Changing charity law for the better? The Law Commission's Report and the draft Charities Bill

The Report focuses on a number of technical areas of charity law.  Notably, the draft Charities Bill (the draft Bill) appended to the Report (and designed to give legislative effect to many of the Report's recommendations) makes no change to the law on public benefit or the regulation of fundraising, which probably explains the lack of wider interest in the Report.  That said, the draft Bill contains the most significant legislative changes to charity law since the Charities Act 2006.    

While the draft Bill is unlikely to become law for some time, it is hoped that the parliamentary approval process is not derailed or significantly delayed by the demands placed on parliament by Brexit. 

This briefing provides an overview of key areas of change proposed on: 

• Amending charitable purposes (of corporate and unincorporated charities)
• The statutory powers of unincorporated charities set out in the Charities Act 2011 (the Charities Act)
• Dealing with charity land
• Permanent endowment
• The process for charities established by Royal Charter or statute to amend their governing provisions
• Ex gratia payments
• Simplifying mergers and incorporations

The above is not an exhaustive list and a round-up of some of the other proposals follows a summary of the key recommendations on these topics.

Amending charitable purposes (of corporate and unincorporated charities)

The Report recommends closely aligning the process to amend the charitable purposes of charitable companies and CIOs with the process for changing the purposes of unincorporated charities established as trusts or unincorporated associations. 

Currently, while Charity Commission consent is required for changes to corporate charities' objects, legislation does not govern the factors the Charity Commission consider when giving consent.  At present, the Charity Commission's practice has been fairly liberal in allowing charitable purposes to be broadened (or otherwise altered) where the trustees make a compelling case that this is in the charity's best interests. 

The changes would remove some of the Charity Commission's discretion when asked to consent to changes to the purposes of charitable companies or CIOs.  This may result in it becoming more difficult for charitable companies and CIOs to amend their purposes as when considering a request for consent, the Charity Commission would be required to have regard to:

• The purposes of the company / CIO when it was established;
• The desirability of securing that the purposes of the company / CIO are similar to the purposes being altered; and
• The need for the company / CIO to have suitable and effective purposes in the current social and economic circumstances.

Conversely, trustees of unincorporated charities may find it becomes simpler to alter their charity’s purposes if the draft Bill becomes law.  The requirement for a particular circumstance (e.g. the original purposes have been fulfilled) to have arisen before changing the current purposes can be contemplated by the Charity Commission (known as a cy-près circumstance) will be removed.  Instead, trustees will be able to apply for approval to change their purposes if they consider this to be expedient in the interests of the charity.  While the Charity Commission will still be required to have regard to a similar set of considerations to those above when deciding whether to consent, there will be no initial hurdle to clear as to whether a cy-près circumstance has arisen.   
 
The statutory powers of unincorporated charities set out in the Charities Act

Major change is proposed to the statutory powers of unincorporated charities that enable their trustees to:

• amend a charity's powers and administrative proceedings;
• amend purposes where a charity’s income is below £10,000 and the charity does not have designated land; and
• transfer all the property of a charity with income below £10,000 and with no designated land.

It is recommended that these powers are repealed and replaced with a broad power to amend the governing documents of unincorporated charities, which will be subject to Charity Commission consent in the following five circumstances:

(1) the change is to the charity’s purposes, its dissolution clause or impacts on the benefits available to trustees;
(2) the change creates permanent endowment;
(3) the amendment is subject to third party consent and that consent has not been obtained;
(4) the amendment impacts on the rights conferred on a named person or the holder of an office specified in the constitution, unless that person consents to the amendment or has died; or
(5) an amendment gives the trustees the right to make an amendment falling within (1) to (4) above. 

Given the uncertainties that practitioners have raised on the application of some of the existing powers and their utility, this proposal is to be welcomed in its simplification of the current law.  

These changes will place unincorporated charities on a broadly equivalent footing to corporate charities when it comes to making changes to their governing documents. 

The process for charities established by Royal Charter or Statute to amend their governing provisions

The Law Commission recommends Royal Charter charities are given a statutory power to amend their Royal Charters, subject to the amendment being approved by the Privy Council, and such a provision is included in the draft Bill.  This should mean that in many cases a charity will not require a supplemental Charter if its existing Charter contains no power of amendment.  

It is also recommended that new guidance is produced advising charities established by Royal Charter on amending their governing documents.

Dealing with charity land

A number of simplifications are planned for the rules on disposing of charity property.  First, the range of individuals entitled to advise trustees on the disposal of charity property is likely to be extended to include estate agents and agricultural valuers, as well as Chartered Surveyors.  It would also be permitted for trustees or employees to provide advice where suitably qualified to do so.  Additionally, there are proposals to simplify the matters covered by the advice and make these requirements less prescriptive. 

The rules on disposals to connected persons will change so a charity will be able to dispose of property to its trading company without Charity Commission consent.

Another helpful simplification is the change proposed to the regime for trustees giving certificates personally when disposing of property or granting a mortgage over charity land to confirm the statutory requirements have been met.  The proposal is that certificates can be given by the person(s) authorised to sign the contract or conveyance instead.  If enacted, this should reduce some of the administrative burden for charities when dealing with or mortgaging charity land.    

Permanent endowment

The chapter on permanent endowment in the Report is worth reading as it provides an interesting overview of the law on permanent endowment.  The commentary also includes the rather unusual view that permanent endowment can be held as corporate property rather than always being held on trust.  This view is not shared by many practitioners but the interpretation seems partly based on the broad definition of permanent endowment in the Charities Act.  It informs the recommendations made, which include extending the power to lift the restrictions on spending permanent endowment to corporate and unincorporated charities.

At present, there are two powers available to lift restrictions on spending permanent endowment.  The first is available without Charity Commission consent where the income of the charity is under £1,000 or the market value of the fund is up to £10,000.  The second power is subject to Charity Commission oversight and relates to larger funds.  Responses to the consultation highlighted that large funds far greater than £10,000 often generate income under £1,000.  It is therefore recommended that the thresholds be changed so that where the market value of the endowment exceeds £25,000, the resolution will require Charity Commission oversight.   
   
It is also recommended that charities be permitted to ‘borrow’ up to 25% of permanent endowment funds. 

Ex gratia payments

Where a charity has no legal obligation to make a payment but feels a moral obligation to do so, the payment is frequently referred to as ex gratia.  While the Charity Commission’s guidance currently encourages trustees to proceed without authority for small payments under £1,000, it is now proposed to put this on a statutory footing and extend the circumstances where ex gratia payments can be made. 

The proposal is to allow charities to make ex gratia payments where there is a moral obligation to do so on a sliding scale depending on the size of a charity, from £1,000 up to £20,000 for larger charities with income over £1m. 

Mergers and incorporations

A number of these proposals should help simplify some of the common issues arising on charitable mergers and incorporations, including:

• Making charitable corporations automatically trust corporations in relation to charitable trusts.  This will make it simpler to incorporate charities where land continues to be held on trust with a corporate trustee.  This change would avoid the need for the appointment of a single corporate trustee to be made by Charity Commission Scheme or in the alternative, for an application to be made to the Lord Chancellor to request this status for the corporate trustee. 
• The well-known loophole in the legislation creating the Register of Mergers is ‘fixed’ so it should no longer be necessary for shell charities to be retained following a merger, where it is considered there is a risk of losing legacy income that could arise in future.
• A number of technical amendments to vesting declarations are recommended. 

Round-up of other recommendations

Briefly, other notable recommendations contained in the Report include proposals to:

• Remove the definition of special trusts and the particular powers applicable to special trusts.
• Simplify the regime for failed charitable appeals to make it less onerous for charities to deal with sums raised for a purpose that cannot be achieved because of a shortfall of funds or otherwise.
• Amending the statutory power to remunerate trustees for providing services to also allow trustees to be remunerated for providing goods to a charity.
• Give the Charity Commission additional powers to :

a) direct charities in relation to their names, including permitting the Charity Commission to decline to register a change of name for a particular period; 
b) determine the trustees of a charity (which adds to the current power of the Charity Commission to determine the identity of the members of a charity) and ratify invalid or uncertain trustee appointments; and
c) refer a matter to the Charity Tribunal without the Attorney General's consent. 

• Permit the court to give consent to "charity proceedings" (i.e. proceedings relating to an internal dispute or matter within a charity), where the Charity Commission is faced with a conflict of interest in relation to the granting of that consent.
• Permit charities that have adopted a total return approach to investment under the Total Return Regulations 2013 (this will not apply to charities that have a Total Return Order in place from the Charity Commission) to use their permanent endowment to make social investments that are expected to make a negative or uncertain financial return. 

Further information

For anyone short on time, the 43 recommendations of the Law Commission are summarised in Chapter 16 of the Report starting on page 355.  The mark-up of the Charities Act is also very useful to quickly identify the proposed legislative changes.  The Law Commission has also published a Summary of the Report.

It is hoped that the changes can be implemented fairly swiftly, given the benefit to the sector they promise and the considerable savings for charities with the removal of complex legislative requirements, which the Law Commission has deemed to be unnecessary after extensive consultation.  

If you require further information on anything covered in this briefing please contact Elizabeth Jones([email protected]) or your usual contact at the firm on 020 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, September 2017