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Good practice in property transactions

 

The Foundation would like to thank the Charity Commission for their assistance in producing this part of the Property Advice Service section of the website.
 

General duties as trustee


The primary duty of trustees is to carry out their trust, essentially the business of the charity or other organisation, in accordance with its terms, whether a trust deed or whatever else constitutes the organisation and sets out its goals. Trustees have a general duty to act reasonably and in the best interests of their charity, ensuring that it is solvent, well-run and delivering the charitable outcomes for the benefit of the public for which it has been set up.

To whom will these apply?

Specifically to trustees but also those running charitable companies, voluntary or community organisations.  We will refer in this section to trustees but as a general guide this section should be taken to apply to whomever is running the organisation, for example trustees, directors or a management committee.

The Charity Commission code on the key principles of good governance sets out the principles which they envisage should apply universally to those running charities and voluntary or community organisations. 

How will these duties arise in context of a property transaction?


We have set out below the trustees’ key duties and considerations in relation to different property transactions. The requirements are often complex and highly regulated and suitable professional advice should be obtained before you proceed with the transaction.

Acquiring land


This includes buying and renting property.

The trustees must ensure that:

•    they have the power and authority to acquire land and whether this is restricted to acquiring land which is necessary for the purpose of carrying out the organisation’s activities or also for investment
•    if acquired as an investment, they have considered the potential income from and increase in value of the property and any risks associated with the investment (such as a fall in value). They have also examined other forms of investment and consider this to be the best return for the charity based on the risks associated with different investments
•    they are paying a reasonable price or rent for the property
•    the property is in a good condition
•    the acquisition is in the best interests of the organisation
•    the property is suitable for its planned use
•    the organisation can afford the property and any mortgage being taken out to pay for it
•    the terms of any lease they are taking are reasonable and fully understood
•    any conflicts of interest have been properly managed.

The trustees should obtain a written report from a qualified surveyor on matters affecting the value, condition and use of the property.

In most cases the trustees will not need consent from the Charity Commission or the Court before acquiring land, unless, for example, they do not otherwise have power to do so or if they are planning to buy land from one of the trustees, their close relatives or a business in which they have an interest.  You should seek professional advice if you are unsure as to whether approval is required.

Further guidance on acquiring land can be found in the Charity Commission publication CC33 – Acquiring land

Disposing of land

This includes the sale of freehold property, the assignment of a lease of leasehold property and the grant or surrender of a lease.

The provisions of Section 117 of the Charities Act 2011 will apply to these transactions and whilst we will set out the general principles of which trustees must be aware, specialist professional advice should be sought so as to ensure that the statutory controls are complied with. Detailed guidance can be also found in the Charity Commission publication CC28– sales, leases transfers or mortgages

The principal considerations are:

•    do the trustees have power to dispose of the land?
•    is the land ‘designated’ i.e. required by the governing document to be used for a particular purpose of the charity, for example a village hall? If it is designated, there may be restrictions on its disposal or use of the proceeds of sale. Professional advice should be obtained in these circumstances
•    would the disposal be in the organisation’s best interests?
•    will any lease being granted impose onerous obligations on the trustees or grant additional rights to the tenant(s) and will the landlord be entitled to take back possession of the premises at the end of the lease?
•    is approval required from the Charity Commission or the Court ? 

Generally speaking, approval will not be required if the trustees have obtained a written survey and valuation of the land from a qualified surveyor, advertised the disposal and satisfied themselves that the terms for the disposal are the best that can reasonably be achieved.  However, approval will be required where the disposal is to one of the trustees or someone connected with a trustee or if it is of ‘designated land’ which will not be replaced.

Although there is no equivalent requirement to Section 117 under Scottish law, it might still be advisable to obtain professional advice on these matters.

Creating a mortgage or charge over property


If the trustees are borrowing funds to finance a property purchase, it is highly likely that the lender will require some form of security for the loan or grant.  This will usually take the form of either a legal charge or a mortgage.  Section 124 of the Charities Act 2011 contains similar restrictions on mortgages or charges as there are on trustees disposing of charity land.

In most cases, the trustees will not need the consent of the Charity Commission or the Court so long as they meet the conditions in Section 124.

To comply with Section 124, the trustees should obtain written advice from a suitably qualified person on the following points:

•    is the loan or grant necessary for the charity to purchase the property or perform its objects
•    are the terms of the loan or grant the best they can reasonably achieve
•    can the charity repay the loan or grant on those terms.

The advice must be given by a suitably qualified professional, although an employee of the organisation, such as its accountant, can give the Section 124 advice if the loan or grant is small. However, for a larger loan it is more appropriate for a professional financial adviser from outside the charity to be paid to provide a professional opinion. This is largely because if the advice proves to be defective and loss is suffered by the charity as a result, then the professional adviser's Professional Indemnity Insurance should cover some or all of that loss.
Further guidance can be found in CC28, as above.