Charities Act 2022 - simplifying property sales in estates (a step too far?)

The Charities Act 2022 was passed on 24 February 2022 but some of its provisions remain in abeyance until commencement is ordered by secondary legislation.

One of the key provisions of the 2022 Act will be to simplify the regime relating to restrictions on disposals of charity property under Part 7 of the Charities Act 2011 (the ‘restrictions’). The regime will become less prescriptive and will broaden the class of professional that can provide trustees with a qualifying report under s119 commonly required in order to comply with the restrictions.

A recent dealing has underlined risks which will be particularly heightened in a legacy context, when the more liberal controls on disposals of charity property under the CA 2022 come into effect.

The charity was the sole beneficiary of the residuary estate which comprised a property in a sought-after seaside location. Appropriation by the executor for the purpose of avoiding taxation of gains meant that a s119 report was required for compliance with the restrictions. The property had been marketed and the executors had arranged for a local surveyor (recommended by the selling agents) to prepare a s119 report for the purposes of complying with the restrictions. The parties were set to exchange, and all was well…or was it?

The surveyor’s report didn’t make any recommendation as to price, nor did it comment on the treatment of any development value that might have been attributable to the significant landholding that came with the property. On closer inspection the report was defective and did not comply with the strict requirements of s119. With the property lying at the bottom of a buying chain there was significant pressure to exchange, and the buyer threatened to pull out if exchange didn’t occur immediately. Swift action was required.

Cue a mad dash to instruct an alternative surveyor to provide a replacement report that met the requirements of the restrictions. We found one – no mean feat given the property location in one of the least accessible corners of the British Isles. All was once again well… or was it?

The replacement report concluded that the surveyor could not recommend that the charity proceed with the sale. It cited errors in the marketing of the property; that it had been marketed for too short a period; at the wrong time of year; and not enough was made of certain other valuable characteristics which might be expected to improve the price that the property would reasonably be expected to achieve. Crucially, the surveyor concluded that the proposed terms of sale were not the best terms reasonably available, and that if marketed properly they would expect the property to achieve a sale price increase of up to £120,000 – a margin of around 15%.

Oversights happen. However, the difficulty for charities in this position is that they are often several steps removed in the process of complying with the restrictions – relying on professional advice in the form of a qualifying report under s119 often obtained by executors in circumstances where the charities have little practical knowledge of the property, the local market or how the transaction might have been handled. This makes it difficult to spot errors. By luck in this instance the original report contained a couple of red flags which prompted the legacy officers involved to register the need for advice which led to the second opinion.

Under the current regime the requirements for a qualifying surveyor’s report are prescribed by The Charities (Qualified Surveyors’ Report) Regulations 1992. The Regulations set a high bar in terms of the quality and content of the report for the purposes of satisfying the restrictions. Roll forward into Q1 2023 when the more liberal 2022 Act provisions are expected to come into force and the Regulations no longer apply; what of this scenario then? One wonders whether there is a risk that the less prescriptive regime under the CA 2022, combined with the broadening of the class of professional – essentially to include certified estate agents and qualified charity trustees and employees, as well as surveyors – that can provide a report for the purposes of s119, might contribute to less experienced professionals providing less rigorous advice, with all of this making the type of scenario considered above harder to spot and potentially costing charities valuable legacy income. Only time will tell, and whilst there is no reason why this should necessarily be the case, charities should be alive to the potential risks when the new regime comes into force.

For now, the existing regime under the CA 2011 prevails. When the CA 2022 regime comes into effect next year, charities and their trustees should continue to ensure that the professionals that they appoint have the requisite credentials to allow them to provide the advice required – and should not be afraid to ask questions where they have doubts or questions. If you have any concerns, please contact one of the Withers legacy team.