Charity Commission finds ‘basic and serious mismanagement’ by the trustees in selling land for £15m less than it was worth.
The Charity Commission has concluded that the trustees of a charity were responsible for serious mismanagement in the way they sold the charity’s London property in 2010.
The charity sold the property for £6 million in December 2010. The new owners sold it on for over £21 million shortly afterwards.
The Commission undertook a statutory inquiry and concluded that the trustees failed to fulfil their legal duties and responsibilities towards the charity, and that ‘the failures and breaches were not minor or technical in nature’ but ‘amount to basic and serious mismanagement’.
Problems and lessons to be learnt
1. Suitable surveyor's advice
The charity trustees failed to obtain a legally compliant report from a suitably qualified surveyor at the critical time.
Interestingly the Charity Commission criticises the trustees for failing to take specialist advice about how to ensure the charity would benefit from a possible increase in value of the property if a change of use for the property and/or enfranchisement (i.e. lengthening the lease duration or acquiring the freehold) was secured. The report also criticises the professional advice that was received (some before the sale was agreed and some retrospectively) in relation to these issues.
The relevant Regulations do not technically require some of these points to be covered, but the Commission appears to be saying they must still be considered as part of the general trustees' duties to act in the best interests of the charity.
It is critical that the surveyor's advice is received at the beginning of any proposal. The purpose of the surveyor's report is to advise on how to go about achieving best value for the charity. If the property has already been marketed or principles of a deal agreed it can waste money and be difficult to withdraw from.
Lessons for trustees: obtain your surveyor's advice as soon as you consider selling (or receive an unexpected offer) ensure you instruct your surveyor to provide both:
a) a report what complies with the Charities Qualified Surveyor's Reports Regulations and
b) advice on any other means of maximising the value to the charity.
Always test the market one way or another. This case demonstrates the value of instructing experts in the charity sector. Experts will not always be the cheapest option, but should prove their worth in the value for money they provide. The Commission implies in the Inquiry Report that the Charity should have been sharing a significant portion of the extra £15M.
Lesson for surveyors: the purpose of the Regulations is to maximise the value to the charity. It is well known in the sector that the Regulations and the law behind it are not fit for purpose, but the law as it exists must be complied with and professionals must help the charity trustees discharge their legal duties by considering the wider picture and offering advice that achieves the basic purpose as well as ticks off each specific point in the Regulations. Surveyors should always take account of the potential for a change of use, release of existing covenants/restrictions, the potential for redevelopment, the planning regime, enfranchisement (where relevant), overage, and other anti-embarrassment covenants/methods. Even if a point in the Regulations or these additional areas is not considered relevant it is important to say so in order that there is a proper record that the point has been considered rather than forgotten.
Lawyers are often criticised for being too focused on technicalities and processes rather than delivering what their clients want. However, this is a perfect example which illustrates the importance of getting the process right.
Had the trustees obtained a valid report before entering into the agreement then they would have discharged their primary duty and would almost certainly have avoided this Charity Commission inquiry which lasted around 4 years and a public finding of mismanagement.
Lesson: seek advice on the process and follow it. Trustees are not obliged to always follow every recommendation from their professional advisers, but if the trustees decide to follow a different course of action they must have a clear reason why and document it properly in their minutes or records to evidence that they have discharged they duties properly.
3. Due diligence on the buyer
In this case the buyer was a shell company that seems to have been specifically set up for this one deal. At no time did the charity trustees consider the buyer's motives, how they were going to fund the purchase, or the risks for the charity in dealing with this particular buyer.
In this case it appears clear that the buyer company was set up in such a way that there was never a realistic possibility of the charity trustees enforcing any contractual obligations against the buyer.
Lesson: it is important to know if a potential buyer can honour its promises. Can it actually afford the property? Where is the money coming from and when will it be available? You should have a reasonable idea what the buyer proposes to do with the property. If it is clear that the buyer will quickly sell the property on again then the charity trustees and their advisers must take account of that and seek to protect the charity's position against successors.
4. No bad faith and no action against the trustees
The Commission did not find evidence that the trustees, or anyone associated with the charity, derived any unauthorised private benefit from the sale or any indication of bad faith on the part of the buyer.
There is no mention of further action against the trustees, such as seeking the £15M (or some of it) from them to make up the loss to the charity. There is no indication of whether the trustees have £15M to pay to the charity. Such action could be possible and charity trustees should be careful on property transactions to avoid putting the charity and their personal assets at risk.
Lesson: The trustees have received a finding that they have seriously mismanaged the transaction and should perhaps think themselves fortunate they are not facing any further action. The implication seems to be that the Charity Commission won't take further action against the trustees as individuals unless they find they have personally benefitted or there is some element of bad faith. However, trustees should not risk putting themselves in such a position. Professional advisers must ensure they discharge their professional obligations properly so they do not expose themselves to the risk of a negligence claim.
Harvey Grenville, Head of Investigations and Enforcement at the Charity Commission, said: "This case highlights that disposing of charity land can involve complex arrangements, which charities need to be careful about and obtain proper professional advice on. But even for simpler deals, it’s a reminder of why it is so crucial that all charities and trustees understand the basic duties set out in our guidance, ‘The essential trustee’.
These duties include trying to get the best deal for your charity and complying with the specific legal requirements that apply in charity law when selling or leasing charity land or property."