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Charity Mergers and Property - What Are the Key Issues to Consider?

on Friday, 19 February 2021.

When two charities merge and either or both of them hold property, there is often much more to consider than trustees first anticipate.

The amount of work required to correctly transfer the property can be similar to an acquisition of the property. Where property needs to be transferred, there is the charity that already owns property and the charity who is acquiring it. Sometimes, both charities own property and so they are both the acquiring charity and the owning charity. After the merger, the trustees of the merged charity will be responsible for all of the properties, so it is important to understand the obligations and burden of what is being taken on.

Trustees still have their fiduciary duties to act in the best interests of the charity and that includes doing due diligence and taking advice on the terms of the acquisition/disposal, even if that is part of a merger between two charities which has wider benefits.

What Are The Usual Steps?

The usual steps required to prepare and complete the property elements of a merger are as follows:

  • If you are the owning charity, it is a good idea to undertake a property audit at a very early stage in the merger discussions. Review what property is held and make sure that the title documents and any other relevant documentation is in good order and readily available. Keys things to consider at this early stage are: is the property registered at the Land Registry? If not, do you have the deeds? If not, then you need to consider how the ownership of the property is evidenced. Considering issues like this at a very early stage helps avoid delays and unexpected issues later on.
  • Identify what property is held by which charity. Are there any restrictions or limitations on that property which dictate the most sensible ownership structure for the merged charity? For example, if there are two charities, each holding property and the trustees need to pick which will be the eventual charity to hold all the property. If the owning charity owns freehold property with no restrictions and the acquiring charity has a lease with a prohibition on that lease being transferred, then transferring the freehold property into the acquiring charity would be the simplest solution. It is also worth considering whether all of the property currently held by the two charities is required and whether some can be sold, or the leases terminated if it is surplus to requirements after the merger.
  • The acquiring charity should undertake a full title review to identify any potential issues or onerous provisions that might come with the land. Key points to consider at this stage are: is the land freehold or leasehold? Are there any restrictions or prohibitions on transferring the property? Is the property subject to any charges or leases?
  • The charities need to consider what level of due diligence they consider appropriate. Often, merging charities have worked together for a period of time and consider that they know each other's operations well. This may be the case, but there can be issues affecting the property which aren't obvious on a day-to-day basis which could affect the transaction or the future occupation by the merged charity.

    • The acquiring charity may choose to raise enquiries of the owning charity to elicit information that the trustees have about the property. This may feel formal, but the standard list of questions will assist the trustees in formulating information that they may not have considered relevant.
    • They may also want to undertake standard conveyancing searches on the property to identify things such as the planning designation of the property and any potential environmental liabilities. You will want to know that the new lease is compatible with the authorised use of the property, whether that authorisation comes from the planning designation or the lease and particularly if the use of the property is going to change after the merger.
    • It is also worth considering the physical state of the property being acquired. Before purchasing a property, it is advisable to commission a condition survey and it is no different on a merger. Any particular liabilities presented by the condition of the property should be taken into consideration. This is relevant whether the property is freehold or leasehold, as the liability for repairing it is still likely to fall to the acquiring charity.
  • The next steps depend on the type of property being transferred. If it is freehold with no restrictions, then a straightforward transfer can be completed. Where there are restrictions on the property which require the consent of a third party, then these should be investigated as early as possible because these can often cause significant delays. If the property is leasehold, then there are likely to be further restrictions or requirements on transferring it. For example, the landlord probably needs to provide their consent to assign, and the costs of granting that consent will need to be paid by the charities as part of the costs of the merger. In some circumstances, the landlord might want reassurance, like a rent deposit, from the acquiring charity.
  • If there is a charge secured against the property, consider whether this needs to be paid off or transferred to the acquiring charity. Early discussions with the lender will be required to ensure that any requirements they have can be fulfilled without causing delays later in the process. If the legal charge is going to be transferred to the acquiring charity, then the trustees of the acquiring charity should take advice on the legal charge from a suitably experienced person (this does not have to be external to the charity, it could be a finance director for example). If the charge is going to need to be paid off, then the merging charities will need to consider where the funds will come from.
  • Finally, once the property has been transferred, it is likely that it will need to be registered at the Land Registry in the name of the acquiring charity.

In most instances, the merger will fall within an exemption to the usual requirements on a disposing charity because the two charities have compatible objects and usually the transfer is for less than market value. Although, if this is not the case then those requirements will need to be complied with - for example, the owning charity will need to get a qualified surveyor's report to support the trustees' decision to dispose of the property.

In addition, as stated above, the trustees of both charities must comply with their fiduciary duties to act in the best interests of the charity, and that includes doing due diligence on the property and taking advice on the terms of the merger. It is best practice to minute those discussions so that you have a paper trail showing that all issues were given due consideration.

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Our upcoming webinar, 'Charity Mergers - A Look Behind the Legal Process', will give practical tips to trustees, chief executives, and finance directors (as well as other stakeholders) on the merger process, and improve knowledge and understanding on the topic to assist charities in making strategic decisions in the interests of their beneficiaries. Book your free place today.

For specialist legal advice on property issues surrounding a charity merger, please contact Jessica Booz in our Charity Law team on 07584 191 949, or please complete the form below.

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