Charities Bill [HL]

moved Amendment No. 64:"After Clause 26, insert the following new clause—"    ““SALE OF FUNCTIONAL PROPERTY    After section 36 of the 1993 Act insert— ““36A   SALE OF FUNCTIONAL PROPERTY (1)   Notwithstanding the provisions of section 36(2), no land or buildings forming part of the functional assets of a charity shall without an order of the court or the Charity Commission be mortgaged or charged for the repayment of money borrowed, nor in the case of land or buildings in England or Wales be sold leased or otherwise disposed of save in accordance with the provisions of this section. (2)   For the purposes of this section, ““the functional assets of a charity”” shall mean all such assets as are or have within the preceding 4 years been used or occupied for the purposes of an undertaking conducted by the charity in the pursuit of any primary purpose of the charity (but not including property used or occupied in the course of profitable investment for the benefit of or in the course of the management and administration of the charity). (3)   Subsection (1) above shall not apply to any mortgage or charge for the purposes of securing borrowings or any sale lease exchange or other dealing with land or buildings which the trustees duly certify to be in their opinion required for or expedient in the interests of the better functioning or development of the undertaking of the charity in relation to which the land or buildings shall have been used or occupied, and in relation to any such transaction so certified the provisions of section 36 shall apply accordingly. (4)   Any person dealing with the trustees of a charity in good faith and acting without actual notice of any impropriety in the giving of any such certificate as is referred to in subsection (3) hereof shall be entitled to rely on the giving of such certificate as conclusive evidence that the certificate has been properly given but save as aforesaid a certificate given in breach of the duty of the trustees shall have no effect.”””” The noble Lord said: My Lords, Amendment No. 64 has been suggested by the Independent Schools Council, the body which represents about 1,300 independent schools, almost all of them charities, with over 500,000 pupils. The amendment is not unconnected with your Lordship’s deliberation of the previous amendment tabled by the noble Lord, Lord Swinfen, concerning trustees who are not terribly expert, and, indeed, it is not unconnected with your Lordships’ deliberations last week on the amendment from the noble Lord, Lord MacGregor of Pulham Market, concerning schools with charitable status which fail to satisfy the public benefit requirements. Its intention is to buttress these charities against sales of their buildings or lands at below full value by improving the bargaining power of voluntary, unpaid, charitable trustees when faced with a predatory approach from a much tougher commercial purchaser. Earlier in Report stage, I made reference to the new breed of purely profit-making commercial providers of education. These operators will not be giving bursaries, providing help to the maintained sector, opening premises to state schools or doing any of the other public-benefit activities which charities will undertake. These commercial companies are currently looking for opportunities to buy out existing premises. Pressure from such commercial purchasers may be greater if some independent charitable schools—a small minority, I trust—find they are unable to stay in business because they cannot demonstrate public benefit. Many schools, but also hospitals and retirement homes, carry out their activities on land or in buildings with considerable development value. There are astute commercial operators, backed by private equity funds, who can muster property development expertise to acquire those assets. Such purchasers can run circles around less commercially astute charities whose volunteer trustees may well have no expertise in property development or commercial negotiation. There is a requirement on the charity to sell for full value, but this can be met by a single letter from a local surveyor saying that the price seems right. The problem is that the trustees of schools will often wish to sell the school as a going concern, but the underlying reality is that the value of the premises may be much higher if some or all the assets are stripped out and land is developed. There are special problems where trustees of a school feel unable to continue but nevertheless hope that the school can continue. In general, their negotiations must be conducted in the utmost secrecy because knowledge that a school is for sale can precipitate the withdrawal of pupils, further impair the school’s financial viability and depress its value as a going concern. In those circumstances, a well funded commercial purchaser can strike a less-than-equitable bargain with trustees who are unable to test the open-market value. The certificate from a surveyor or valuer can state that the sale price is the best value obtainable, but negotiations and conditions of secrecy with a charity in financial distress can lead trustees to accept an unequal bargain. This amendment would redress that inequality of bargaining power in favour of the trustees. It would help them to attain full value for the assets that they sell by making it necessary, in limited but important circumstances, to obtain the Charity Commission’s sanction for the proposed sale. That requirement would not apply if the trustees were simply moving their operations from one building to another or selling land or buildings held for investment purposes. It would apply where trustees were bringing to an end or substantially reducing the charitable undertaking carried on in those buildings or on that land. So whether in the case of a school or a retirement home, trustees could move premises without the Charity Commission’s permission, unless they were significantly downsizing, but they would always need the commission’s approval if selling the premises and discontinuing the activity; for example, ceasing to run a school. I am told of a real example where the development value of a school was between £16 million and £20 million but the offer for purchase, on the basis that the school would carry on as a going concern, was between £2 million and £3 million. In that case, the purchaser was also negotiating for a commitment from the trustees to use part of the proceeds of sale to fund bursaries in the newly commercial school. That sounds very much like having one’s cake and eating it. After the commercial operator had purchased the charitable assets for a knock-down price it would then benefit from part of the amount that it had paid when it came back in the form of bursaries, which gave that school a competitive advantage in the local market. I understand that that process then makes neighbouring schools more vulnerable to predatory purchasers. The endgame could well be a number of purchasers in the local market, a merger of schools and the sale of surplus land, with a development gain accruing not for charitable purposes but to the private-equity investor. I can see that over a generation there could be considerable loss to the total charitable estate. The perverse outcome is that schools, which as charities must demonstrate public benefit, get replaced by profit-making schools that turn their back on the local community and have no charitable aim. The concern of the amendment, therefore, is the protection of charity assets in an increasingly tough financial environment. The guiding principle is that, if there is a fundamental change in a charity’s activities which involves selling land or buildings, the Charity Commission should check that the sale is properly handled in the best interests of charity. Where there is the possibility of development gain further down the line, for example, the commission should check that the proper amount of that gain will accrue to the charitable estate rather than to the commercial purchaser. With the expert input from those appointed by the commission wherever that seems appropriate, the imbalance in skills between an ailing charitable body and a well funded commercial purchaser can be redressed. The dangers here are real already, but the position becomes more urgent if there are any cases where the Bill’s public-benefit requirement means that more sales by charitable trustees become necessary. Putting the protection of the amendment in place seems a wise plan. I beg to move.