another charity (whether that charity is registered or not.)
6.3 While we broadly welcome the changes, we are concerned that there could be significant practical difficulties for charities, for example in relation to their ability to check which working names are available given that working names are not required to be registered with the Charity Commission even where the charity itself is required to be registered and the power extends to working names of charities which are not registered.
6.4 This could be mitigated in part by requiring registered charities to register their working names with the Charity Commission in order to make it easier for charities to check whether a name is already in use.
7.1 We note that, by the Charities Bill, current s106 Charities Act 2011 is amended and that a new power is added at s331A Charities Act 2011. Although a very minor point, we would suggest that the two provisions appear consecutively in the Charities Act 2011 i.e. that s331A be moved to s106A so that it is easier for trustees to find both provisions.
8.1 We agree with the Government’s rejection of the recommendation to repeal s121 Charities Act 2011 (recommendation 18). Our view is that advertising designated land disposals and considering representations is appropriate and proportionate given the nature of the assets for the reasons expressed by the Government.
8.2 The Call for Evidence states that views are welcomed on any other technical provisions which would assist charities but have not been suggested so far.
8.3 We would like to propose a ‘social disposal’ power, which would allow for real estate to be disposed of for a combination of financial return and advancement of charitable purposes. This would be achieved by amending the current wording of Clause 18 of the Charities Bill to expressly allow ‘social disposals’.
8.4 The effect of this change would be to qualify the nature of the assessment that trustees need to make when disposing of land or granting a lease, so that a wider conception of social value – which is in line with the way that trustees make decisions about social investment – is expressly permitted when determining what is in the interests of the charity, beyond merely considering the financial terms of the proposed disposal.
8.5 We think that this is a relatively modest proposal in the sense that trustees would still need to obtain the advice of a designated adviser as to the financial terms of the proposed disposal, which offers protection. It is not a straight exemption. However, critically, the amendments explain that the decision is not merely a decision on financial terms, which we think would allow for many more ‘social disposals’ in practice.
8.6 This would also be a helpful expansion upon the idea of social investment in current Clause 18(2)(c) of the Charities Bill in keeping with the spirit of the Bill and which would enhance the Bill. That said, if our suggested additions are included, only the first limb of Clause 18(2)(c) is needed.
8.7 We do not see that this change would be controversial, given the fact that Parliament has already provided charities with a statutory power of social investment which enables trustees to make social investments on an essentially identical basis and the other protections of the Charities Act 2011 remain.
8.8 It is arguable that charities are already able to make ‘social disposals’ of this kind, depending on how ‘best terms’ reasonably obtainable is interpreted, but this amendment would put the question beyond doubt.
8.9 Our suggested amendment to Clause 18 of the Charities Bill is set out in red below:
18 Exceptions to restrictions on dispositions or mortgages of charity land
(1) The Charities Act 2011 is amended as follows.
(2) In section 117(3) (exceptions to restrictions on dispositions of charity land)—
(a) after paragraph (a) insert—
“(aa) any disposition by a liquidator, provisional liquidator, receiver, mortgagee or an administrator,”;
(b) omit paragraph (b);
(c) for paragraph (c) (but not the “or” following it) substitute—
“(c) any disposition of land held by or in trust for a charity which is made to another charity otherwise than as a disposition made with a view to achieving the best price that can reasonably be obtained;”
(3) In section 119(requirements for dispositions other than certain leases)—
(a) at the end of subsection 119(1)(c) insert—
“or, in the case of a social disposal, that it is in the interests of the charity to make the disposition having regard to the benefit they expect it to achieve for the charity (by directly furthering the charity’s purposes and achieving a financial return).”
(b) insert a new subsection 119(5)—
“(5) For the purposes of subsection (1) a ‘social disposal’ is any disposition of land held by or in trust for a charity which is made with a view to both (i) directly furthering the charity’s purposes and (ii) achieving a financial return for the charity, and therefore otherwise than as a disposition made with a view solely to achieving the best financial terms that can reasonably be obtained.”
(4) In section 120(requirements for leases which are for 7 years or less etc)—
(a) at the end of subsection 120(2)(b) insert—
“or, in the case of a social lease, that it is in the interests of the charity to make the disposition having regard to the benefit they expect it to achieve for the charity (by directly furthering the charity’s purposes and achieving a financial return).”
(b) insert a new subsection 120(3)—
“(3) For the purposes of subsection (2) a ‘social lease’ is any grant of a lease within the terms of subsection (1) which is made with a view to both (i) directly furthering the charity’s purposes and (ii) achieving a financial return for the charity, and therefore otherwise than as a disposition made with a view solely to achieving the best financial terms that can reasonably be obtained.”
(5) In section 124(9) (restrictions on mortgages)—
(a) after paragraph (a) (and the “or” following it) insert—
“(aa) granted by a liquidator, provisional liquidator, receiver, mortgagee or an administrator.”;
(b) omit paragraph (b).
9.1 We welcome the inclusion of a new power for the Charity Commission to confirm trustee appointments. We are called upon fairly regularly to advise charities in relation to defective trustee appointments and this is particularly an issue for unincorporated charities where the chain of trusteeship can break down due to historically defective trustee appointments and retirements leading to no properly appointed trustees to take decisions.
9.2 We note that the Charities Act 2011 introduced a power for the Charity Commission to determine membership (s111 Charities Act 2011). However, we note that this power has seldom been used by the Charity Commission.
9.3 In this regard, we also note that the Charity Commission can already make a scheme under s69 Charities Act 2011 to appoint trustees where there is a defect in the existing appointment and we have successfully assisted charities to obtain schemes in these circumstances.
9.4 However, we note that the Charity Commission’s publicly stated position is that it will only assist charities where trustees are unable to resolve a particular issue themselves which, understandably, enables the Charity Commission to effectively channel its resources. In our experience, charities have often needed to go to great lengths, time and cost, such as taking steps to trace former trustees, before the Charity Commission is willing to make a scheme to appoint its trustees. Given the importance of having properly appointed trustees, this new power will be of greatest utility to charities if the Charity Commission’s policy on exercising the power is proportionate.
Bates Wells
13th September 2021
15
[1] It is estimated that the implementation of the reforms will deliver cost savings for charities of at least £28m over a ten year period (https://www.gov.uk/government/publications/charities-bill-factsheet/charities-bill-factsheet)
[2] Page 3, Charities Bill Explanatory Notes https://bills.parliament.uk/publications/41673/documents/319
[3] https://s3-eu-west-2.amazonaws.com/lawcom-prod-storage-11jsxou24uy7q/uploads/2017/09/6.3781_LC_HC304_Technical-Issues-in-Charity-Law_FINAL_080917_WEB.pdf