OG56 Local authorities as trustees

Last reviewed:
Last updated:

Policy Statement/Overview

IMPORTANT NOTE

  • This is an interim conversion – all the information from the original format OG has been copied over into this new format.
  • The guidance has not undergone an extensive review at this stage; it will be reviewed and renumbered at a later date.
  • The Casework Guidance tab contains all the text from the original style OG; you may find it easier to navigate using the OG Contents tab. The other tabs remain empty until the OG is fully converted.

Summary of the guidance

OG Contents (Site map)

Casework Guidance

Please read the Important Note on the front page

OG56 A1

OG56 A1 Overview - 14 March 2012 

1. Principal roles played by local authorities in the trusteeship of charities

 

1.1 Statutory role: background

Local authorities in England and Wales include County, Unitary, District, Borough and Parish Councils (in Wales, a Community Council is the equivalent of a Parish Council). They function first and foremost as local government bodies and their primary functions are to deliver a range of public services within their geographical areas. Their responsibilities and operations are defined in the various Local Government Acts. The policies and decisions within this framework are set by locally elected councillors on the basis of political considerations. It is usual for local authorities (other than parish / community councils) to employ staff to provide the administrative support to enable the policies of the Council to be put into practice (in much the same way as civil servants advise on and put into practice the policies of the Government of the day).

 

1.2 Trusteeship role

Local authorities can act as:

  • sole trustee: the authority as a corporate body both holds the property and oversees its application, as charity trustee (see section 2 below);
  • joint trustee together with individual trustees;
  • custodian trustee: the authority holds the property but takes no decisions on its use. OG 56 B1 section 5 provides further guidance.

 

They can also:

  • appoint their nominees as trustees (see section 5 below);
  • exercise other powers in relation to a charity; or
  • fund the charity either through grants or contracts.

 

In addition the holder of an office connected with the local authority may either be a trustee ex officio, or have some other powers and duties towards the charity, such as appointing some of the trustee body.

 

The precise responsibilities, if any, of the local authority as a trustee will be set out in the charity’s governing document. A local authority could be involved in more than one capacity, for example acting both as custodian trustee and appointing one or more of the charity trustees.

Top of page 

2. Local authorities acting as sole trustees

Many local authorities act as sole trustees of local charities - especially charities for recreational or educational purposes.

 

In order to be a charity, a body must be established for exclusively charitable purposes. It cannot be established to further the purposes of some non-charitable body such as the local authority itself. Local authorities and charities often both have close interests in local topics. The charity needs to be independent of the local authority in the sense that decisions about the administration and operation of the charity need to be taken solely in the interests of the charity, with a view to furthering its charitable purposes, and for no other purpose.

 

Against this background, although there may be benefits in a particular case in having a local authority as trustee, in general there are potentially serious disadvantages, which are summarised in OG 56 C1. Therefore, in exercising our power under s.69 of the 2011 Act to appoint charity trustees, unless there is a compelling reason for appointing the local authority, we will generally try to make some other trustee arrangement. OG 56 B1 provides further guidance on this.

Top of page 

3. Local authorities acting as sole trustees: Issues at Registration

OG 56 B2 section 1 provides further guidance on issues to consider at registration, for example where a local authority is to be the trustee or where the charity is being set up to take on a local authority facility (such as, perhaps, the provision of a leisure centre).

Top of page 

4. Local authorities acting as sole trustees: Issues after Registration

Where we have serious concerns about the ability of a local authority to act as trustee because, for example:

  • it fails to deal satisfactorily with conflicts of interest; or
  • its members become involved in internal council disputes over the charity which cause the administration of the charity to break down; or
  • it fails to separate clearly its statutory property from that of the charity; or 
  • when a local authority is proposing to lease charity property to itself in its corporate capacity or vice versa (OG 56 B3 provides guidance on this subject),  

we should be prepared to advise the local authority that it would be appropriate for it to stand down voluntarily as a trustee, whilst recognising that we can remove a trustee only where the normal conditions set out in s.79(3) of the 2011 Act apply (a formal inquiry having been opened first) .

 

We should also bear in mind our concerns when making a Scheme for a charity of which the local authority is already sole trustee. We should consider whether other trusteeship arrangements might not be more appropriate, and, in suitable cases we should suggest that the local authority retires in favour of a suitably constituted body of individual trustees.

 

We should not, however, as a matter of course open new cases simply to seek to replace a local authority as trustee where there are no other good reasons for doing so.

Top of page 

5. Local authorities nominating trustees

Persons who are appointed trustees of a charity must exercise their own judgement as to the best interests of the charity. It is no part of their function to represent the body appointing them, or to carry out the wishes, or discharge the statutory duties, of the body appointing them. In exercising a power of appointment, a local authority’s sole concern is to ensure that it selects a fit and proper person to act. It would be quite wrong for a local authority to regard its appointee as an instrument for giving effect to its policies or wishes. (A power to appoint trustees is considered to be a fiduciary power: this means that it must be exercised in the interests of the charity, and not in the interest of the person who exercises it.).

 

Local authorities can have an important and useful role in identifying suitable individuals to act as trustees. If however there is a risk of actual or perceived conflict of interest, or of undue influence, the guidance in OG 56 B2 should be followed.

Top of page 

6. Where councillors or officers of the Council are to be appointed

 

6.1 Issues at Registration

The appointment of members or officers of a local authority as trustees of a body might suggest, in certain circumstances, that the body was not intended to be independent of the local authority. We must be alert to this possibility at Registration stage in case the trusteeship arrangements are such as might give rise to conflicts of interest and duty in the administration of the charity. This may have the effect of exposing the charity's transactions to the risk of being set aside.

 

For example, an intention that the body should not be independent of the local authority might be evident where these individuals are appointed by the authority to a charity which contracts with it or is likely to do so having regard to the nature of the charity. In those cases, there may arise a conflict of interests for those appointees which will be difficult to resolve. For example, such appointees might be unable to contribute to the trustees' discussions concerning the contracts with the authority without exposing the contractual arrangements themselves to the risk of their being set aside. Further guidance is set out in OG 56 B2.

 

6.2 Issues after Registration

It is the responsibility of every trustee to act in the interests of the charity, whether or not he or she is connected with the local authority. But the authority has a duty not to pressurise a charity trustee who is connected with it to act otherwise than in the interests of the charity, and may be liable for any breach of trust caused by its doing so.

 

A charity is entitled to the impartial judgement of its trustees, directed solely towards achieving the best interests of the charity. Trustees are bound, therefore, not to allow their other interests to influence their judgement. Where the appointment of a member or officer of the local authority will give rise to the risk of a continuing or substantial conflict of interest for that individual, the charity’s interests will generally require the local authority to appoint an individual who has no connection at all with the local authority.

 

OG 56 C2 provides guidance on the separate issue of officers and councillors who are trustees, but have not been appointed by the Council.

Top of page 

7. The Law

There are a number of statutory provisions which set out the circumstances and restrictions on local authorities acting as trustees. These are set out in OG 56 C3.

Top of page 

OG56 B1

OG56 B1 Local authorities as trustees - 8 June 2012 

1 Application for registration from charities with a local authority as sole trustee

If the charity is an ecclesiastical charity or a charity for the relief of poverty, we must point out that by virtue of s.139(3) of the Local Government Act 1972, local authorities are prohibited from acting as trustees of such charities. We should suggest that alternative trustee arrangements should be made either before registration or as soon as possible after registration.

 

In all other cases, when we receive these applications, caseworkers should always check:

  • for potential conflict of interest between the roles of the local authority as charity trustee and its role in its statutory capacity, which might arise, for example, from a contractual relationship between the two; and
  • whether the local authority in its statutory capacity will receive any undue benefit

 

Any concerns should be raised with the promoter (who will almost certainly be the local authority itself). If it appears that a body of individual trustees may be more appropriate, subject to the points in OG 56 B2, this should be suggested to the promoter.

 

If, in such a case, the promoter insists that the local authority should be trustee, the application for registration can only be rejected if the evidence is such as to indicate that the purpose of the institution is not its declared charitable purpose, but is, in fact some ulterior non-charitable purpose of the local authority which is promoting it.

 

lawyer_referconsultThis inevitably involves the assertion that the promoters are acting in bad faith in seeking to establish the institution as a charity, and legal advice should be taken as to whether the organisation can be said to be properly established for wholly charitable purposes and thus required to register as a charity.

 

If there are particular concerns about the future administration of the charity, caseworkers should consider the circumstances in line with the Risk Framework to see if there are regulatory issues that require further action from Operations or Investigations and Enforcement.

Top of page 

2. New appointments by us

Any proposal that a local authority should be appointed by us as sole trustee of an existing charity should be examined carefully against the factors set out in OG 56 C1. Section 4 of OG 56 C1 provides examples of when it is appropriate to appoint a local authority. It should be accepted only if we are satisfied, after considering all other possibilities, that that would be the most beneficial arrangement for the charity having regard to the need to:

  • avoid conflicts of interest;
  • safeguard the charity’s property; and
  • safeguard the beneficiaries' interests.

 

If this is not the case, we should not agree to the proposal and should invite or suggest an alternative arrangement.

Top of page 

3. When we offer to make a Scheme where the local authority is already sole trustee

When making a scheme for some other purpose in relation to a charity which is administered by a local authority as sole trustee, caseworkers should consider, with the aid of OG 56 B2, whether other trustee arrangements would be more appropriate. In suitable cases, and with the agreement of the Authorised Officer responsible for making the Scheme, caseworkers should take the initiative and suggest to the local authority that it might retire in favour of a body of individual trustees while, perhaps, retaining the right to appoint some of those persons. It should be clearly understood that those appointed by the local authority would have to act in the interests of the charity and not in accordance with the instructions of the local authority – see OG 56 B2.

 

Indeed in some cases it will be necessary for the local authority to resign as trustee. By virtue of s.139(3) of the Local Government Act 1972 local authorities are prohibited from acting as trustees of ecclesiastical charities or charities for the relief of poverty. Thus, in some circumstances, it will not be lawful for a local authority to be appointed or to remain sole trustee.

 

An obvious example is where a Scheme is being made to permit a parish council to sell allotments for the labouring poor and to provide for the resulting income to be applied for relief in need purposes.

Top of page 

4. Constitutional issues for local authorities when acting as charity trustees

In cases where a local authority is sole trustee, it should be remembered that it is responsible in the same way as any other charity trustee for carrying out the normal duties and responsibilities of a charity trustee.

 

4.1 Who may make decisions

It is up to the local authority to decide, within the scope of local government law, what structures should be used to reach decisions in its name as trustee. An alternative to requiring all the decisions to be reached by the full body of councillors, for example, is to set up a separate committee to discharge its responsibilities as trustees (see section 101 of the Local Government Act 1972).

 

4.2 Position of individuals acting on behalf of a local authority

Whatever the structure employed, the individuals concerned are not themselves charity trustees. They must, however, act in a responsible way so as to ensure that the local authority acts properly as a charity trustee. If they fail to so this, they may be liable to the council under local government law for any losses it bears as charity trustee (see section 6 below).

 

4.3 Correspondence

We are entitled to be satisfied that those who deal with us on behalf of a local authority are entitled to do so. We would, however, only question the validity of statements made on behalf of a council about the decisions it has reached as charity trustee if we have good reasons to do so.

 

4.4 Advice to the local authority

In cases where a local authority is sole trustee, we should be careful to give advice only on matters affecting the performance of its duties and responsibilities in that role. We should avoid giving advice to individual councillors or agents on their individual responsibilities in the conduct of this business since they are not charity trustees. Their conduct is governed by local government law, but their decisions must be justified by the local authority by reference to its position as charity trustee.

Top of page 

5. Local authorities as Custodian trustee

Under section 4(3) of the Public Trustee Act 1906 and articles 30(1)(h) and (i) of the Public Trustee Rules 1912 a local authority may act as the custodian trustee of a charity, but only if the charity is for the benefit of the people living in the whole or part of its area. For example, parish councils are often appointed custodian trustees of charitable village halls, recreation grounds and youth clubs. However, a local authority cannot act as custodian trustee of an ecclesiastical charity or a local charity for the relief of the poverty.

 

The main duty of a custodian trustee is to hold the property of a charity (except, if it agrees, dividends and other income) and to have the custody of all securities and documents relating to the property owned by the charity. A custodian trustee:

  • cannot manage a charity - that is a matter for the managing trustees; and
  • cannot act for the managing trustees even if there are none; and
  • must carry out the managing trustees' instructions unless that would involve the custodian trustee in a breach of trust or some personal liability.

 

The main advantage for the local authority is that by being appointed as custodian trustee, it can maintain a close link with the charity, so long as it accepts that it must act within the limits defined for custodian trusteeship.

 

Occasionally, a local authority, acting as custodian trustee, might attempt to act outside the boundaries of this role. In such cases we should advise the managing trustees to ensure that the local authority limits its activities appropriately. If it refuses to do so, we should consider whether it is appropriate for it to continue to act as custodian trustee. We could also advise the managing trustees of the option of appointing a different custodian trustee.

 

OG 39 provides general guidance on custodian trustees.

Top of page 

6. Liability of a local authority and its agents 

6.1 The general position in law

The position is similar to that for any corporate trustee (see OG 38 B4 and section 4 above). In principle, a corporate trustee (such as a local authority) is liable for breach of trust in the same way as an individual trustee. It can be sued for breach of trust, and if liable will have to compensate the trust out of its corporate assets.

 

Whether the individual officers who commit the local authority to an action which results in a breach of trust are in turn liable to compensate that body (in its corporate capacity) is a matter for local government law: it is not our concern. Similarly, any complaints on this topic should be addressed to the District Auditor.

 

6.2 Indemnity insurance

We should NOT make an Order authorising the purchase of indemnity insurance for the authority as sole trustee out of the charity’s funds. A public body with the capacity to act as charity trustee should be prepared to accept the ordinary measure of legal responsibility for its actions as such, without seeking any indemnity.

 

Additionally, because any personal liability incurred by the councillors will be to the council rather than directly to the charity, the taking out of trustee indemnity insurance will not be appropriate, because they are not charity trustees. It would not therefore be expedient in the interests of the charity to provide cover for possible liabilities incurred by councillors.

Top of page 

7. Remuneration issues  

7.1 Can charity funds be used to pay for services which the local authority is obliged to provide by law?

It is rare for charitable funds necessarily to be applied in discharging statutory functions. Unless the funds are held for charitable purposes that necessarily involve applying them for the statutory functions of the local authority, a local authority cannot, as charity trustee, use charity funds to pay for its staff, agents or contracts for services which it needs to acquire for the discharge of its statutory functions.

 

7.2 Can a local authority, as charity trustee, employ one of its own staff to provide services to the charity, from charitable funds?

Occasionally a local authority will wish to pay one of its own employees from the funds of a charity of which it is trustee. For example, a local authority may want to use the funds of a charity under its trusteeship to pay for its own clerk to act as clerk to the charity.

 

This is acceptable if:

  • the service provided is necessary to the charity;
  • the payment covers no more than the reasonable cost of providing that service;
  • the employee is suitably qualified to provide the service; and
  • the service being provided is not one which would cause the employee’s duty to the local authority to conflict with his or her duty to the charity. Such a conflict is likely to arise, for example, if a local authority solicitor is asked to provide legal advice to a charity about a contract between it and the local authority.

 

Payments in these circumstances form part of the necessary running costs of the charity which the trustees of any charity are entitled to meet from the charity’s funds.

 

Explicit authority (either in the governing document or from us) would be needed if the payments to the employee included an element of profit or gain to the local authority.  This would be regarded as a trustee benefit and we should treat any instances of this in line with the principles on trustee remuneration. Similarly, where the employee receives payment over and above the going rate for the job but where there is not necessarily any element of profit for the authority, we should establish the grounds on which the local authority can justify such payments as being necessary and in the interests of the charity.

Top of page 

8. Local authorities and individuals acting jointly as trustees

In the past we have recommended the appointment of individuals to act jointly with a local authority, but since this also has disadvantages, we should no longer suggest it as a preferred solution.

 

Some of the same issues relating to joint trusteeship arise in the context of corporate trustees. OG 38 B2 provides a fuller discussion on this topic.

Top of page 

OG56 B2

OG56 B2 Issues connected with the independence of trustees particularly when the trustees are nominated by local authorities - 14 March 2012 

1. Issues at registration

1.1 Independence of purpose

In order to be a charity, a body must be established for exclusively charitable purposes. It cannot be established wholly or in part to further the purposes of a non-charitable body such as the authority itself.

 

We should be alert to this principle especially at the registration stage where the charity is being set up to take on a local authority facility with a body of individual trustees, some of whom may be nominated by the local authority. In such cases we should ensure that the charity will be properly independent. (Section 1 of OG 56 B1 provides guidance on applications for registration from charities with a local authority as sole trustee).

 

For example, a body may be apparently set up:

  • to take over the leisure facilities of a local authority; and
  • to provide in them recreational facilities within the meaning of s.5 of the Charities Act 2011 (see OG 10 B18: Recreation).

 

However, the real object may be to further some local authority purpose which falls outside the ambit of s.5 of the Act. It may be the intention that the powers reserved to the local authority, in the constitution of the body, will be used to ensure this.

lawyer_referconsultIf any such concerns are identified, caseworkers should seek legal advice.

 

1.2 Misuse of powers

Where a body’s constitution reserves a particular power to a local authority, and that power is capable of being exercised (consistently with the constitution) in the interests of the local authority, the body in question will not be a charity. The purposes for which the body is established will include the non-charitable purpose of promoting the interests of the local authority.

 

In that sort of case, the existence of the power goes to status.

 

On the other hand, the power may be exercisable (on the correct interpretation of the body’s constitution) only in the interests of the body itself. In that case, evidence of an intention to misuse the power may indicate that the body is not being set up in good faith as a charity (see OG 21 A3). However, such evidence may show no more than a degree of ignorance of the relevant legal principles on the part of the promoters. In all cases, we would be justified in making further enquiries.

 

Even if the issue is not about charitable status, we may want to assess it under the risk framework and consider whether or not to investigate and check abuse of this kind.

 

Quite apart from formal powers, a body may have been established in such a way that it is financially and practically dependent upon the local authority. Evidence that the local authority intends to exploit that dependence for its own purposes may suggest that the body was not established in good faith. There may, for example be evidence that:

  • a business plan for the new body; and
  • draft funding agreements with the local authority,
  • have been drawn up even before the appointment of trustees.

 

If those agreements contain provisions that commit the new body:

  • to carrying out various policies of the local authority; or
  • to complying with decisions made from time to time by the local authority,

it may be difficult to avoid the conclusion that the new body has been established, in part at least, to enable the local authority to pursue its own wishes and policies.

 

lawyer_referconsultIt is very important in this sort of case to seek legal advice.

 

Experience suggests that, once we have explained the legal principles whose practical effect is to require a charity to be independent, local authorities are generally prepared to concede the necessary degree of independence.

 

In a case where the local authority refuses to adjust its relationship with the new body, even when those principles are explained, the conclusion that the body is not established in good faith as a charity is likely to be unavoidable.

 

1.3 Factors indicating genuine independence

A charity established by, or at the behest of, a local authority is required to be no more or less independent than any other charity. There would be no doubt that a body was sufficiently independent to be a charity if it:

  • is set up with independent trustees, who are not subject to a conflict of interest between the charity and the local authority;
  • is in a position to obtain its own independent professional advice;
  • negotiates any funding or leasing arrangements with the local authority at arm's length;
  • has arrangements in place which preserve the trustees' fundamental discretions as to the selection of beneficiaries and the provision of services, and does not require the trustees simply to give effect to the policies and wishes of the local authority; and
  • has trustees who are free to make their own decisions on matters outside any funding arrangement.

 

These points do not constitute a legal test for charitable status and should not be regarded as a check-list.

 

lawyer_referconsultHowever, the absence of one or more of these features should prompt further enquiry (and, in an appropriate case, referral for legal advice).

 

These enquiries may lead to the conclusion that the organisation is not established for exclusively charitable purposes and therefore should be rejected. 

 

Alternatively, they may reveal concerns about administrative issues rather than issues of status and if so the case should be referred for monitoring the relationship with the local authority.

Top of page 

2. Local authorities wanting to appoint trustees

2.1 Appointing the individual best fitted to carry out the responsibilities of trusteeship of the charity

There is no objection in principle to local authorities appointing trustees. Indeed, the local authority may be well-placed to identify individuals who have much to offer as trustees.

 

However, a local authority must understand that it is bound to appoint the individual best fitted to carry out the responsibilities of trusteeship of the charity in question.

 

It may, indeed, be desirable for a local authority having a power of appointment to consult the trustees of the charity as to whether the trustee body currently lacks any particular expertise. The local authority must not expect its appointee to represent its interests. He or she must act solely in the best interests of the charity. Hence, for example, a local authority should not appoint a trustee in order to protect its interests under a funding agreement.

 

2.2 Schemes which define powers of appointing trustees

Local authorities sometimes take the view that where they offer charities financial assistance, for example where this may be necessary for the charity’s continued survival, they should have the right to nominate all or a majority of the trustees.

 

Where we have to define powers of appointing trustees in the schemes which we make, our preference is not to confer a power on local authorities to nominate all or a majority of trustees. Local authorities who provide financial assistance for charities should not necessarily expect to receive, in return for that assistance, the right to appoint all or a majority of their trustees. However, if the funding authority is insistent, there may be no practicable alternative but to agree, if the charity's viability is to be secured. A trustee appointed by a local authority, like any other trustee, is bound to act solely in the interests of the charity. A trustee who is a member or officer of a local authority, whether appointed by the authority or not, should consider the need to withdraw from trustee discussions of matters in which the authority has an interest which is distinct from that of the charity. The governing document of the charity may require him or her to withdraw. By not withdrawing a trustee in this position increases the legal risk that the relevant transaction may subsequently have to be set aside

 

However, where we make a Scheme to provide for a local authority to appoint a majority of the trustees, we should advise it that:

  • the interests of the charity and its beneficiaries are separate from and so may not be the same as those of the local authority and its tax and rate payers; and
  • its nominated trustees must act in the best interests of the charity.

 

We should set out in the Scheme a regime under which trustees with a conflict of interest and duty are precluded from taking any part in the relevant decisions which may involve such a conflict of interest.

We should also indicate our willingness to give them advice should they feel themselves to be in a position where they may be unable to comply with these conditions.

 

2.3 Points to consider

Caseworkers should bear in mind that any financial gain to the charity (for example, as a result of a financial agreement with the local authority) should not be at the expense of the charity losing its separate identity from the local authority.

 

In this sort of case, we should ensure that the local authority understands clearly these obligations on the trustees and that having the right to appoint all or a majority of trustees is not the best way to represent its interests. It should take other steps to monitor the use of its funding and to secure that that funding is used for the purposes for which it was given.

 

This can, for example, be achieved through reporting arrangements between the charity and the local authority.

 

2.4 Avoiding conflicts of interest

It is important to ensure, when we are appointing trustees, that the trustee body should be able to operate effectively. That requires us to avoid appointing individuals who are likely to be subject to substantial and continuing conflicts of interest, (for example, as a result of a funding agreement with the local authority).

 

In the case of a charity which has intermittent contact with the local authority, a trustee who is a member or employee of the local authority will need to withdraw from discussions at which a conflict of interest arises. If there are several trustees in that position, it may be sensible (depending upon the circumstances and, in particular, the likelihood of such conflicts arising) to constitute the trustee body so as to ensure that there will be a quorum of individuals who will not be conflicted in that way.

Top of page

OG56 B3

OG56 B3 Can a local authority grant a lease as charity trustee to itself in its corporate capacity or vice versa? - 14 March 2012 

1. Issue

Occasionally, a local authority will be the sole trustee of a charity which owns land. The question may arise as to whether it can grant a lease of some of that property to itself in its statutory capacity or vice versa.

Top of page 

2. Our Policy

In considering this issue, we must consider whether such a proposal would be allowable in view of the principles established by the Courts in Rye v Rye (1962) AC 496. If it is allowable, we must then approach the matter in the same way as any other proposal to lease charity property to a connected person.

 

However, we also should bear in mind that what is most important is not simply the process, but whether or not the transaction is in the interests of the charity, rather than those of the local authority.

 

Caseworkers should know the legal basis upon which these proposals are put forward and the criteria for considering whether or not our consent is needed. However, it is up the charity's legal advisers to put together the conveyancing arguments and to convince our advisers that they are relying on a suitable authority.

Top of page 

3. The legal position

3.1 Rye v Rye: Individuals cannot lease their own property to themselves

The case of Rye v Rye establishes the rule that no one person can grant themselves a lease of their own property. In that specific case, however, the leasehold and freehold interests were both held for the private benefit of the same individual: neither of the interests was held on trust. The principles of that case are not identical to those that arise with a charity. There may thus be some doubt as to whether the arrangements at section 1 above would in fact be prevented by this case. The Court nonetheless found the concept of someone making themselves their own tenant defective.

 

In this context, we should therefore seek from the legal adviser to the charity the grounds for considering why the proposed lease is acceptable, despite the difficulties which the Courts identified with such a concept.

 

lawyer_referconsultIf the response suggests that the principles in Rye v Rye do not apply, it should be referred for legal advice.

 

If this view is continued, we should treat the proposal in line with the advice set out in sections 4 and 5 below

 

3.2 Ingram v IRC [1999] 1 ALL ER 297

It may be that the local authority concerned may seek to avoid the objection in Rye v Rye by leasing the charitable property to a nominee acting for the local authority in its statutory capacity. The case of Ingram v IRC established that a lease by a person to a nominee for himself is not prevented by Rye v Rye. A local authority as charity trustee could, in principle, grant a lease of charity property to a nominee for itself in its statutory corporate capacity, so long as:

  • it is within its powers as trustee of that charity to grant this type of lease; and also
  • a local authority under local government law is able to hold property in its statutory corporate capacity in the name of a nominee.

 

Again we should clarify the basis on which the charity believes it is entitled to make this kind of disposition.

 

lawyer_referconsultLegal advice should be obtained to ensure that the line taken by the charity fits in with the principles in this case.

 

Such a lease is a disposition within the meaning of s.117(2)(a)(ii) of the Charities Act and requires the authority of an Order. The situation is exactly the same as where an individual charity trustee grants a lease to himself as an individual.

 

The guidance set out in sections 4 and 5 below is relevant when considering such a proposal.

Top of page 

4. Points to take into account when considering a proposed grant of a lease by a local authority as charity trustee of the freehold to itself in its corporate capacity

The first point to establish is whether the charity has a sufficient power to dispose of the property in this way.

 

If such a power is available, caseworkers will then need to assess why it is necessary to grant such a lease.

 

We will need to be satisfied on the following points before we can make the required Order under s.117(1) of the Charities Act:

  • why the property in question is not being used (or is not going to be needed) for the purposes of the charity;
  • why the interests of the charity will be better served by leasing rather than selling the property;
  • whether there was any alternative to letting the property and, if so, why it had been rejected;
  • why, precisely, the local authority wished to take a grant of the lease for its statutory purposes.

 

If it is clear that there are good reasons in the interests of the charity why the lease should proceed in principle, caseworkers will then need to be satisfied that a report has been properly drawn up in accordance with the requirements of s.117(1). We should usually insist that the charity properly advertises the proposal to grant a lease unless there are clear reasons in the interests of the charity why it should not do so.

 

Caseworkers should pay particular attention to the surveyor's recommendations to advertise the property in order to test the market price. In particular, if the surveyor recommends that the proposed lease should not be advertised, we will need to be wholly satisfied that:

  • there are good reasons for this; and
  • it is in the best interests of the charity not to do so.

 

If we are not satisfied that the transaction is in the interests of the charity we will simply refuse to make the Order.

Top of page 

5. Ensuring that the advice is independent

It is inevitable that a conflict of interest will be present in such a transaction. Where this conflict of interest is significant (because, for example, of the importance of the land in question to the achievement of the Council’s manifesto objectives) caseworkers should ensure particularly that the advisers are acting on behalf of the charity. In all cases we should expect that the charity will receive its own independent legal advice from qualified professionals who are not connected with the local authority. If caseworkers are not entirely convinced that:

  • these conditions are satisfied; or
  • the proposals in the surveyor's report are in the best interests of charity,

we should consider whether we should request a report from the District Valuer.

 

In the most sensitive situations where, for example:

  • the land is of significant value; and
  • a decision not to grant the lease would have a significant and adverse impact on the ability of the local authority to carry out its policies; and
  • the benefit to the charity is difficult or impossible for us to judge on the basis of the evidence supplied,

we should consider asking the local authority to stand down as trustee to be replaced by independent trustees. This may in practice be difficult to achieve and an alternative may be to appoint, as a supportive measure, a Receiver and Manager to take responsibility for the decision on this particular matter (see Appointment of Interim Manager OG 5 B1).

Top of page 

6. Granting leases to the local authority as trustee

It also follows that a local authority, in principle, could grant a lease of its corporate property to a nominee for itself as trustee of a charity. The charity would have to have, or be given, the power to hold the lease in the name of a nominee as there is at present no general power to do so.

 

Caseworkers should be satisfied that the proposals are in the best interests of the charity.

Top of page 

OG56 C1

OG56 C1 Advantages and disadvantages of a local authority acting as sole trustee - 14 March 2012 

1. Disadvantages of appointing local authorities as trustees

 

1.1 The need to distinguish between corporate and charity property

One of the principal disadvantages is that local authorities often fail to separate their own property from that of the charities under their trusteeship. At the very least, this will mean that the accounts of the charity concerned do not comply with statutory regulations: at worst this can lead to serious breaches of trust arising from the application of charity property for the benefit of the local authority.

 

If charities which have a local authority as trustee fail to comply with the statutory regulations they are just as much subject to our monitoring procedures as any other charity which is in breach of the regulations.

 

Examples have included local authorities using the income of a charity to pay for services instead of raising the necessary funds through the rating system to pay for them.

 

If we become aware of a situation of this nature we need to inform the local authority of its duties and responsibilities to the charity. The charitable assets must be properly identified and accounts properly drawn up.

 

Local authorities will also need to be aware of the Local Authorities (Companies) Order 1995 which sets out the additional responsibilities for charitable companies connected with local authorities: see OG 56 D1.

 

Distinguishing between corporate and charity property can be a particular problem in the event of local government reorganisation. A successor authority might not appreciate that property transferred to it from a predecessor authority is held on trust for charitable purposes, with the result that it mistakenly treats it as part of its corporate property. In addition, charitable property might be transferred to the wrong authority when such a re-organisation takes place.

 

1.2 Conflict of interest

As will have been seen from OG 56 A1 and OG 56 B1, a local authority can face difficulties in addressing the conflict of interest that might arise between its role and duty as a local authority and its role as a charity trustee. Conflicts often arise, for example, between the interests of the local authorities and their council tax and ratepayers on the one hand and those of charities and their beneficiaries on the other hand.

 

Such conflicts of interest can also arise where a charity under local authority trusteeship is to enter into a contract for the sale or purchase of property to or from the local authority with the result that the validity of such contracts might be set aside. For further guidance on the position with regard to leases of property, please see OG 56 B3.

 

Conflicts of interest might also arise between the individuals who are responsible for reaching decisions on behalf of the local authority as trustee. The council members might disagree on matters of policy concerning the charity on party political or personal grounds unrelated to the interests of the charity concerned.

 

1.3 Administration

Local authorities sometimes give the administration of charities less attention than would bodies of individual trustees constituted solely for the purpose of administering them. Section 4 of OG 56 B1 provides further information on this subject.

Top of page 

2. Advantages of appointing local authorities as trustees

The administration of a charity by a local authority can have advantages:

  • as a body corporate, a local authority enjoys perpetual succession, so that it is not necessary to make individual appointments of charity trustees or to vest the charity's property in them;
  • the authority may well have an informed view of the needs of the charity’s beneficiaries, especially if the charity provides services similar to services provided by the authority;
  • in the case of a recreation ground or open space, the local authority is able to make bye-laws for the land which are enforceable by the police and the criminal courts;
  • often the local authority will be willing to subsidise the operation of the charity out of its own statutory funds:
    • either directly, by way of grant aid; or
    • indirectly by, for example:
      • meeting the cost of maintaining the charity's property; or
      • providing professional services free of charge.

Top of page 

3. When it is not appropriate to appoint a local authority

In most circumstances, the interests of the charity are likely to be better served by constituting a body of individual trustees to administer it. This is particularly the case where there could be a conflict of interest between the local authority and the charity (for example with regard to a particular land transaction or because the local authority is providing funding to the charity). If a local authority provides funds the danger is that it might be tempted to lay down conditions which are in the local authority's interests and not the charity's. OG 56 B2 provides guidance on trustees nominated by Local Authorities and OG 56 C2 provides guidance on potential conflicts of interest trustees nominated by the local authority may face.

 

OG 56 B1 details the statutory prohibition on local authorities acting as trustees of ecclesiastical charities or local charities for the relief of poverty.

Top of page 

4. When it is appropriate to appoint a local authority

There will continue to be circumstances in which it will be appropriate for a local authority to act as sole trustee. These will include cases where:

  • it is not possible to persuade suitable individuals to act as trustees; or
  • the actions of a body of trustees are under investigation and the appointment of a local authority as sole trustee is advisable as a precautionary, possibly short term, measure.

We will also be approached for our consent occasionally to a transfer of land to a local authority under:

 

In such cases, we should not allow the fact that the local authority concerned would become the sole trustee of the relevant charity to be a sufficient reason for declining to authorise such a transfer.

 

However, before we give our consent we still need to be satisfied that the transfer to the local authority is the most beneficial arrangement for the charity, having regard to the need to avoid conflicts of interest to safeguard the charity’s property and the beneficiaries’ interests.

Top of page 

OG56 C2

OG56 C2 Potential conflicts of interest which trustees nominated by the local authority may face - 26 July 2000 

1. What constitutes personal interest in this context?

Personal interests in this context extend beyond purely financial interests and can include interests arising from employment by, or membership of, a local authority. Where there is a contractual relationship between a charity and a local authority, for example, an obvious conflict of interest arises for any trustee who is also a member or officer of the local authority whenever the trustees discuss questions relating to that contractual relationship.

 

That would include:

  • questions of negotiating and agreeing the terms of the contract;
  • compliance with the terms of the contract;
  • enforcement of the contract against the local authority;
  • disputes arising under the contract;
  • renegotiation or renewal of the contract;

any question, in fact, in which the local authority has an interest that is potentially adverse to that of the charity.

Top of page 

2. When a trustee should consider withdrawing from a trustees' meeting

Where a trustee has a conflict of interest and duty in relation to a particular matter, for example where the matter concerns a contract or proposed contract between the charity and a local authority of which he or she is a member or officer, he or she should consider withdrawing from any meeting at which the matter is discussed.

 

This will be sufficient to resolve the conflict of interest where the governing document specifically permits trustees facing a conflict of interest to withdraw from appropriate meetings.

 

The governing document may either permit or require the trustee with the conflict of interest to withdraw from the meeting. However, the transaction in question will, of course, only be secured if the trustee with the conflict does withdraw.

 

Where the governing document is silent on this matter, the general law will apply. A strict application of the principles would mean that the mere existence of a conflict of interest might provide grounds for the transaction concerned to be set aside if it is not in the interests of the charity. This would be so, even if the trustee(s) concerned withdraw from relevant meetings. In practice, however, the risk of a transaction being set aside is likely to be reduced if the trustee(s) concerned play no part in the discussions over the issues over which they face a potential conflict. Where individuals find it difficult to decide how to proceed, they should take their own legal advice on the matter.

 

Obviously if a trustee regularly withdraws from decisions of the trustees on this basis, there must be a question whether his or her usefulness as a trustee is being reduced to the point where it might be preferable to appoint someone else in his or her place.

Top of page 

3. When would-be trustees face a continual conflict of interest

Provided that they understand that, in acting as trustees of a charity, their sole duty is to the charity, there is no objection in principle to a member or officer of a local authority becoming a trustee of a charity. That said, an officer or member who would face a continuing or substantial conflict of interest if he or she became trustee of a particular charity should not offer himself or herself for appointment as a trustee of that charity. The position depends on the extent to which the charity concerned is connected with the local authority.

Top of page

OG56 C3

OG56 C3 Statutory provisions under which local authorities hold, acquire and administer gifts and land - 14 March 2012 

1. Gifts made for the benefit of the inhabitants

S.139 of the Local Government Act 1972 enables a local authority to hold and administer gifts made for the benefit of the inhabitants of the area (except where these would be held on trust for an ecclesiastical charity or a charity for the relief of poverty).

 

If we discover a local authority acting as trustee of an ecclesiastical charity or a charity for the relief of poverty we should point out that it is in breach of s.139 of the Local Government Act 1972. We should seek to regularise the trusteeship. If there is no other convenient way of doing this, we should offer to make a Scheme to regularise the position.

 

Occasionally, charities will be set up for recreational and educational purposes for the benefit of people in need. In those cases it will be a matter of construction as to whether or not the main purpose of the charity is the relief of need or for recreation or education.

 

lawyer_referconsultLegal advice should be sought in such cases before deciding whether a local authority would be in breach of s.139 of the Local Government Act 1972.

 

Top of page 

2. Land held on trust for the purposes of public recreation

S.3 of the Open Spaces Act 1906 provides for the transfer to local authorities of land held on trust for the purposes of public recreation.

 

Our approval is required to any alteration of the trusts and conditions affecting the land which may be agreed by the trustees and the local authority. This approval should be given by letter/email by an Authorised Officer following our policy on the use of Authorised Officer powers - see OG 702.

 

OG 56 C1 section 4 provides further guidance.

Top of page 

3. Land held as open space for any charitable purpose

S. 4 of the Open Spaces Act 1906 provides for the transfer to local authorities of land held as open space for any charitable purpose. Such transfers require the consent of the Commission.

 

This consent should be given by Order offered and made by an Authorised Officer following our policy on the use of Authorised Officer powers.

See OG 702.

 

OG 56 C1 section 4 provides further guidance.

Top of page 

4. Parochial charities, notably allotment charities and recreation grounds

In addition, many parish and (in Wales) community councils have become sole trustees of parochial charities, notably allotment charities and recreation grounds, by virtue of:

  • ss.5 and 6 of the Local Government Act 1894 (which dealt with the transfer of powers relating to non-ecclesiastical matters from parish officers to the then newly formed parish councils) or;
  • s.298 of the Charities Act which deals with the transfer of property (excluding property connected with an ecclesiastical charity) held for the benefit of inhabitants of a parish from charity trustees to the parish or community council.

 

Orders under s298 should be offered and made by an Authorised Officer following our policy on the use of Authorised Officer powers - see OG 702.

 

However, we cannot make such an Order if the trusts of the charity require that the land is vested in the Official Custodian for Charities.

 

When dealing with parochial charities, we also make Orders under s.79(2) of the 1993 Act for the following purposes:

  • appointing additional trustees when the trustees of a parochial charity do not have an elected member in their midst; and
  • appointing additional trustees where there is a sole trustee.

Top of page 

5. Acquisition of the freehold of or an interest in open spaces and burial grounds

S.9 of the Open Spaces Act 1906 provides for the acquisition of the freehold of or an interest in open spaces and burial grounds.

 

S.10 provides that a local authority, having acquired such an interest under the terms of this Act, shall hold and administer the open space or burial ground in trust to allow the enjoyment by the public as an open space.

Top of page 

6. Maintenance of a closed churchyard

S.215 of the Local Government Act 1972 gives parochial church councils authority to request a particular parish or community council to take over the maintenance of a closed churchyard (there is no transfer of ownership of the land in these circumstances).

OG56 D1

OG56 D1 The Local Authorities (Companies) Order 1995 - 26 July 2000 

The Local Authorities (Companies) Order 1995 imposes additional regulatory requirements on charitable companies which are closely connected with local authorities. Basically certain controls which apply to local authorities themselves are extended to the companies. The nature of these controls depends on the closeness of the connection between the company and the authority, but may include:

  • expenditure controls
  • a requirement that the Audit Commission should approve the company’s auditor;
  • a right of public inspection of the minutes of meetings;
  • additional information provision duties;
  • a requirement to identify the local authority connection in public documents; and
  • governance restrictions reflecting those which apply to authorities themselves, for example:
    • limits on director remuneration;
    • non-participation of disqualified councillors; and
    • no party political activity.

Top of page