Charity Mergers - Property Aspects to Consider
When two Charities merge there is often charitable property to consider and the work required to transfer this can be significant.
Where property needs to be transferred, there is either a Charity that already owns property (Owning Charity) or a Charity who acquires property (Acquiring Charity). Sometimes, both Charities own property and so they can be both an Acquiring Charity or an Owning Charity. Post-merger, the Trustees of the merged charity will be responsible for all properties so it is important to understand the obligations of each property.
What Steps Do Merging Charities Need to Think About?
The usual steps required are:
- Collating Title Documents - If you are the Owning Charity, you should undertake a property audit at a very early stage. This includes reviewing what property is held and ensuring relevant documentation is readily available. Keys things to consider are whether the property is registered at the Land Registry. If unregistered, it should be checked whether deeds are available and how the ownership of the property is evidenced.
- Title Review - The Acquiring Charity should undertake a title review to identify issues or onerous provisions, for example whether the land is freehold or leasehold, are there restrictions to transfer the property or if there are charges or leases.
- Due Diligence - Often, merging Charities have worked together and may know each other's operations. However, there can be issues affecting the property which aren't obvious on a day to day basis and could affect the transaction or future occupation by the merged charity.
Examples of due diligence that the Acquiring Charity can do includes:
- raising enquiries of the Owning Charity to elicit information about the property;
- undertaking standard searches to identify matters such as the planning designation of the property and potential environmental liabilities; and
- commissioning a condition survey to establish the physical state of the property.
- Charities Act - the Charities Act 2011 imposes various requirements on charities that are disposing or acquiring property. Both the Owning and Acquiring Charity will need to carefully consider their obligations before they contractually agree to enter into the merger.
In most instances, the merger will fall within an exemption to the disposal requirements if the two charities have compatible objects and the transfer is for less than market value. If this is not the case, then the Charities Act disposal requirements will need to be complied with. This requires the Owning Charity to commission a Qualified Surveyor's Report to support the disposal. The Trustees of both charities must act in the best interests of each charity, which includes doing due diligence and taking advice on the merger's terms. It is best practice to minute discussions to create an audit trail showing that all issues were considered.
- Transfer of Property - Freehold properties with no restrictions can be transferred via a straightforward transfer deed. Where consent of a third party is required, then this should be sought as early as possible to avoid delays. If the property is leasehold, then there are likely to be further requirements to overcome. For example, the landlord probably needs to provide their consent and their costs to grant consent will likely need to be paid by the charities. In some circumstances, the landlord might want reassurance like a rent deposit from the Acquiring Charity.
- Charges - If there is a charge secured against a property, consider whether this needs to be paid off or transferred to the Acquiring Charity. Early discussions with the lender will ensure that any requirements they have can be fulfilled. If the legal charge is going to be transferred to the Acquiring Charity then the Trustees of the Acquiring Charity should take advice from a suitably experienced person. If the charge is going to need to be paid off, then the merging Charities will need to consider where funds will come from.
- Post-Completion - 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. The parties will also need to consider whether the SDLT charities exemption applies or if SDLT payment is due. Even if the exemption applies, the Acquiring Charity will still need to submit an SDLT return.
Summary
When charities merge there are a number of property issues that can arise. Any charity that is considering merging with another should factor property into the timetable from the outset to save parties time and cost.