Ruthin School was a charitable school sold to a commercial group

Law firm VWV partner Siân Champkin outlines considerations for charitable schools selling to commercial schools groups

While the sale of independent schools operated by charities to those who operate schools on a commercial basis has always been present in the sector, we are increasingly seeing a trend for these types of transactions.

These projects still most often generally arise where a school is struggling to remain competitive and finding the challenges of the sector too great to continue operating as a stand-alone school with a charitable board. These schools may not have the option of merger with another charitable school due to geography, financial standing or other reasons.

However, we have also more recently found that commercial operators are being specially chosen as a strategic partner of choice from those in stronger positions. We often now see a commercial sale being discussed and considered alongside charity mergers on an equal footing, or indeed as the preferred route to pursue. There appears to be, among charitable boards, a recognition that a charity merger may not represent the best solution for a school, while joining a commercial group is in the best interests of the school and the charity operating it.

Those concerns most often felt by charitable governing bodies when considering the strategic option of remaining an independent/separate school – risk of closure of the school site and the ability to weather economic and demographic challenges – can sometimes be best mitigated by a transaction with the commercial world rather than a charity partner.

But what are the considerations for these sorts of sales?

Timing is crucial, and it is critical that decisions are made at the earliest opportunity to ensure a school has the widest range of options available to it and time to implement them. Of course, circumstances outside the control of a school can sometimes accelerate action being required but we would always encourage these sorts of decisions to be made from a position of strength not weakness. This will almost always end in the best possible outcome for all involved.

Thorough and considered decision-making is, as always, critical for any board but more so for a charitable one considering a sale. Ensure decision-making takes into account all relevant factors, such as strength and suitability of the chosen partner, the effect on beneficiaries, and regard to other reasonable options. Further, be sure to discount irrelevant factors, including those of an emotive nature. Always make sure decisions, at every stage, are well documented and record all consideration of factors (even if they are disregarded). Take advice from those with the required expertise and knowledge of transactions of this sort. The Charity Commission provides excellent guidance on decision-making and we would recommend this is understood and borne in mind throughout.

The most significant difference between a charity merger and commercial sale generally is the transaction consideration. In charity-to-charity mergers no price is paid as the acquiring charity takes on the assets and liabilities and continues to use them for charitable purposes. In a sale to a commercial operator the buyer needs to pay fair market value for the assets, with the principal asset likely to be real estate. A Charities Act valuation is legally required to be undertaken on the disposal of property to a non-charitable party and this will form an important part of the considerations in the sale. Undertaking a valuation early on in the process is critical but also engagement with the valuer is required at various stages as it is important to ensure that the valuer will approve the deal terms.

Governors will need to assess and consider what regulatory requirements there may be on a sale and the required involvement of the Department for Education and, in some circumstances, the Charity Commission. Generally, Charity Commission consent is not required for a charity merger nor sale to a commercial group, but it’s important to understand if this is required, for example, where permanent endowment land is to be sold or the power of sale is not contained in the constitution. Early assessment of these matters can ensure a smooth transaction without undue delay.

Where a school is to be sold and funds are received by the charity that has sold it, it is important for those remaining board members of the legacy charity to consider how best to use them. Note, it is usual for a smaller number of the board to remain post-transaction as the charity is no longer operating the school. While the charity will need to settle any liabilities outstanding, such as bank debt, it is likely to still hold considerable funds post-completion. While it’s not unusual for the funds to be used to support bursaries at the school that has been sold, it is critically important that the board consider the proper use of those funds. They should not be supporting the cash flow of a school now owned by a commercial group, something that has been criticised in the past by the Charity Commission.

We have seen in some situations alternative education charities being supported with donations by the legacy charity post-completion. Examples include the Royal SpringBoard, which works with state boarding and independent schools to help them target fully-funded school places for the young people who need them most, and with community organisations and local authorities to access these effectively. This serves to protect charities from criticism of supporting or pursuing non-charitable purposes.

In summary, we are already experiencing and further expecting a significant rise in schools seeing the benefit of being part of a group, be it commercial or charitable. Hopefully the above proves as a useful starting point of what should be considered by those thinking about taking this course of action.

Siân Champkin