Richard Jones lists the property considerations of a merger, and in particular, compliance with the Charities Act

Due to the financial challenges that have been experienced in recent years, driven by high inflation and high interest rates, an increasing number of independent schools and independent school groups have considered mergers as part of tackling such challenges. With the Labour government removing the VAT exemption from independent school fees with effect from 1 January, the independent school sector has been put under further pressure, with more mergers seemingly increasingly likely. Some larger school groups also see mergers as a strategic opportunity to bring in single or smaller schools to expand the group.

If an independent school or independent school group is contemplating a merger, there are of course a number of legal (and practical) matters to consider. Many independent school companies are registered charities, and so one consideration will be compliance with the land provisions of the Charities Act 2011, when entering into property transactions as part of the merger. The merged entity may also subsequently decide that having consolidated two or more schools, it now has surplus land, and is in a position to sell one (or part) of its sites. Compliance with the Charities Act will also be relevant in such a transaction.

The overarching intention of the land provisions of the Charities Act is to prevent charities from disposing of (potentially high value) charitable assets at undervalue, and other misuse of charitable land. The restrictions which are imposed on land by the Charities Act, focus much more heavily on charities disposing of land, rather than acquiring. In an arm’s length sale of land to a third party for value, the charity trustees are typically expected to obtain advice to ensure that they are getting the best terms and price. However, such steps are not always needed.

Compliance with the Act when merging

Where one charitable independent school is transferring its land to another charitable entity as part of a merger, compliance with the Charities Act will often be achieved through an exemption. This exemption to the legislative restrictions and usual hurdles is met where one charity is transferring land to another charity for nil or nominal value and the charitable objects of the two charities are compatible (for example, both parties having objects to advance education for the public benefit). If the charitable objects are not compatible, then one option may be for one of the charities to make an application to the Charity Commission to amend its objects in order to facilitate the merger.

If both parties in the merger are non-charitable, then compliance with the Charities Act will of course not be necessary.

It is possible, however, that one of the entities might be charitable, and the other non-charitable. In such an instance, Charities Act compliance will likely be considered when agreeing how to structure the merger. If the non-charitable entity is transferring its land and assets to the charitable entity then substantial Charities Act compliance is not necessary. If, however, it is proposed that the charity is the party transferring its land (and school business and other assets), then this will need to be a sale for market value, and it may be necessary to apply to the Charity Commission for consent for a number of reasons. In this scenario, the charity will inevitably need to continue after the sale, albeit potentially with slightly redefined purposes. It is also worth noting that the charity might not be able to sell its land at all if it is subject to endowments.

Property disposals post-merger

Following the merger of two independent schools or groups, after a period of reflection, the merged school group may decide that it now owns some surplus land which it no longer requires. Whether it is the entirety of one of its school sites, or part of a site, the school group could generate income through a sale or letting of the unwanted land.

Such a disposal of land would likely involve placing the property on the open market with an agent, but could also present a more organic opportunity such as an independent nursery or community group agreeing to a lease. Presuming the post-merger group is a charity, such disposals of its land will trigger the need to comply with the land restrictions of the Charities Act. Any exemptions are unlikely to apply, meaning that the charity will need to sell (or let) the land for market value, and the trustees will need to obtain written advice in ensuring that they are getting the best terms (and price) reasonably obtainable for the disposal.

With the exception of leases for seven years or less, the trustees must obtain and consider a written report on the proposed transaction (which must contain certain prescribed information on particular topics) from a designated advisor acting exclusively for the charity who can be either:

• A qualified surveyor (defined as a fellow or professional associate of the Royal Institution of Chartered Surveyors),
• An agricultural valuer (but specifically one who is a fellow of the Central Association of Agricultural Valuers), or
• An estate agent (but specifically one who is a fellow of the National Association of Estate Agents, also known as NAEA Propertymark).

Updates to the Charities Act 2011, introduced by the Charities Act 2022, mean that a broader pool of advisors can be used (previously only surveyors were permitted), but the reality is that charities continue to opt to use charity specialist RICS qualified surveyors as advisors on most land disposals. There may, however, be instances where a school is looking to sell a residential property (for example, a former caretaker’s house) or green space where an estate agent or agricultural valuer could be utilised. Other changes introduced by the Charities Act 2022 also mean the format of the advisor’s report is simpler and less prescriptive, and the advice could be provided by an employee or trustee of the school provided that they hold one of the professional qualifications listed above and are removed from any decision-making process.

It would be beneficial to involve your chosen designated advisor as early as possible in the marketing and sale process, and you may wish them to engage with any agents you appoint. While the advisor’s final version of his or her report will need to be issued close to the finalising of legal documents (so it reflects the final agreed terms of the disposal), much of what the report advises on is practical points such as marketing (when to market, how long for, whether any improvements should be made to the property before marketing, etc), so instructing this advisor sooner rather than later would be prudent. Another timing point to be aware of is that the advisor’s report must be commissioned and considered by the trustees before you exchange contracts (if there is to be a contract), and of course prior to completion in any event.

Where the school is looking to grant a lease for seven years or less, the advice requirements are less stringent. The trustees should seek advice from someone who they reasonably believe to have the “requisite ability and practical experience to provide them with competent advice”. This advice might, for example, be provided by someone internal such as a finance director or someone with surveying or valuation expertise, but again, anyone who provides internal advice must be excluded from the decision-making.

While seeking advice is the most common route of compliance, the school could alternatively apply to the Charity Commission for an order. This is likely to be more time-consuming, but can be appropriate in the context of a complex transaction, and the Commission must be consulted where there is a proposed disposal to a connected person or there’s a possible conflict of interests.

Other considerations

Your surveyor or chosen advisor will of course advise you on the different types of buyers who might be interested in purchasing all or part of a school site, and the way in which the transaction might be structured. If the land has development potential, then a developer might make an offer that is conditional on obtaining satisfactory planning permission, or your agent might negotiate a subsequent uplift in the sale price if certain conditions are met (known as overage). Such legal mechanisms can certainly extract greater value from the land being sold, but bear in mind that the process is usually more complex and can attract a greater risk of an abortive transaction.

When selling (or letting) part of a school site, a key consideration is pupil safeguarding. From a practical point of view, you will need to consider whether it is safe to sell the relevant part of the site that you have identified, and you might also need to consider who you are selling the land to and for what purpose it will be used. Where you are selling part of a site, you will need to consider access rights and the buyer’s need to access your retained land for maintenance and other purposes, and whether this is all appropriate from a safeguarding point of view. Where certain restrictions or stipulations connected to safeguarding need to be implemented as part of the sale or lease, these should be agreed with the buyer so it doesn’t become a sticking point during the negotiation of legal documents. Appropriate covenants to reflect your agreed safeguarding requirements can then be included in the legal drafting (for example prohibiting the use of the property for a particular purpose).

Richard Jones is a real estate senior associate at law firm Bates Wells

Richard Jones