OG547 Equity sharing by charities and individuals

Last reviewed:
4 December 2014
Last updated:
4 December 2014

Policy Statement/Overview

Equity sharing enables a charity to jointly own a property with another person, usually an employee, in order to help the employee purchase living accommodation that would otherwise be unaffordable.

Because a jointly owned property will be held on mixed trusts, that is, trusts that are part charitable and part private, a charity can only enter into an equity share arrangement where there is an express power to do so.

A power to enter into an equity share arrangement may be found in a charity’s governing document. Where there is no existing power, the trustees can adopt a power by amending the governing document, or the Commission can authorise the specific equity share arrangement by means of a s105 Order. There may be other aspects of the transaction that require our authority.

Where we are asked to make a s105 Order authorising a charity to enter into an equity share arrangement we will usually give authority, as long as we are satisfied that to do so is expedient in the interests of the charity.

Summary of the guidance

The purpose of this guidance is to help caseworkers:

  • to handle initial queries from trustees who are considering entering into a shared ownership ('equity share') arrangement; and
  • to make decisions when asked to authorise equity share arrangements.   

OG Contents (Site map)

Casework Guidance

B1 Definition and key points

B1.1 Definition of 'equity sharing'

We use the term 'equity sharing' to describe the situation where a charity and another person share ownership of a property. The ‘other person’ will usually be an employee of the charity and the purpose of the arrangement is to help to provide that person with living accommodation.

With an equity sharing arrangement entered into for the purpose of providing a property for an employee, the property is usually purchased in the joint names of the charity and the employee, subject to the charity having the power to enter into such an arrangement. Because the property is not held on exclusively charitable trusts, the charity cannot rely on any existing statutory power to make the joint purchase. 

B1.2 Key points

  • A charity can, where an express authority exists, enter into shared ownership (‘equity share’) arrangement with an individual, usually to help to provide accommodation for an employee.
  • Before deciding to enter into an equity sharing arrangement, a charity’s trustees should consider alternative methods which might achieve the same result.
  • An equity sharing agreement should contain an option for the charity to buy the employee’s share in the property, should the employee cease to work for the charity. The agreement may also contain an option for the employee to buy the charity’s share of the property at some point in the future.
  • The equity sharing agreement will set out what proportions of the property are owned by each party and should set out how the costs associated with the upkeep and maintenance of the property will be apportioned between the parties.
  • Where there is no power in a charity’s governing document to enter into an equity sharing arrangement we would usually expect a charity to rely on a power of amendment to adopt such a power. However, where the proposal requires additional authority under s117, or in other limited exceptional circumstances, we will usually provide authority by a s105 Order. We will only make a s105 Order where we are satisfied that the arrangement is expedient in the best interests of the charity. 

B2 What should we do when approached by trustees who are considering an equity share arrangement?

Where we are approached by trustees who are considering entering into an equity sharing arrangement we should ensure that the trustees are aware of the implications of this proposal. Where our authority is required we should make sure the charity provides sufficient information to enable us to consider the case as a whole. The model letter within this OG should help with this. Additional information is set out below. 

B2.1 Key messages

Where a charity's trustees want to help an employee purchase living accommodation, the trustees should first of all consider the alternatives to equity sharing set out in section E1. One of these alternative options may achieve a similar result without the need for an equity sharing arrangement.

Having considered the alternatives, before deciding if an equity sharing arrangement might be appropriate, the trustees must be satisfied that:

  • the joint purchase is necessary to enable the charity to recruit or retain staff of suitable calibre and experience
  • the particular employee is required to live near the job
  • the charity will be able to sell the property, with vacant possession, if the employee no longer works for the charity
  • the charity is not undertaking liability for a higher proportion of the outgoings than is proper in the circumstances.

Equity sharing must not be used simply as a device to boost the employee's remuneration above the going rate for the job.

See section E3 for a guide to the main features we would expect to see in an equity sharing agreement of this type between a charity and an employee. Individual schemes will, of course, vary and you should always take advice if there is any doubt as to whether or not a particular scheme is acceptable.

B2.2 Possible complications

Because equity sharing involves a mix of charitable and private interests, it needs to be viewed with some caution. Trustees must be clear that the motives for entering into an equity sharing arrangement are purely about securing staff of suitable calibre and experience for the benefit of the charity and not simply a way to give an additional benefit to an employee, over and above the going rate for the job.

When drawing up an equity share agreement, trustees must ensure that the interests of the charity are protected:

  • carelessly framed equity sharing documents could prevent the charity from being able to sell the property with vacant possession if the employee is no longer employed by the charity
  • any disparity between the equity sharing proportions of the charity and of the individual needs to be taken into account when apportioning costs and liabilities under the arrangement.

B2.3 Eventual purchase of whole property by employee

In some cases (particularly those involving non-conformist clergy) the intention from the beginning is that the employee will eventually exercise an option to buy out the interest of the charity in the trust of land, either during the period of employment or on retirement. The terms of the option will be set out in the equity sharing documentation.

An option to sell land at some point in the future is an agreement to dispose of property at that time. This being the case, and because the employee is a connected person for the purposes of s117, trustees will require an Order under section 117(1) before the transfer can take place. The trustees may wish to obtain such an Order prior to granting the option. In this case, we will need to be satisfied that the terms of the option ensure that the eventual sale of the charity’s interest will be at the appropriate price. We would usually expect the terms of the option to require an up to date valuation of the property at the time that the option to buy is exercised.

See section B4 for more information about when to make the s117(1) Order.

NOTE: The Universities and Colleges Act 1925 applies to Oxbridge colleges (and certain other colleges). The provisions of this Act mean that the disposal of any land held under this Act falls outside of section 117 of the Charities Act so our authority is not required to disposals in these cases.

B2.4 Can an employee's spouse be named as joint co-owner? 

It is possible for another occupier of the property, usually the employee's spouse, to be a beneficiary of the trust of land. This can sometimes be a condition attached to the employee's mortgage. Where this is the case, the equity sharing documentation should ensure that no person can become a beneficiary of the trust of land, except on terms agreed by the charity (see section E3.2).

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B3 Applications for authority

B3.1 When might we authorise an equity sharing arrangement? 

Where a charity applies to us for authority to enter into an equity sharing arrangement, we should only agree to grant this authority where:

  • there is no existing power to enter into an equity sharing arrangement within the charity's governing document
  • it is not appropriate for the charity to amend its governing document to adopt a suitable power, either because we will need to give additional authority under s117 (see section B2.3) or, exceptionally, where there is particular time pressure and we can make an Order more quickly than the charity can amend its governing document
  • the trustees have confirmed that they have considered the alternatives set out in section E1 and, having done this, they are satisfied that the equity sharing arrangement is necessary in the interests of the charity
  • the equity sharing documentation appears to properly safeguard the charity's interests
  • having considered the case as a whole, we are satisfied that the joint purchase is expedient in the interests of the charity.

In order that we can fully consider the case, we will require certain basic information from the trustees. The checklist in this guidance is designed to help caseworkers ensure they have all the necessary information to consider the case and the model letter for trustees includes this checklist in an annex. Caseworkers should use this model letter to ensure that trustees provide all the necessary information in support of their application.

reviewableHaving gathered the necessary information, and considered the case as a whole, if we are satisfied that entering into the equity sharing arrangement is expedient in the best interests of the charity, we will usually authorise this.

 

B3.2 How do we grant authority?

If we decide to authorise an equity sharing arrangement, the form of authority will depend on the circumstances of the particular case and charity. (See section E3.3 for details of how we deal with different charity types.)

We usually give our authority by Order under s105, and, if required, s117 of the Act. 

 

B3.3 When might we refuse to authorise an equity sharing arrangement?

We will usually authorise a proposed equity share arrangement, as long as the charity's trustees are satisfied that this is in the best interests of the charity (and subject to the points in section B3.1). However, there are occasions where the circumstances of a particular case mean that we will refuse to give authority. This might be where the terms of the equity share agreement are unfair or might be being used to increase the employee's remuneration beyond the going rate for the job. There may also be occasions where entering into the agreement might be an abuse of the trustees' powers.

lawyer_referWhen considering refusing to give authority we should take into account any impact this decision may have on the employee in the context of human rights and equalities legislation. Caseworkers may decide to take legal advice to clarify this.

 

reviewableA refusal to authorise an agreement is a formal decision of the Commission and this should be clearly recorded on the case file along with the reasons for making the decision. We should also refer the trustees to the decision review pages on our website. 

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B4 When might we need to give authority under s117 to an equity sharing arrangement?

B4.1 Where there is an option for the employee to buy the charity's share of the property in the future

We consider that the grant by a charity to its employee of the option to buy the charity's share of the property in the future is an agreement to dispose of an interest in land, if it is made on or after 1 January 1997 (see section E1.2).

It will not usually be possible for trustees to comply with the requirements of s117(2) before granting an option because an employee is a connected person. This does not affect the validity of the option but the charity will not be able to sell the property without an Order, under s117(1), authorising the disposal (subject to the proviso re Oxbridge colleges set out in B2.3)  

We need to consider, and agree with the trustees, the best time to make the s117(1) Order. We can do this either;

  • at the time that the option to buy is granted (that is, when the equity share agreement is signed). This has the advantage that we can check the terms of the equity share agreement to ensure that the safeguards surrounding the disposal (particularly in relation to ensuring that the charity receives a fair price on disposal) are sufficient and, where they appear not to be, suggest changes; or,
  • at the time that the disposal takes place. This has the advantage of allowing us to gather more information about the disposal at that time, for example, the actual price, before we authorise this.

If we are making a s105 Order to authorise the equity sharing arrangement, it might be easier to make this a joint Order, under s105 & 117(1). This will save the charity having to contact us in the future and will save the Commission having to make another Order at the time of disposal.

However, where the charity does not need our authority to enter into the equity share arrangement, either because it has an existing power to do so, or because it will use a power of amendment to adopt such a power, there is no particular advantage to us in making the s117(1) Order at the time the option is granted. Where this is the case, having considered the relative merits of both options, we should agree with the charity the preferred way to proceed.

Where we are approached by a charity's trustees to authorise a disposal under an option to buy, where we did not make a s117(1) Order at the time of purchase, we will need to make a s117(1) Order authorising the disposal. We should only make this Order where the parties have obtained an up to date valuation to ensure the employee is paying the current market value for the property and where, having considered the case made, we are satisfied that the proposal is expedient in the best interests of the charity.

B4.2 Where the employee is also a trustee

If the employee is also a trustee of the charity (this often happens with Ministers and Church charities) the equity share arrangement will always need our consent under s105 and s117, even if there is an existing power in the governing document, or where the charity has adopted a power. Because the employee is a trustee, any dealings between the charity and the trustee, including a joint purchase, will be self dealing and will be voidable unless proper authority is obtained.

B4.3 What if there is an option for the charity to buy the employee’s share?

Where the equity share agreement includes an option for the charity to buy the employee’s share at some point in the future, such a purchase does not necessarily require the authority of the Commission. However, the trustees will need to be able to demonstrate that the proposed purchase is in the interests of the charity.

Where the employee is a trustee of the charity, the initial joint purchase, as well as the eventual purchase of the trustee’s interest by the charity, will be self dealing. Neither of these transactions will be valid without the authority of the Commission or the court. The required authorities can be included in a single Order.

B4.4 What about agreements entered into before 1 January 1997?

If we are approached by a charity that has an existing equity sharing agreement which includes an option for the employee to buy the charity's share of the property, and the agreement was made before 1 January 1997, we will need to authorise the disposal. This is because the option, when granted, was not an agreement to dispose of an interest in land, so could not have been authorised under s36 of the 1993 Act (now s117) at the time the agreement was made. Where we are asked to authorise this kind of disposal, we will, apart from in exceptional circumstances, grant this authority as a matter of course. (see section E4.2.)

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Checklist of questions to obtain basic information

This checklist is designed to ensure that we are given sufficient information to fully consider the case where we are asked to authorise an equity sharing arrangement. The principle reason we ask for this information is to enable us to judge that the agreement is on reasonable terms that are fair to the charity. We should send the checklist to the charity as early as possible during a case to avoid delays later on. The checklist is included in the model letter for charities.  

1 Why is this arrangement necessary in this particular case?

2 (a) Have the trustees considered any other methods of funding the purchase (for example, making a loan to the employee)?

   (b) If so, what were they, and why have they been rejected?

3 Are the trustees satisfied this arrangement forms part of a reasonable remuneration and benefits package for the employee?

4 (a) Have the trustees reviewed the charity's financial position and satisfied themselves the proposed arrangement is affordable?

   (b) If the charity is borrowing any funds, are the trustees satisfied the repayments are affordable?

5. Is the property already subject to an equity share arrangement and, if so, how will this be brought to an end?

6 How are the costs of the transactions to be met?

7 (a) What is the purchase price of the property?

   (b) Has professional advice been received by the trustees that the price is fair and reasonable?

   (c) Please give the name of the employee (and that of any other equity sharer(s))

   (d) Please give the name and role of any other person or body involved (eg, a holding trustee).

8 What share of the property will be owned by the charity and by the employee?

Case studies

D1 Where we authorised an equity sharing arrangement

The charity

Income - over £2.5 million pa.

Activities - The charity runs an ecclesiastical training college.

The initial approach

The charity's trustees contacted the Commission stating that they were intending to jointly purchase a property with an employee who was about to start work for the charity. The employee was required to move to central London, where the charity is based, in order to be able to carry out the job. The trustees enclosed a draft copy of the Trust Deed, which set out the equity sharing arrangement, for our consideration.

Our response

We replied, confirming that our authority would be needed before the equity share agreement could be signed. We used the text of our model letter and asked that the trustees respond to each point in the checklist included in the letter.

The charity's response 

The trustees replied, stating that:

  • there was no existing power in the governing document to acquire land that was not exclusively charitable
  • there was an option to buy contained in the equity share agreement
  • the charity's solicitor had advised that an equity share arrangement was the best option available to the charity.

The trustees responded to each of the points on the checklist as follows: 

  • it was essential that the trustee lived close to the charity's premises and the joint purchase was necessary to be able to retain an employee of a suitably high calibre
  • they had considered making a loan to the employee but had concluded that this was not a suitable option at the time
  • the trustees were satisfied that the proposed equity share was a reasonable part of the employee's remuneration package
  • the charity could afford to enter into the equity share arrangement without the need to borrow additional funds
  • the property had no existing equity share attached to it
  • the transaction costs would be shared between the charity and the employee in accordance with the equity share proportions   
  • the total purchase price of the property was £340,000
  • independent professional advice was taken before the trustees agreed to enter into an equity sharing arrangement, this confirmed that the price was fair
  • 50% of the property would be held by the charity with 50% held by the employee.

The trustees also set out the address of the property, the name of the equity sharing employee (there was no other party involved) and confirmed that:

  • The charity's interests were protected by a trust deed and the equity share was recorded on the title documents of the property
  • the charity would be free to sell the property with vacant possession if the employee were to leave the post
  • the employee would be responsible for paying all outgoings for the property, except for major improvements or substantial repairs or alterations.

Our decision   

Having considered the case as a whole, we were satisfied that the equity sharing arrangement was reasonable and necessary to enable the charity to retain the services of the employee and that the charity's interest in the property was sufficiently protected by the documentation. That being the case, and because we agreed to authorise the possible future disposal at the outset, we authorised the arrangement by making a s105 Order.

This decision was taken by an Authorised Officer in accordance with our Authorised Officer policy.

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D2 Where a charity had entered into an equity sharing arrangement without authority

The charity

Income - £100,000 pa 

Activities - The charity advances the Christian faith by running a Church and associated activities.

The initial approach 

The charity's trustees approached the Commission to inform us that they had, ten years earlier, entered into an equity sharing arrangement with an employee. They had now become aware that there was no power or authority to do this. The trustees were looking to regularise the position by selling the charity's share of the property to the employee, for less than full value, and were seeking our authority to do so.

Our response

We replied, agreeing that the position needed to be regularised, and that our consent would be required to the proposal they put forward. We also explained that we will only authorise a proposal where this is expedient in the best interests of the charity. We did not ask the trustees to complete the checklist due to the unusual nature of this case, instead we asked:

  • why the trustees considered it was better to sell the charity's share to the employee rather than retain a (properly authorised) equity sharing arrangement
  • why the trustees thought it appropriate to sell the charity's share of the property to the employee for less than full value
  • if the proposed disposal would affect the charity's ability to enter into a similar arrangement should the current employee leave and be replaced
  • for copies of any independent advice the trustees had taken regarding the valuation of the property.

The charity's response 

The trustees responded, saying that they had reconsidered their decision following our advice and were now proposing to regularise the equity sharing arrangement, rather than dispose of the charity's share of the property. The trustees' letter set out the following:

  • the trustees wanted to continue to help the employee in purchasing the property;
  • the original purchase of the charity's half of the property did not require the charity to borrow any money, so there were no outstanding monies owed by the charity in relation to the property
  • the employee had an active mortgage relating to half of the property
  • the employee was not a trustee of the charity
  • the equity share agreement included an option for the trustee to buy the charity's share of the property in the future; and
  • the charity was not involved in any other equity sharing arrangements.

The letter also enclosed a copy of an up to date valuer's report and a draft Trust Deed which set out how the charity's interests would be protected.

Our decision 

We said that, in the light of the information provided, which demonstrated that the equity sharing arrangement was reasonable and necessary, and because the option to buy required our authority under s117, we would be prepared to make an Order to authorise the arrangement. We asked for additional information (the full address of the property and who would hold title to the property) to ensure that the Order included the correct details. The charity provided the information we required and we made the Order.

This decision was taken by an Authorised Officer in accordance with our Authorised Officer policy.

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Legal/Policy/Accountancy Framework 

E1 What alternatives are there to equity sharing? 

There are alternatives to equity sharing arrangements which may enable a charity to help an employee purchase a property without the need for equity sharing. Trustees should consider these options before deciding to go ahead with an equity sharing arrangement. Where we are required to authorise an equity share arrangement we will only do this where the trustees have confirmed that they have considered these alternatives and, having done so, they are satisfied that entering into the equity sharing arrangement is in the best interests of the charity.

In deciding what course of action to take, we would expect the trustees to take independent professional advice. Where we are asked to authorise an equity share arrangement, caseworkers may find it helpful, when considering the application, to see a copy of that advice.

E1.1 Making a loan to the employee secured by a legal charge

A charity may decide to make a loan to the employee to help with the purchase of a property, this would not be an equity sharing arrangement and, as such, would not need authority from the Commission.

The loan would usually be secured by a second mortgage over the property (any loan made to the employee by a mortgage lender would be secured by a first mortgage). This has the advantage of simplicity; the disadvantages, which the trustees may raise, are that:

  • in a rising market or when inflation is high, the charity would not benefit from any increase in the value of the property but would merely get its money back, eroded by inflation; and
  • in a stagnant or falling market, the second mortgagee (the charity in this case) would be in a vulnerable position because the first mortgagee has to have its loan paid off in full before a second mortgagee gets anything.

These are valid concerns although, in the second case, an equity sharing arrangement could lead to a similar result in that the external lender would have first call on the money released by the sale of the property.

E1.2 Making a loan secured by a legal charge on terms geared to equity share

This is a way of dealing with the disadvantage set out in the first bullet point in section E1.1.

As well as setting out the terms of the loan, the legal charge documentation sets out the amount contributed by each party as a proportion of the total value of the property. Any future increase in the value of the property will be shared between the charity and the employee in the same proportions as the two parties shared the cost of purchasing the property. This has the advantages of an equity sharing arrangement without the charity actually holding an equity share.

Where a legal charge is granted, this would usually be a second legal charge, as the employee’s mortgage company would usually have a first charge over the property.

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E2 What powers are available for a charity to enter into an equity sharing arrangement?

E2.1. Where there is an existing power in a charity's governing document

Where land is co-owned by a charity and a private individual in an equity sharing arrangement, the beneficial trusts under which the property is held are mixed, that is, partly charitable and partly private. Because of this there is no statutory power for a charity's trustees to create a trust of this kind. (We do not consider that the powers of disposal and land management contained in TLAT or the Trustee Act 2000 are wide enough to provide this power.)

To create such a trust, without our authority, the charity would need an express provision in the governing document to acquire land:

  • that is not subject to exclusively charitable trusts
  • in which they will have only a part interest.

lawyer_referIf it appears, or if the charity trustees claim, that the charity does have a power to enter into equity sharing arrangements, caseworkers should take legal advice to confirm the position.

 

Where a charity has an existing power to enter into an equity sharing arrangement, either because it has had a power since the charity was established, or because the trustees have adopted a power using s280, the trustees must only use this power where they are satisfied that to enter into the arrangement is in the best interests of the charity. The trustees might find it useful to work through the checklist which is included in the model letter for trustees to ensure they have properly considered the implications of the proposal before making their decision.       

E2.2 Where there is no existing power

Where there is no existing power in the charity's governing document to enter into an equity sharing arrangement, an unincorporated charity can use the power of amendment in the charity's governing document to adopt a suitable power. If there is no power of amendment in the governing document, the trustees can use the statutory power of amendment given by s280 of the Charities Act to adopt such a power. Similarly, a charitable company can rely on the powers of amendment given by company law to adopt a power. Where trustees adopt a power to enter into an equity sharing arrangement it will still be necessary for the trustees to be sure that exercising that power is in the best interests of the charity. The trustees should take appropriate advice with regard to this.

Wherever possible, we should encourage the trustees to amend the charity's governing document to adopt a power to enter into an equity sharing arrangement. However:

  • where the charity will need additional authority under s117 to authorise a future disposal; or
  • where, on the grounds of time pressure, or cost to the state (see Charter body and Statutory body in section E3.3), it is preferable for us to make an Order rather than have the trustees amend the charity's governing document; and
  • having considered the case made, we are satisfied that the arrangement is expedient in the interests of the charity;

we will usually make an Order to authorise the equity sharing arrangement. See section B3.1.

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E3 What information must an equity sharing agreement contain?

E3.1 General information 

The details of an equity sharing arrangement will be laid down in the documentation by which the trust of land is created. This would usually be in the form of a Trust Deed. This documentation will be signed by, or on behalf of, both the charity and the employee (and possibly also the employee’s spouse).

lawyer_referThere may be occasions where a charity suggests a method other than a Trust Deed to set out the equity sharing agreement. Where this is the case, seek legal advice.

 

If the property is sold, each party will be entitled to a proportion of the sale price in accordance with the terms agreed.

The equity sharing documentation:

  • should give certain rights to the charity to buy out the interests of the employee in the trust of land; and
  • may give certain rights to the employee to buy out the interests of the charity in that trust.

(These are referred to as ‘options to buy’, see section B4.1.)

The wording of the equity sharing agreement is a matter for the charity's trustees and their professional advisors.

E3.2 What particular points should the equity share agreement cover? 

The responsibility for ensuring that the legal documentation is technically sufficient to give proper effect to the equity sharing arrangement rests with the charity and its professional advisors. Particular care will be necessary to ensure proper protection of the charity's interests, and a fair allocation of costs, obligations and liabilities, where either the beneficial interests (called equity sharing proportions) of the charity and the individual, or the amount each is borrowing on mortgage, are different.

As a guide, in all cases:

  • There will be equity sharing documentation, which will recite that the employee is required to live near the charity, and go on to declare the extent of the beneficial interests.
  • The employee (and any spouse who is identified as a beneficiary of the trust of land) will have the right to occupy the property in accordance with s.12 of the Trusts of Land and Appointment of Trustees Act 1996. But no-one else should be allowed to become a beneficiary of the trust of land or to acquire any other right to occupy the land held in the trust.
  • There should be cross-covenants between the charity and the employee regarding:
    • the performance of obligations under the agreement by which the property was acquired, and under any mortgage obtained to help finance the purchase
    • the responsibility for repairs, insurance and other out-goings
    • restrictions on dealing with the property and the beneficial interests (including the arrangement of a second mortgage or an increase in any first mortgage)
    • provisions for the payment of sums due under the mortgage and other outgoings.

Broadly, the employee will be responsible for:

  • council tax
  • water and sewerage rates
  • electricity, gas and telephone
  • any other outgoings not expressly shared between the parties.

While the cost of buildings insurance and repairs will usually be borne according to the equity sharing proportions.

  • There will be cross-indemnities in respect of breaches of any obligations under the equity sharing agreement.
  • The equity share documentation should contain cross-options enabling the charity to buy out the interests of the employee (and of any spouse) in the trust of land, and may contain provisions enabling the employee (and any spouse) to buy out the charity’s interest (see section B4.1). The charity will normally be granted ‘first option’ and there will be provision for the calculation and agreement of the open market value of the property when the option to buy is exercised.

At the least, the charity’s option should be exercisable:

        • on termination, in whatever circumstances, of the employee’s employment with the charity
        • on breach of any of the employee’s obligations under the equity sharing agreement
        • in the event of the bankruptcy of the employee or of other proceedings which would put the charity’s interest in the property at risk.

 

There will be clear provision for the charity to acquire vacant possession of the property on completion.

E3.3 How should different types of charities deal with equity sharing?            

The equity sharing arrangement will have to be structured differently according to the type of charity. The bullets below summarise briefly the most common types of charity and, in each case, indicate how the trust of land will be created.

  • Unincorporated charity

    • Holding title. In the case of a charity which is not a body corporate, the property held in the trust of land must be held jointly in the names of all of the charity trustees, or their nominee(s), and the employee. Where the charity trustees are a group of individuals, and bearing in mind that property held on mixed trusts cannot be vested in the Official Custodian, it will normally be more convenient for the charity’s interest in the trust of land to be held in the name of a nominee or nominees jointly with the employee. (There should be no more than four of these nominees in total (s.34 Trustee Act 1925).) If there is no power in the governing  document to appoint nominees the trustees can rely on the statutory power granted by the Trustee Act 2000 to do so. See section 3 of OG 86 B4 Trustee Act 2000

      If the charity has a custodian trustee (a corporation formally appointed under the Public Trustee Act 1906), which may or may not be a charity, the 1906 Act requires that the charity’s interest in the trust of land must be held in the name of the custodian trustee. (Further information about custodian trustees can be found in OG39 Custodian Trustees.) Similarly, where a charity has a corporate holding trustee, rather than a custodian trustee, the charity’s interest in the trust of land should be held in the name of the corporate holding trustee. (Where we make an Order authorising the arrangement, it may be advisable to name the corporate holding trustee in the Order, to be clear that it holds title on mixed trusts.)


lawyer_referCaseworkers should take legal advice if the custodian trustee maintains that it cannot hold the charity’s title to the property held in the trust of land because the trust of land is only partly charitable.

    • The power to enter into the arrangement. It is unlikely that an unincorporated charity will have a power in its governing document to enter into an equity sharing arrangement. Where no power exists, the trustees can adopt a suitable power. This can be done using a power of amendment in the charity's governing document or, where there is no such power, using the power of amendment given by section 280 of the Charities Act. (Where a charity adopts an equity sharing power, the clause should set out that the charity will enter into an equity sharing arrangement only where this is necessary to recruit or retain staff of suitable calibre and experience.) Alternatively, in cases of exceptional time pressure, or where additional authority is required under s117, we can make a s105 Order authorising the equity share, if we are satisfied that the arrangement is expedient in the best interests of the charity.

 

  • Charitable company

    • Holding title. A company can hold the title to the property which is to be the subject of the trust of land jointly with the employee. The company and the employee will then each be trustees of the trust of land.
    • The power to enter into the arrangement. In some cases, there may be a power to enter into an equity sharing arrangement in the articles of association of the company.  However, if there is no express power in the articles to enter into the trust of land, the power may be conferred by amending the charity's articles of association. Such an amendment would not be a regulated alteration and would not need the consent of the Commission under s198 of the Charities Act. See OG 518 - Alterations to governing documents: charitable companies. If authority is conferred by an alteration to the charity's articles, the power should set out that the charity will enter into an equity sharing arrangement only where this is necessary to recruit or retain staff of suitable calibre and experience. Alternatively, in cases of exceptional time pressure, or where additional authority is required under s117, we can make a s105 Order authorising the equity share, if we are satisfied that the arrangement is in the best interest of the charity.
  • Charter body

This is a charity established by Royal Charter. 

    • Holding title. It is generally held that a charter body has all the powers of a natural person and can therefore, hold title to the property jointly with the employee.
    • The power to enter into the arrangement. The charity's solicitors may take the view that the Charter includes a power to enter into an equity sharing arrangement. Where this is the case, we should not object. However, where this is not the case, and where it is likely that the charter body will be entering into equity sharing arrangements only rarely, we can authorise the arrangement by a s105 Order. Where it is likely that the charter body will be entering into equity sharing arrangements more frequently we should suggest that the Charter is amended to adopt the necessary power.
  • Statutory body

This is a charity incorporated by Act of Parliament.

    • Holding title. A statutory body has all the powers of a natural person and can, therefore, hold title to the property jointly with the employee.
    • The power to enter into the arrangement. If the governing Act does not empower the incorporated charity to enter into an equity sharing arrangement, authority can be conferred by a section 105 Order or by amending the Act. In practice, we will usually make a s105 Order to authorise the arrangement as this will quicker and cheaper (therefore a better use of public funds) than amending the Act.

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E4 Effect of the Trusts of Land and Appointment of Trustees Act 1996

E4.1 Rights of the charity, the employee and others in occupation of the trust property

From 1 January 1997, when the Trusts of Land and Appointment of Trustees Act 1996 (TLAT) came into force, the trust created by an equity sharing agreement is a ‘trust of land’ (s.3 TLAT and the revision of s.205(1)(ix) of the Law of Property Act 1925).

Under s.12 of TLAT, a beneficiary of a trust of land has certain statutory rights to occupy the land held in the trust. In this context, ‘beneficiary’ means any person who, under the trust of land, has an interest in the property subject to the trust; this will include the charity’s co-purchaser, its employee. The underlying purpose of the equity sharing arrangement is, of course, to provide accommodation for the employee. The statutory rights of occupation are capable of being regulated by agreement between the parties (s.13(3)–(5) of TLAT).

Provisions fairly allocating responsibility for meeting the cost of outgoings; repairs, property insurance, mortgage interest, repayment of mortgage principal, etc, between the employee and the charity must be included in the trust documentation. This does not mean on an equal basis. There are some outgoings the employee will have sole responsibility for eg mortgage interest on a mortgage used to purchase the employee’s interest.

The employee will, of course, be a beneficiary of the trust of land, but a spouse or other person who shares the occupation of the house with the employee may also be, or become, a beneficiary. However, it is important to ensure that no person becomes a beneficiary of the trust of land except on terms agreed by the charity, and that no person can acquire any right to occupy the trust property otherwise than as a beneficiary of the trust of land. This should be set out in the trust documentation.

Any person who became a beneficiary of the trust of land without the agreement of the charity could acquire rights to occupy the property which were not contemplated by the equity sharing agreement. This could frustrate the proper working out of the agreement, and damage the interests of the charity. A similar difficulty would arise if someone acquired a right to occupy the property on some basis other than that of beneficiary, eg, under a lease or tenancy granted by the employee.

A spouse might be named as a beneficiary in the trust documentation under which the trust of land is created. But the employee (and any person so named) should be required to undertake:

  • to ensure that no other person is allowed to become a beneficiary of the trust of land; and
  • to procure on behalf of the charity an undertaking from any other person allowed to share occupation of the house that he or she will not assert that he or she is a beneficiary of the trust of land; and
  • not to grant a lease or tenancy of any property held in the trust of land.

E4.2 How TLAT affects options to buy 

Position before 1 January 1997
Before 1 January 1997 all land in England and Wales which was jointly owned was held on trust for sale. The property was vested in trustees and the equitable interest of the beneficiaries of the trust was considered to be not in the land itself, but in the proceeds of sale and in the rents and profits until sale. TLAT has the effect of converting such trusts for sale into trusts of land.

Agreements entered into before 1 January 1997
We consider that, where an equity sharing agreement entered into before 1 January 1997 includes a legally binding option for the co­-purchaser to purchase the charity's interest in the property, the option was not, when granted, an agreement to dispose of an interest in land.

Accordingly, it would not have been possible for the trustees to comply with s.36 of the 1993 Act (now s117) before entering into the agreement. When the charity transfers its interest in the property after 1 January 1997, it does so under its contractual obligation entered into prior to January 1997. Usually, it will not be possible for the trustees to comply with their obligations under s117 upon such a disposal. Accordingly, it will require an Order from us under s117(1). However, because of the contractual obligation on the trustees, we will usually make the s117 Order as a matter of course unless the grant of the option in the first place was manifestly unfair and an abuse of the trustees’ powers or there are other exceptional circumstances justifying us not making an Order. (See Decisions of the Commission – Shree Vishwakarma Association of the UK.)

lawyer_referIf there are any doubts as to whether an option to buy is legally binding, caseworkers should refer to Legal Services for advice.

 

Agreements entered into on or after 1 January 1997
We consider that any option which is granted by a charity on or after 1 January 1997 in respect of an interest in a trust of land is an agreement to dispose of an interest in land. The trustees will not usually be able to comply with the requirements of s117(2) before entering into the option, as the eventual disposal will be to a connected person. The trustees can still grant the option but they will not be able to complete the transfer of their interest in the property to the employee without an Order from us under s117. Accordingly, the trustees might prefer to have an Order from us authorising the final disposal prior to granting the option. Before making such an Order we will need to be satisfied that the terms of the option ensure that the eventual sale of the charity’s interest will be at an appropriate price. We would usually expect the terms of the option to require an up to date valuation of the property at the time that the option to buy is exercised.

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Q&As

F1 What is equity sharing?

We use the term 'equity sharing' to describe the situation where a charity and another person share ownership of a property. The ‘other person’ will usually be an employee of the charity and the purpose of the arrangement is to help that person to purchase residential accommodation.

With an equity sharing arrangement entered into for the purpose of providing a property for an employee, the property is usually purchased in the joint names of the charity and the employee, subject to the charity having the power to enter into such an arrangement.

F2 Why might a charity consider entering into an equity sharing arrangement?

A charity's trustees might think it is appropriate to help an employee to purchase living accommodation. This would usually be where:

  • the employee is required to live near to the job;
  • the employee cannot afford to purchase living accommodation without assistance;
  • the joint purchase will help to recruit or retain suitably qualified staff; and
  • having considered the advantages and disadvantages, the trustees are satisfied that entering into the equity sharing arrangement would be in the best interests of the charity.      

F3 Does a charity need a power to enter into an equity sharing arrangement?

A charity cannot enter into an equity sharing arrangement without an express power to do so. Because a jointly purchased property would be held on trusts that are only partly charitable, the charity cannot rely on statutory powers to purchase such property. (See section E2.)

F4 What information should an equity sharing agreement contain?

An equity sharing agreement must be carefully prepared to protect the charity's interests in the property. The documentation must set out what proportion of the property is owned by each party and what proportions of the associated outgoings are to be paid by each party. The agreement must also ensure that the charity can purchase the employee's share of the property should the employee no longer work for the charity. (See section E3.)

F5 Can an equity sharing agreement include an option to buy the whole of the property in the future?

An equity sharing agreement should always include a provision for the charity to purchase the employee's share of the property, should the employment come to an end. Additionally, an agreement can include an option for the employee to purchase the charity's share of the property, if the trustees think this would be in the best interests of the charity. Because the sale to the employee will be a connected person transaction, this will require the consent of the Commission under s117 of the Charities Act. How this consent is given depends on the circumstances of the particular case. (See section B4.)

F6 Can the title be held by the employee only?

There may be occasions where the employee’s mortgage lender requires title to be held solely in the name of the employee, rather than in joint names. This may also be necessary for tax reasons (HMRC will advise charities regarding the tax implications of a joint purchase).

Where this is the case, it is important that the charity’s interest in the property is fully protected. To do this, the charity must take out a charge over the property in addition to the equity share documentation.

This will not affect our decision making process if we are required to authorise the equity share arrangement. As long as the equity sharing documentation sufficiently protects the charity, and the charity’s interest in the property is registered with the Land Registry, we will apply the same test as we would where the property is held in joint names.  

F7 Can the property be vested in the Official Custodian?

Because a property subject to an equity sharing arrangement is held on trusts which are not exclusively charitable, the title to the property cannot be vested in the Official Custodian. However, this does not prevent any other land belonging to the charity being vested in the Official Custodian.

F8 Does the charity need to inform the Land Registry?

The options granted in the equity sharing documentation will have to be protected by appropriate entries on the Land Registry Charges register of the title of the property. Caseworkers should ensure that the charity's solicitors are aware of this.

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Model Letters

G1 Model letter to a charity's trustees who are proposing to enter into an equity sharing arrangement - including trustee checklist

Thank you for your letter dated ##.

Generally, charity trustees have the power under the Trusts of Land and Appointment of Trustees Act 1996 to acquire land for their charity without obtaining the consent of the Commission. However, the property transaction outlined in your letter would constitute a shared ownership (or equity share) arrangement.

Where land is co-owned by a charity and a private individual in an equity sharing arrangement, the beneficial trusts under which the property is held are mixed, that is, partly charitable and partly private. Because of this the charity will need a specific power to enter into such an arrangement and many governing documents will not contain a suitable power. The trustees will therefore need to either amend the charity's governing document to include a suitable power or obtain the Commission’s authority to enter into such an arrangement.

Alternative option

An alternative, which may achieve the same result as an equity share, is a loan with a legal charge which provides that the amount secured for the charity is equivalent to the value of the appropriate portion of the equity, rather than just the amount loaned. This may be a simpler solution than the equity sharing route, whilst still ensuring the charity benefits from any increase in the value of the property.

Obtaining the Commission’s authority

If the trustees have decided these alternative options cannot be used and they wish to pursue the equity sharing arrangement, they will need to either amend the charity's governing document or obtain the Commission’s authority.

The Commission’s authority will be given by means of an Order under section 105 of the Charities Act 2011 on the grounds that the arrangement is expedient in the interests of the charity.

Before agreeing to the arrangement, we will need to be satisfied that:

  • the joint purchase is necessary in the interests of the charity; and
  • the charity's interests are properly safeguarded.

In relation to the first point, there is certain key information that the trustees must provide to demonstrate that the purchase is necessary. A list of questions that must be answered to provide the information we require is attached as an annex to this letter.

To show that the charity’s interests are safeguarded, there should be an equity sharing agreement (usually a Trust Deed) laying down the terms of the equity share. This must be signed by, or on behalf of, both the charity and the employee. The trustees should take appropriate professional advice on the terms of the equity sharing documentation to ensure the charity’s interest in the property is adequately protected.

Options to buy

If the equity sharing agreement includes an option for the employee to buy the charity’s share of the property at some point in the future, this will be a disposal of charity property. The charity will need to comply with the terms of s117 of the Charities Act 2011 before disposing of the property.

Section 117 allows a sale without Commission consent where the charity can comply with certain conditions. However, in this case, the disposal will be to a connected person as defined by s118 of the Charities Act 2011 and so the charity will not be able to comply with the terms of s117 without an Order of the Commission. This Order will be required even if the charity already has or adopts a sufficient power in its governing document to enter into a shared ownership agreement (and therefore does not need the Commission’s authority for that aspect of the arrangement).

We can make this Order at the time of purchase, as long as the wording of the equity share agreement ensures that the property will be sold at the appropriate price at the time of disposal. This will usually be achieved by including in the equity share documentation a requirement that there is a valuation of the property at the time of disposal. This will have the advantage that it will not then be necessary for you to obtain authorisation from us under s117(1) at the time the option for the employee to purchase the charity's share of the property is exercised.   

Where we are giving a power to enter into the equity share agreement by s105 Order, we may be able to incorporate the s117 Order into this.

If the trustees wish to go ahead with the proposed joint purchase of property, and if our authority is required, they should contact the Commission with the key information requested and a copy of the equity sharing documentation, for our consideration, before entering into the agreement.

Annex – Checklist of questions to obtain key information

1 Why is this arrangement necessary in this particular case?

2 (a) Have the trustees considered any other methods of funding the purchase (for example, making a loan to the employee)?

   (b) If so, what were they, and why have they been rejected?

3 Are the trustees satisfied this arrangement forms part of a reasonable remuneration and benefits package for the employee?

4 (a) Have the trustees reviewed the charity's financial position and satisfied themselves the proposed arrangement is affordable?

   (b) If the charity is borrowing any funds, are the trustees satisfied the repayments are affordable?

5. Is the property already subject to an equity share arrangement and, if so, how will this be brought to an end?

6 How are the costs of the transactions to be met?

7 (a) What is the purchase price of the property?

   (b) Has professional advice been received by the charity that the price is fair and reasonable?

   (c) Please give the name of the employee (and that of any other equity sharer(s))

   (d) Please give the name and role of any other person or body involved (eg, a holding trustee).

8 What share of the property will be owned by the charity and by the employee?

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