Selling charity land: commercial terms vs social impact

Answer

The answer is more complicated than one might think, with the law in this area remaining largely untouched by the liberalising measures introduced to other areas of charity law.

In recent months, the question has been given increased prominence by a campaigning organisation in Somerset called the Old Deanery Project.

The Old Deanery Project was set up to purchase, from the Church of England Diocese of Bath and Wells, the Old Deanery building, which is part of the Wells Cathedral estate. The intention was that they would create an art gallery or museum, social hub and café on the site. Unfortunately for them, a private developer seems to have outbid them to the tune of around £350,000. The Diocese is a registered charity; the Old Deanery Project is not.

As charity trustees, the trustees of the Diocese are under a legal obligation to sell for the best terms reasonably obtainable. It seems on this basis that the trustees would be in breach of their legal duty if they sold the property at an undervalue to a community organisation instead of to a private developer on market terms.

However, the Old Deanery Project is of the view that the Diocese can (and should) take into account non-commercial elements of their much lower offer, for example, the social and community value to be gained by selling to them rather than a private developer. Without wishing to cast any doubt on the importance of these non-commercial factors to the community as a matter of principle, this interpretation of the law does not seem to hold water.

The first point is that a sale of land by a charity at less than best terms can only be made where it is transferring the property to another charity as an application of its assets to further its charitable purposes. Since the Old Deanery Project is not a charity, this exception cannot apply and any sale to them by the Diocese needs to be treated as a regular commercial land disposal.

The question therefore becomes, can social impact be taken into account by a selling charity in the context of a regular commercial land disposal?

The Charity Commission's guidance is quite clear on this. In sales of charity land which do not fall within the very limited exception described above, achieving best commercial value for the selling charity is the priority and social impact should not play a part in trustees' decision-making processes. There is no balancing act between commercial and social concerns in these cases. Securing best value for the charity is paramount.

Background to charity land disposals

Navigating the regime for land disposals by charities can give even experienced trustees a headache and is a common reason for trustees to seek professional advice. Questions around the instruction of surveyors, the need to advertise land disposals, disposals to connected persons (and what that term means), and myriad other questions can be burdensome for charities to manage. Meanwhile, the consequences of getting it wrong can be serious.

This article considers one aspect of the regime which goes to the heart of what trustees should be thinking about when disposing of their charity's land: are trustees satisfied that the terms of the disposal are "the best that can reasonably be obtained" for their charity?

The article also provides some practical guidance to trustees dealing with the land disposal regime in their own charities.

The law

The way charities are permitted to deal with their land has remained subject to quite strict statutory procedures, even while other areas of charity regulation have been liberalised (eg, powers to invest across a broad range of financial and social asset classes and the power to pay trustees for services).

Broadly, the law states that where a charity disposes of a freehold property or grants a lease in excess of seven years, the trustees must:

• obtain and consider a written report on the proposed disposition from a qualified surveyor;
• advertise the proposed disposition as advised in the surveyor's report; and
• be satisfied that the terms on which the disposition is proposed to be made are the best that can reasonably be obtained for the charity.

This regime does not apply to transactions with people or entities with a connection to the disposing charity (which according to the Charity Commission includes trading subsidiaries); such transactions can only be entered into with Charity Commission consent. Neither does it apply to transactions between the disposing charity and another charity where the disposal is for less than market value and is authorised by the trusts of the disposing charity; in other words, it is a disposal in furtherance of the charity's objects (so best value is not required).

The two practical steps set out above are pretty clear, if sometimes onerous in practice.

But what does the phrase "best terms" mean? Is the sole consideration the sale price, or can the trustees take into account other commercial factors? Should the trustees be considering non-commercial factors like the potential social impact of a sale to a particular buyer? What if a better offer comes in before the deal is finalised and contracts exchanged?

Putting profit before community?

These questions are pertinent in the context of the sale by the Bath and Wells Diocesan Board of Finance of the Old Deanery, a Grade I listed building which overlooks Wells Cathedral. The sale has been the subject of significant press attention, within and outside the charity sector. The Diocesan Board is affiliated with the Church of England and is a registered charity in its own right.

The Old Deanery Project offered £1.25 million for the Old Deanery in summer of this year with a view to developing a community arts centre and hub on the site, only for the Diocesan Board to receive an offer of £1.6 million from an unnamed private buyer. Media coverage suggests that the Diocesan Board is in negotiation with the highest bidder only. 

The Old Deanery Project, which counts among its membership Geraldine Peacock, a former chair of the Charity Commission, argues that in accepting the higher offer in these circumstances the Diocesan Board is "riding roughshod over community interests". The group also argues that the Diocesan Board needs to consider the "social value", rather than just the financial value, of the two bids (and, one assumes, any other bid which might be received at a later date). 

The Old Deanery case has echoes of a similar case in North Yorkshire, where the Diocese of Leeds sold a former school in Arkengarthdale to a private buyer (for £185,000) rather than to a local interest group (for £150,000) which wanted to turn the school building into a community hub.

In both these cases the selling charities have been accused of putting profit before community, stripping community assets or being greedy at the expense of the communities which they serve. But is this fair?

Best terms or best price?

As alluded to above, the crux of this question concerns the construction of the phrase "best [terms] reasonably obtainable". Is it limited to commercial terms or can non-commercial considerations, such as the social value to be gained from selling to a particular buyer, be considered as well?

The precise meaning of "the best [terms] that can reasonably be obtained" has been the subject of some confusion within the sector, not least because some Charity Commission guidance seems to conflate "best terms" with "best price". However, it seems likely that "best terms" means more than simply "best price".

For example, in its 2017 report, Technical Issues in Charity Law, the Law Commission says that: "[the law] requires the charity trustees to be satisfied that the ‘terms’ – and not the ‘price’ – are the best that can reasonably be obtained for the charity, which recognises that the trustees might not simply be seeking the best price from the disposal of charity land." 

In addition, elsewhere in the land disposal regime, the legislation does refer to best price rather than best terms, which begs the question, if Parliament meant "best price" instead of "best terms" in the context of this type of land disposal, why not say so?

It is probably incorrect, therefore, to elide best terms with best price in the context of this provision (albeit price clearly remains a fundamental factor in considering if the charity sale is on the best terms).

So what else should trustees think about other than achieving the highest possible sale price?

A widely held view is that "best terms" includes things which do not strictly speaking go to price, but still concern the commercial terms of the deal. This might mean favouring a potential buyer which is able to proceed quickly or which has committed financing in place. Another consideration for a seller might be whether a buyer insists on bespoke terms in the transfer document which put the selling charity at risk of future claims. In such circumstances the selling charity might conclude that a lower offer nevertheless contains more favourable terms than a higher offer. Turning back to the Old Deanery case, the question then becomes whether non-commercial issues (for example the social value to be generated from selling to a particular buyer) can be included in a "best terms" analysis.

The Old Deanery Project is of the view that they can. The law, as supplemented by regulatory guidance, suggests this is not correct.

Social value in land disposals

The idea that a selling charity can consider issues of social or public benefit when considering a commercial land disposal conflates two separate elements of the statutory regime.

As noted above, it is true that there are limited circumstances where a charity can dispose of its property for less than market value on the basis that such a disposal would have a positive social impact, but this only applies (a) where the disposal is to another charity, and (b) where the trusts of the disposing charity authorise the disposition. In practice, this means a disposal can be made for less than market value only where the charitable purposes of a buying charity are no wider than those of the selling charity (or, if the purposes of the buying charity are wider than those of the selling charity, the land would need to be held on special trusts by the buying charity). This would essentially be an application of charitable funds in furtherance of the purposes of the disposing charity.

The proposed sale by the Bath and Wells Diocesan Board to the Old Deanery Project does not fall within this exception to the land disposal regime, because the Old Deanery Project is not a charity (it is a Community Interest Company). Moreover, even if it was a charity, it is unlikely that a community interest group concerned with creating spaces for the benefit of the local community would have sufficiently similar purposes to the Diocesan Board, which are "to promote and assist the work and purposes of the Church of England in the Diocese of Bath and Wells."

In this case, then, the Diocese is simply entering into an arm's length commercial transaction for the sale of its property. Accordingly, social value or moral outlook cannot be a factor in trustees' decision-making, however much they may want it to be.

As if to reinforce the point, the Commission's Operational Guidance OG 548 goes on to address the contentious issue of ‘gazumping’. This is the practice of progressing a transaction with a buyer but withdrawing from that transaction before exchange of contracts in favour of a higher bidder. The guidance is clear:

"If the trustees receive a higher offer for the disposal before the transaction has been completed, they should accept it on the principle that they should achieve the best terms reasonably obtainable for their charity. Accepting the higher offer is effectively gazumping and, although it may be unpopular, is a proper practice in these circumstances."

While not directly relevant to the Bath and Wells case, in endorsing this practice, the Commission is sending a clear message that the overriding duty of trustees in disposing of land (unless the disposition amounts to an application of the selling charity's charitable funds, as set out above) is to achieve the best financial and commercial terms for their charity, irrespective of concerns around social impact.

On this basis, the trustees of the Diocesan Board do indeed seem to have the law on their side.

Good practice in land disposals

Understanding the regulatory approach

Trustees of charities which hold land should familiarise themselves with the Charity Commission's Guidance (CC28) and its Operational Guidance (OG 548). The regime is complex and not always intuitive, but an understanding of the way the Commission approaches the issues is important when considering transacting in land.

Avoid confusing different elements of the regime

As set out above, the circumstances in which land can be sold below market value on the basis that doing so would confer a social benefit are very limited. In most cases, social considerations should not be weighed against commercial ones as part of a "best terms" analysis.

Structuring the transaction

Charity law considerations should be raised as early as possible in the transaction process, while the transaction is still in the structuring phase, especially if there are any familial or business connections with the proposed buyer of the land. This will ensure any issues are picked up early and that the Charities Act procedure does not delay the process.

Avoid a gazumping situation

No charity would ordinarily want to be faced with having to gazump a buyer of their property, with all the reputational damage that doing so can bring. A good way of avoiding this situation is to seek best and final offers or sealed bids. Selling charities may also wish to consider asking potential buyers in a best and final offers process to put their best and final offer in writing, along with all the other terms of sale, for example availability of funds, willingness/ability to complete quickly and any special terms. We would hope in most cases that using this process (and taking the property off the market once all best and final offers are received) will mean the charity is able to proceed in a fair and reasonable way. Having said that, trustees should always act in the best interests of their charity and if that means accepting the offer of a buyer offering the highest price, then this will be defensible on the basis that the trustees are fulfilling their legal duty. 

Documenting the decision-making process

Trustees of selling charities should ensure their record keeping is meticulous and where possible refers to each step in the land disposal process as it arises.

Emma Moody and Joseph Harris are members of the charities team at Womble Bond Dickinson. Emma is a partner and Joseph is a solicitor at the firm.  

This article was first published on Womble Bond Dickinson’s website on 11 December 2020.