On 24th February 2022 the Charities Bill received royal assent becoming the Charities Act 2022. It is coming into force in stages to allow for the necessary guidance to be updated.
In our final article we look to the future and the amendments that are hopefully coming into force by the end of 2023 and one which is postponed indefinitely.
How the Charities Act impacts the appointment of trustees?
The Charities Act gives the Charity Commission a wide ranging power to make an order ratifying the appointment or election of a charity trustee where there is a possibility that an individual was not correctly appointed or elected. The consent of the charity trustee involved is required for any appointment.
When making the order, the Charity Commission also has the power to vest property in the relevant charity trustee and also validate any actions taken by the individual before the order is made.
This is a useful power, however whether will be used much by the Charity Commission is another matter. Generally the Charity Commission asks charities to rectify their own problems if possible and every rarely uses its current powers to correct mistakes.
Remuneration of charity trustees and the Charities Act
The Charity Commission will get a new power to authorise a charity trustee to retain a benefit which they have already received for work done for the charity or to order a charity to pay a trustee for work already done which was not a permitted benefit. An order can only be issued if the Charity Commission considers that it would be inequitable for the person in question not to be paid the remuneration or be allowed to retain the benefit.
When making these orders the Charity Commission must consider:
- Whether, if the person had not carried out the work, the charity would have paid someone else to carry it out
- The level of skill with which the work was carried out
- Any express provision in the charity’s governing document prohibiting the person from receiving the remuneration or retaining the benefit
- Whether remunerating the person or allowing the person to retain the benefit would encourage breaches of trust or breaches of duty by charity trustees.
The granting of this power means it is no longer necessary to apply to court in this situation.
Amending charity governing documents
A charity is not a legal entity in its own right. It is usually established as either a company, a Charitable Incorporated Organisation (CIO) or an unincorporated entity such as a trust or an association. The Charities Act makes a number of changes to the way each of these entities can change their governing documents and aligns the considerations which need to be made by the Charity Commission when providing consent to certain amendments.
Amending charitable purposes
Amendments to the purposes of a charity generally require Charity Commission consent. The Charities Act states that the matters which the Charity Commission must consider before giving consent to a change to the purposes of a charity are as follows:
- The purposes of the charity when it was established (if, and so far as, they are reasonably ascertainable)
- The desirability of securing that the purposes of the charity are, so far as reasonably practicable, similar to the purposes being altered
- The need for the charity to have purposes which are suitable and effective in the light of current social and economic circumstances.
The considerations are now the same for charitable companies, CIOs and unincorporated charities and are based on the current considerations made before granting a cy-près scheme.
The Charities Act amends the rules that require Charity Commission consent for any amendment to the objects of a charitable company. Once this section of the Charities Act comes into force, only amendments which alter the substance of the company’s charitable purposes will require prior approval from the Charity Commission (these are known as regulated alterations). This will align the description of a regulated alteration for a charitable company with that for a CIO.
The Charities Act will allow for amendments to a CIO’s constitution to take effect on the date the members’ resolution is passed, or on a later date specified in the resolution.
However, if the amendment is a regulated alteration and requires Charity Commission consent, then it will be ineffective unless prior consent has been obtained from the Charity Commission. Although resolutions can be validly passed subject to Charity Commission approval being obtained.
Additionally, any changes to the CIO’s purposes will only become effective when registered with the Charity Commission.
These amendments have come about as a result of dissatisfaction with the current rules which state that amendments to a CIO’s constitution only take effect when registered with the Charity Commission. This procedure is unhelpful as there is no certainty as to when the amendments will be effective and CIOs are not notified of when registration happens.
The grounds for refusing to register changes to a CIO’s governing document have also been removed.
Several powers available to unincorporated charities will be removed completely.
The current powers for smaller charities to resolve to transfer all their property to another charity and to alter their purposes will be removed. As will the current power for unincorporated charities to amend administrative provisions in their governing documents.
These provisions will be replaced by a wide ranging statutory power for unincorporated charities to amend their governing document by resolution.
The trustees must be satisfied that any amendment is expedient in the interests of the charity before passing the resolution and the resolution cannot result in the charity no longer being a charity.
The following amendments will require prior Charity Commission approval:
- Alterations to the charitable purposes of the charity
- Alterations to a provision directing the application of property of the charity on its dissolution
- Alterations which provide authorisation for the charity trustees or members of the charity, to obtain any benefit
- Alterations to a restriction that renders property permanent endowment
- Any amendment that would have required the consent of a person (other than a charity trustee or member), unless that person consents to the amendment or is no longer in existence
- Any amendment that affects any right directly conferred by the governing document on a named person; or the holder of an office or position specified in the governing document, unless that person consents to the amendment or is no longer in existence
- Any amendment that would confer power on the charity trustees to make certain amendments.
This statutory power will apply in addition to any express powers already included in the governing document of the charity.
Changes to the rules on charity mergers
When a charity merges with another charity or incorporates (establishes an incorporated charity and transfers its assets to that charity) there is often a concern that any legacies left to the merging charity will be lost as that charity will cease to exist after the merger. For this reason, following a merger, some charities chose to continue to run as a shell charity to receive legacies. This is not ideal as it creates an administrative burden and can cause confusion for executors.
The Charities Act 2006 tried to solve this problem by introducing the register of mergers which is kept by the Charity Commission. The register contains details of charities which have merged. If a merger is registered, then any legacy to the charity which transferred its assets will still take effect and be treated as a legacy to the charity which received the assets as part of the merger.
However, there is an issue with this. A merger can only be registered if one of the charities has ceased to exist completely. Many wills specify that any charity named in the will must exist at the time of death and therefore, if the charity has been completely wound up, the gift in the Will shall fail even though the merger is registered.
The Charities Act has now dealt with this issue. If a charity named in a will is wound up and the merger is registered, the gift will be treated as a gift to the merged charity even if the Will states that the charity must still exist at the time of death. This means that it should no longer be necessary to keep shell charities in order to deal with legacy issues.
These rules will apply for any deaths after the date the provision comes into force no matter when the Will was prepared or when the merger was registered.
The only way the gift will fail is if the will specifically does not allow this provision to apply.
Transferring charity land
At present, if a charity is transferring land to another charity for less than market value, there is generally no need to go through the process of getting advice and a report and ensuring that the trustees have approved the terms of the transaction as being the best that can be reasonably obtained for the charity.
However, this broad approach is not always appropriate as often the charity transferring the land still wants to receive a financial return. This is especially so if the disposal of the land is in the course of social investment. When a charity makes a social investment there is always some level of financial return but also some level of charitable return as part of the investment is to further the purposes of the charity.
Therefore, when this section of the Charities Act comes into force it will confirm that the general requirements for disposing of land will still apply in certain circumstances.
These situations will be:
- A commercial transaction with another charity under which the charity disposing of the land is still trying to achieve the best price that can reasonably be obtained
- A social investment by the disposing charity which broadly means a transaction under which the charity is looking to obtain both a financial and charitable return.
The requirements are to obtain a report on the property and consider whether a disposal is in the best interests of the charity. This aligns the rules regarding charity land with those regarding social investment in that when making social investments, charity trustees need to be sure that what they are doing is in the best interests of the charity and the charity will benefit both financially and in charitable terms, especially if it is disposing of property at a discount.
The Charities Act also provides that a disposition by a liquidator, receiver, mortgagee or administrator of land held by or on trust for a charity will not be captured by the rules on disposing charity land because those individuals already have a professional duties regarding the disposal of land.
Additionally, the Charities Act will require charities to include in a contract for a disposition of charity land a statement that the disposition has been sanctioned by the court or the Commission or that there is power under the trusts of the charity to effect the disposition and that relevant laws have been complied with.
Currently charity trustees only need to make these statements in certain documents. Once the change comes into effect, the requirement to include statements in land disposal documents will be the same at each stage of the transaction (both contract and completion).
The purchaser and mortgagee protection rules will also be amended so a statement in a contract for a sale or mortgage is conclusively presumed to be true in favour of the person enforcing the contract. Additionally, if no statement has been given in the contract, it will still be enforceable in favour of a person who has entered into the contract in good faith.
This change means that a charity can no longer rely on its own failure to comply with the rules to avoid completing a contract for the disposal of an interest in its land.
Potential changes to ex gratia payments
The Charities Act was due to bring in some very interesting changes regarding ex-gratia payments which would allow all charities to make ex gratia payments and allow charities to make payments up to a certain limit without Charity Commission approval. It would also allow for the delegation of decision making regarding ex gratia payments.
However, some museums and other organisations have questioned whether they can use these powers to return items held in their collections on moral grounds. This was not considered at the time bill was being debated and so further consideration is now being given to the matter which means the implementation of these changes is postponed indefinitely.
The changes being introduced as part of the Charities Act are wide ranging and complex. Our specialist lawyers are here to help charities and trustees navigate their way through these reforms. If you have any questions about any of the points raised in this series of articles, please get in touch.