Management topics

Legacies can be a great source of income for charities. In 2023/24 the estimated value of legacies to the charity sector was around £4 billion.

Types of disputes

Before considering what you should do when faced with a dispute, here is a short summary of the main types of legacy dispute which charities are likely to come across:

CLAIMS AGAINST THE VALIDITY OF WILLS. These can be claims against a will of which you are a beneficiary, perhaps by a disappointed family member, or by another charity to overturn a later will which does not benefit it.

The main grounds of challenge include lack of testamentary capacity (i.e. that the testator lacked capacity to make their will), want of knowledge and approval (i.e. that the testator did not know or approve the contents of the will, perhaps because someone else drafted it), and undue influence (where the testator is coerced into making the will).

CLAIMS UNDER THE INHERITANCE (PROVISION FOR FAMILY AND DEPENDANTS) ACT 1975. This law allows certain classes of people such as spouses, cohabitees, children and dependants to claim against an estate if they feel that the Will does not make reasonable provision for them.

Ever more common

This type of claim has become ever more common, particularly following the Supreme Court case of Ilott v Blue Cross in 2017. Charities regularly find themselves as defendants to claims by estranged children amongst others.

CLAIMS IN PROPRIETARY ESTOPPEL. This is a claim that the deceased promised the claimant something and that they relied on the promise to their detriment. These claims disproportionately tend to involve farms, for example where someone has worked on the farm for years at low or no pay on the promise of receiving the farm on the death of the owner.

CLAIMS INVOLVING POORLY DRAFTED WILLS. Charities seem to suffer disproportionately from these where, for example, the Will drafter has used an incorrect name for the charity or written the name of one charity but the address or charity number of another. The court can be asked to interpret or rectify the will to try to overcome the problems, or the charity may need to bring a negligence claim if a professional will drafter is involved.

ADMINISTRATION ISSUES. Charities regularly encounter problems with executors or their solicitors, for example delays to the administration, failing to apportion inheritance tax correctly or distributing the estate incorrectly. There are various ways of resolving these situations such as removing the executors, bringing a claim against them for an account or, in the case of professionals, claiming in negligence.

The pre-action process

So what should a charity do when faced with a legacy dispute? You've received a letter of claim or been tipped off that the deceased made an odd will shortly before death which cut out their favourite charity. Maybe nothing has happened for months or even years on a valuable estate of which your charity is a beneficiary. What next?

The first step is to act fast. If you have concerns about the validity of a will and want to stop it from being admitted to probate, lodge a caveat with the Probate Registry. This is cheap (the fee is only £3) and it gives you time to investigate. If you receive a letter of claim, acknowledge it.

If you are one of a number of charity beneficiaries, contact the others. Charities regularly work together on legacy disputes which saves costs and time.

Gather evidence, for example, the will file, medical records and, in an Inheritance Act claim, financial information from the other party. Don't just accept what you are told. Often the real situation is very different from that portrayed in a letter of claim, as that is written through the lens of the claimant.

Instruct a specialist solicitor to advise you. The Association of Contentious Trust and Probate Specialists (ACTAPS) has a directory of specialist solicitors. Once you have finished gathering evidence, you or your solicitor will be able to evaluate this and be clear on the merits of the claim so that you know where you stand.

All of the above will normally take place before any court proceedings, at what is called the pre-action stage of the claim. The parties exchange letters of claim and response and relevant evidence. Most claims will be resolved at this stage (more on settlement below).

Court proceedings

If it is not possible to resolve the matter pre-action, it will go to formal court proceedings. What happens next will depend on whether the charity is the claimant or defendant. If it is the claimant, it will issue a claim form supported by either particulars of claim or a witness statement, depending on the type of proceedings, which set out the claim in more detail. The claimant will then serve these on the defendants.

With some types of proceedings, for example claims against the validity of a will, the claimant will also need to provide disclosure of key documents at the same time that they serve the claim form.

Disclosure can be an onerous and time consuming process if there are lots of relevant documents to sort through. In legacy disputes, however, charities tend not to have been involved with the deceased prior to death so the number of documents they will have on their electronic filing systems is usually minimal.

There may be some supporter records but most of the relevant evidence will be that obtained during the evidence gathering process, such as medical records, and is likely to be held by the charity's solicitors.

If the charity is the defendant then, once the claimant serves the proceedings, the charity will have a chance to respond, either by way of a defence or witness statement. The court will then likely list the matter for a hearing, either to set out a timetable for the claim or, if it is a simple claim, to dispose of it. The timetable will include directions for further disclosure if appropriate, exchange of witness statements and expert evidence.

Finally, the court will list the matter for a trial at which witnesses will be cross-examined and the parties will make their submissions.

Aspects of settlement

Very few cases make it to trial. Most are resolved through alternative dispute resolution (ADR). It is important to consider ADR at every stage of a dispute. Not only will settling the matter reduce the charity's costs, but making offers, either in correspondence or at some sort of settlement meeting, can be a good tactical move to put your opponents under pressure. It may also be possible to include a confidentiality agreement to help protect the charity's reputation.

There are various forms of ADR. Mediation is a very popular form of ADR which works well for legacy disputes. It is a type of settlement meeting where the parties spend the day with an independent mediator (either online or in person) who shuttles between them and tries to bring them to a settlement. One of the main benefits of mediation, particularly for charities, is that it is a completely confidential process so that nothing said during the mediation can be referred to later.

Mediation also helps to focus the parties' minds and, if you have an effective mediator, enables them to see the reality of their position and the risks involved in pursuing the matter further. Although it is not inexpensive, it is considerably cheaper than going to trial and is particularly useful in disputes where there is a degree of uncertainty for both parties, such as most claims against the validity of wills or proprietary estoppel claims.

Increasingly active role

In recent years, where there are issued proceedings, the court has taken an increasingly active role in ADR. It regularly conducts settlement hearings, for example, financial dispute resolution hearings. This involves the parties attending court for the day.

Rather than hearing the evidence and making a decision, the judge will read the papers in advance and set the parties various time limited tasks during the day to encourage them to think realistically about settlement. At some point during the day, the judge will give their view on the merits of the claim as it stands, again to encourage the parties to take a realistic approach to settlement.

Some disputes do not warrant the expense of mediation, for example where the estate is modest or where the charity feels confident of success, for example a claim for the removal of executors where they have delayed for many years. In those cases, offers in correspondence can be more cost effective.

Ultimately, in claims involving a non-monetary outcome, such as the removal of executors, it may be necessary to push the matter to a hearing so that progress can be made with the estate administration.

Reputational issues

As well as the legal issues, charities can face reputational threats when dealing with disputes, such as press interest or social media posts. Whilst it is important to be aware of the threats, and to mitigate them by, for example, having a press statement ready in appropriate cases, they shouldn't determine the charity's response to a claim. At the end of the day, by bringing or defending a claim, a charity is usually just trying to make sure that its supporter's wishes are carried out.

Disputes involving wills are becoming increasingly common. By being prepared when they arise and managing them appropriately, charities can help to safeguard their legacy income and reputation.

Other varieties of merger are available! Such as where one charity is appointed as sole member of a corporate charity or sole trustee of another charity. These are not necessarily seen as full mergers, and trustees may struggle conceptually with the powers and duties applicable to them when acting as a board member of a corporate trustee or corporate member of a charity.

Charity incorporations are also a form of merger. This occurs when the trustees of a charitable trust or unincorporated association conclude that it is preferable to operate under a corporate structure, for example, to limit their liability to third parties and attract future board members. The unincorporated charity merges with a new corporate body by transferring to it all assets and liabilities for the better fulfilment of its purposes.

Quest for financial sustainability

Operational mergers are often driven by the quest for financial sustainability. In an environment where charities compete for the same funds and operate under squeaky tight margins, combining forces can achieve the efficiencies and economies of scale needed for a viable business model. A lot of mergers are induced by pressures on the publicly funded sectors, such as care, the arts and voluntary services.

Equally, the compliance and regulatory expectations on service delivery charities can cause trustees to seek out merger partners who can offer more robust “back office” structures providing good internal governance systems and processes.

Sometimes mergers are a logical choice for the end of a charity’s natural life. This may come about due to a reduced need for the charity’s services, or other shifts in the operating environment, requiring significant adaptations to the charity’s business model in order to keep pace. Trustees may decide that they have simply “run out of steam” and, having neither the means nor appetite to see through such a change themselves, feel that a merger is the best option.

Future legacies

You might ask why trustees don’t just allocate remaining charitable funds to appropriate causes and close the charity in these circumstances? The answer is, often, to capture future legacies. Under Charities Act 2022 provisions which sought to close a statutory loophole, the effect of registering a merger on the Charity Commission’s register of merged charities is that all subsequent gifts to the transferor take effect as a gift to the transferee.

In a true charity merger, there is at least one transferor which folds into a transferee charity and then dissolves. The decision as to which charity is to wind up depends on several factors, including its structure, the nature of the assets it holds, the terms of contracts and liabilities, the charity’s name and future branding considerations.

The choice may be clear from the circumstances but otherwise needs to be discussed and agreed between the parties. Merger partners generally want to try to avoid a perception of a takeover.

Important steps to take

It's useful to consider the various steps and key considerations involved in a charity merger:

PLAN AND PREPARE. In a pre-merger planning stage, the transferor would be advised to undertake a house keeping exercise to ensure that all its records and registers are up to date. Copies of all contracts, accounting records etc. should be placed onto a secure data system.

THE “KNOW YOUR PARTNER” PHASE. The merging charities will need to get to know one another intimately. There is a particular onus on the receiving charity trustees to understand what it will be taking on. A charity merger involves acquiring all the assets and liabilities of the transferor - not cherry picking. The due diligence phase of a charity merger is key and should not be rushed or short-circuited.

Legal agreements covering access to personal data and sensitive information sharing can facilitate a secure and confidential exchange of data between the parties.

SIMILARITY OF OBJECTS. The very first task is to assess the compatibility of the charities’ objects. One charity may need to modify its purposes to be sufficiently like those of the other charity. Objects changes are “regulated alterations” that require prior consent from the Charity Commission. There is also a possibility that the governing document (usually of the transferor charity) will need amending to include an express power to merge.

PROCESS. It is important to figure out at this stage the legal mechanism and timetable for agreeing the merger – will this require a vote of the charity’s members or is a trustee decision sufficient? Are there other bodies who need to be involved (such as a regulatory or umbrella body). Is Charity Commission approval of the merger required?

HEADS OF TERMS. It is helpful at an early stage to document the key terms and milestones for the merger, and establish a project group with representatives from both boards to work within the parameters set out in the heads of terms. These should identify mission-critical points to be provided for in the merger documentation.

COMMUNICATIONS STRATEGY. The communication, branding and consultation strategy will need to be a joint undertaking between transferor and transferee. Aligned to the heads of terms, it should set out the approach to be taken when consulting with stakeholders and informing them of the merger and the messaging around the transaction.

CONSULT WITH STAKEHOLDERS. This should be done early on in any merger process. Stakeholders are people who work with the charity in all sorts of ways including its beneficiaries, funders and supporters. Consultation may take the form of newsletters, surveys, webinars or physical meetings at which the draft merger strategy is developed.

Worry about changes

It is important not to disenfranchise people by presenting the decision as a “fait accompli”. It is natural for people to worry about how changes will affect them and whether the charity’s personal and/or community ties will be lost by being absorbed into a larger entity. Boards should listen to concerns and provide as much reassurance as the circumstances permit.

Mergers can also be a difficult time for employees as they will be aware of possible workforce duplication and that redundancies may result. Their rights are protected by Transfer of Undertakings (TUPE) regulations. Charities must inform and consult their employees in line with TUPE requirements and ensure that any redundancies made after the merger are for economic, technical or organisational reasons.

IDENTIFY THIRD PARTIES. Operational mergers frequently involve an array of contractual obligations that need to be either formally ended or passed on to the transferee. This often means bringing third parties such as commissioners, funders, lenders, suppliers, and landlords into the equation.

Early liaison with pension providers is essential to understanding the consequences of winding up the transferor and/or transferring members out of the scheme. This can prove critical to the viability of a merger.

Passing over liabilities

Getting third party consents to the assignment or novation of the transferor’s obligations to the transferee can add significantly to time and legal costs. The transferor needs to pass all its liabilities over to the transferee on the agreed merger date because post-merger, it will be little more than a “shell” charity, devoid of assets and unable to meet any operational obligations.

Although indemnities are generally provided as part of the transfer agreement, ideally the aim is to avoid the charity and/or its trustees retaining any liabilities associated with operating the charity beyond the merger date.

DOCUMENT THE MERGER APPROPRIATELY. There is generally a suite of legal documents to put in place for the merger, including a vesting declaration, transfer or merger agreement which will document the business transfer and highlight any restricted assets, including permanent endowment, that must be ring-fenced by the transferee.

Trustee and/or member resolutions documenting a “best interests” decision making process will be needed. It is suggested using the seven principles in the Commission’s CC27 as a guide.

BOARD CONTINUITY. Within the merger framework, some of the transferor trustees may join the board of the transferee charity, which can have several positive impacts. It preserves a degree of continuity and gives reassurance to staff and beneficiaries that their interests will be represented in the new world of the merged charity (although it is important to remember that this can also result in a conflict of interest or loyalty for those trustees).

The transferor trustees can help to ensure that the merger strategy is implemented in accordance with the letter and spirit of the merger agreement, and oversee practicalities such as the orderly winding up of the charity and registering the merger with the Charity Commission.

Remembering the human factors

In the current climate of uncertainty and rapid change in society and technology, choosing to collaborate – via a charity merger – rather than to compete, may be the way to turn these challenges into an opportunity. This article has explored the legal aspects of a charity merger, it is no less important to highlight the softer, human factors like a shared culture and values which are just as, if not more, fundamental. Like any marriage or alliance, it is the groundwork that you put into knowing your partner and building up mutual trust and respect that ultimately determines the success of a charity merger.

There are over 11,200 charity shops in the UK and according to the Charity Retail Association, these provide their parent charities with around £363m of income each year. They also provide full time employment to around 26,000 people and volunteering opportunities for many more.

Claims for dilapidations

Issues often arise where a lease has expired, no talks have been entered into or they have been inconclusive, the person who agreed the original terms on behalf of the charity has left and the landlord does not want to grant the charity a new lease. In this instance a charity may also have claims made against it for dilapidations, to pay for the cost of returning the property back into suitable repair or removing any fitted-out items in accordance with its obligations under its tenancy agreement.

Charities with a lease may have also been asked to contract out of some of the statutory rights which apply to usual business tenancies under the Landlord and Tenant Act 1954 and so they may not fully understand what legal rights and responsibilities they have, particularly at the end of the contractual term.

A lease will have certain holding over protection under the Landlord and Tenant Act 1954 (LTA 1954). This allows the charity to continue to occupy the property even after the contractual term of the lease has ended. If a charity has a protected lease under the LTA 1954, it has the statutory right to a new lease at the end of the term on similar terms to the current lease.

To initiate a lease renewal, a tenant may have to serve a Section 26 notice on the landlord to put forward terms for a new lease and generate a conversation around a new lease. A Section 26 notice cannot be served where the landlord has served a Section 25 notice that either offers a new lease or opposes the grant of a new lease.

On both sides there are certain steps which need to be taken when approaching these negotiations, and a charity may inadvertently end up in lengthy negotiations requiring legal assistance or in a dispute with a landlord. Care needs to be taken and it is important to seek the advice of a solicitor who is mindful of the costs that a charity could incur to resolve these situations.

Redevelop the premises

Where a tenant has validly served a Section 26 notice on the landlord, the landlord has two months from service of the notice to object to a renewal lease based on a limited number of grounds set out in Section 30 of the LTA 1954. The most common grounds for opposition are where the landlord intends to redevelop the premises or intends to occupy the premises themselves.

The Section 26 notice must set out a date that the new tenancy will take effect. If the lease is not agreed and completed before the date specified in the notice, the tenant will lose its security of tenure rights and the landlord does not have to offer the tenant a new tenancy.

If the lease is not completed before the deadline set out in the notice, the parties will have to agree to an extension, or the tenant will have to issue protective renewal proceedings at court. Unless the parties are far apart in their negotiations and proposed terms for a new lease, it is usually in the interests of both the landlord and the tenant to agree an extension of time to the deadline set out in the notice to avoid incurring significant fees in issuing and defending court proceedings.

Where a landlord is successful in opposing a new tenancy, the tenant may be entitled to compensation. This will depend on the ground relied upon by the landlord in opposing a new tenancy while the level of compensation is linked to the length of time the tenant has been in occupation of the premises.

It is important to take legal advice before agreeing to any new lease to understand the legal and financial obligations the charity will have in the future and to allow trustees to consider whether having a retail premises is still the right strategy for fundraising.