Smart money

According to St Francis of Assisi: 'Where there is charity and wisdom, there is neither fear nor ignorance.' The latter appears not to have been the case concerning one of the countries most venerable charities, The Royal Institution of Great Britain, which was set up for the promotion of science and diffusion of scientific knowledge.

A recent report by the Charity Commission highlights some serious failings within the management of the institution. The report has general applicability to charities and is essential reading for those who are either acting as trustees or advising in this sector.

The institution owns the freehold of a valuable prestigious property in Mayfair, 21 Albemarle Street, and decided to undertake extensive refurbishment works to the tune of £22m.

As is often the case the works overran, taking some two years to complete, and during this period the source of funds used to finance the works proved to be inadequate. The funds were supplemented by £3,202,748 from a permanent endowment held by the institution. Unfortunately, it appears the institution overlooked the fact that the funds were subject to restrictions concerning the purpose for which they could be used, and this did not include refurbishment of the institution's property.

There was a second infringementhighlighted in the report concerning the leasing of some office space in the institution's property to a company, one of the directors of whom happened to be the chair of the institution.

Permanent endowment

Where charities hold a permanent endowment, which may cover land, investments, or other assets, as a general rule the trustees cannot spend these sums for any purpose other than those for which they were specifically given.

If a charity wishes to spend some or all of its permanent endowment it must obtain a statutory power to do so in accordance with the Charities Act 1993 (as amended by the Charities Act 2006). A power can only be exercised if the trustees decide that by using the charity's permanent endowment, as well as any income, it will be able to carry out its purpose more effectively.

In most cases a charity, before spending any permanent endowment, must pass a formal resolution to do so, and obtain consent from the Charity Commission. To obtain consent, the charity will have to apply to the commission providing it with a copy of the resolution and a detailed statement of its reasons for passing it. It will need to satisfy the commission that:

• the funds are permanent endowment;
• all legal requirements for passing a resolution have been met;
• the trustees' statement of reasons supports that decision; and
• what is proposed is in keeping with the spirit of the gift.

Disposition

Charities wishing to dispose of property (which includes the granting of a lease) need to adhere to section 36 of the Act. Under that section an order of the court or consent from the Charity Commission is required for the granting of a lease to a connected person or a trustee. This provision is in place to ensure charities manage any conflicts of interest on any disposal of land.

The provisions required by section 37 of the Act confirming that the land was held in trust for the charity and that the disposition was sanctioned by either the court or the Charity Commission should also have been included in the lease.

As a result of the two infringements, the institution:

• was obliged to put in place a repayment scheme to ensure the £3,202,748 was reinstated in the endowment fund; and
• had its knuckles wrapped over the letting, but was not ordered to enter into a new lease as, among other things, it was accepted that the lease was let at an open market rent.

Even well-funded and large charities '“ usually with internal systems and safeguards in place '“ can easily fall foul of the regulations, but the lesson in the report applies equally to all charities and the way they deal with their assets. All should have robust procedures in place to prevent conflicts of interest arising and to make sure financial controls are applied to ensure funds are used correctly.