The recession has forced cash-strapped charities to cut staff and reassess their spending on professional services, including legal advice. But some areas of work are growing
Charities are increasingly feeling the impact of the recession, with more than half reporting a drop in income at the same time as demand for their services increases. This is forcing them to make painful decisions about drawing on reserves, dropping projects, selling property and shedding staff.
The conventional wisdom, says Anne-Marie Piper, head of charities at City law firm Farrer & Co, is that it takes 10 months before charities feel the full force of a recession on their income from donations.
‘That is when people start going through their standing orders and shaving off any payments they can,’ she says.
‘We aren’t quite there yet, if that holds true this time round. However, there is a feeling that, in light of MPs’ expenses and bankers’ bonuses, the wrong people have been looked after and a desire to regain a sense of morality may encourage individuals to keep donating.
‘The big downturn is in corporate sponsorship, though some companies are still choosing a "charity of the year" and others are encouraging staff to become involved in local causes as a way of bonding.’
Piper has worked through three recessions. ‘This time, charities have reacted quickly. Many have shed staff, renegotiated contracts and re-evaluated their property needs. This always gives rise to increased work for their lawyers, but then things slow down as they hunker down to live within their reduced income.’
Michael King, head of charities and education at south of England firm Stone King Sewell, says: ‘Charities account for something like 17% of GNP so it would be surprising if they were unaffected. They are trying to spend as little as possible on professional advice but you have to get things right. However, I wouldn’t dream of suggesting this sector is recession-proof – we have decided not to increase our fees at all for charities this year.’
The recession is hitting members of the In House Charity Lawyers Group (IHCLG), part of the Commerce and Industry Group, in ‘strikingly different ways,’ says co-chair Eleanor Boddington.
Senior solicitor with the Wellcome Trust, the world’s largest medical research charity, she says: ‘One of our members is a large overseas charity which has been badly affected by the weak pound. Conversely, charities with visitor attractions here are benefiting from the weak pound because more tourists are coming to the UK and more people are holidaying at home. But on the downside, visitors are not spending as much when they visit, so the non-charitable catering and retail subsidiaries which gift aid their profits back to the charity are being hit.’
When it comes to foundations, Boddington says they have all been affected by the drop in endowment values. The Wellcome Trust has been protected from the worst of the market falls by the diversity of its asset base, she says, but it has still dropped from £15.1bn to £13.1bn over the last financial year.
‘However, it is not all gloom,’ she adds. ‘The downturn means charities may be able to negotiate a better deal on their leases because there is a lot of property available. Anecdotally, the new higher rate tax band for those earning over £150,000 is highlighting the fact that it is very tax efficient to give to charities.’
A significant part of any charity’s income comes from legacies. Peter Steer, head of charity legacies at Salisbury-based Wilsons, says the downturn is making charities scrutinise the role of professional advisers.
‘I have instructions going to counsel in four separate cases where we think the executor has acted negligently in delaying obtaining probate and delaying selling stocks and shares which has caused fairly major losses,’ he says. ‘While it is easy to say this with hindsight, there are tangible arguments that, if executors sit on their hands they ought to be liable. Looking back, the case law authorities have tended to be fairly lenient to executors, but that was in a different world.
‘Charities are very mindful of the need to be sensitive but they are under legal duties themselves and they cannot simply give away a gift. Many charities I represent regard mediation as a useful means of resolving contentious cases.’
The fall in legacy values is undoubtedly going to raise the spectre of more family disputes, says Fiona Wilson, a partner with London firm Hempsons and chair of the Charity Special Interest Group UK of STEP (the Society of Trust and Estate Practitioners). She is receiving a growing number of queries from charities that have been left houses which they can’t sell, raising concerns about the legal liability issues of letting pro tem, or about repairs or other expenses that need to be shouldered for a longer period.
‘Those who have been left a future interest in, for example, half a house on the death of a husband or wife are also suffering, especially when the rest of the estate has been left to the survivor. But there is little money remaining from fallen investments for the survivor to live on. Either a dispute may arise, or the charity may be called upon to bear the expenses – and there are always PR issues here,’ she says.
Paul Hewitt, a partner with City firm Withers, co-ordinates the firm’s cross-departmental work on legacy income. He says there are likely to be more disputes under the Inheritance (Provision for Family and Dependents) Act 1975, where people have fallen on hard times.
Another growing area is international work, given the number of people living abroad, he says. ‘When someone dies, their bequests to UK charities can have significant tax issues.’
At the same time, says Steer, there is a ‘huge’ increase in fraud to watch out for, involving forged wills and undue influence.
‘We are also seeing an increase in people making their wills online and it will be interesting to see how that plays out,’ he says. ‘A lot of websites don’t seem very charity-friendly, which is something charities may have to look at.’
Wilson says she is very sympathetic about the legal costs of will writing but it can be far more costly if it is done badly. ‘Somehow the public perception is that a will should be simple and cheap. As for charities which pay for wills themselves, there is clearly a risk if the will is ever challenged – one case like that in the media could cause untold damage to future legacies.’
With an estimated 27 million people without wills, it is inevitable that the market has become very competitive. Earlier this year, a new online client referral site for solicitors, www.totallyfreewills.co.uk/solicitors, was launched, with the initial marketing via charities which promote the service on their websites.
Joint managing director Richard Harris says about 100 charities have signed up, including the Variety Club, Oxfam, hospices and independent schools. ‘Our only caveat in linking up with a charity is that it must not pay for wills from donated funds. We believe it compromises the charity and doesn’t keep the transaction at arm’s length.’
When things get tough, external legal spend comes under scrutiny. Alison Paines, chair of the Charity Law Association and head of charities at Withers, says: ‘I don’t think the recession has noticeably changed our work. However, clients are more interested in talking about value and they are reviewing their advisers. We have been involved in more pitches and tenders in the last six to nine months than we were this time last year.
‘Also, because we are very busy, inevitably other people are looking to see if they can do the work. But it is our expertise that distinguishes us – this is not a soft area of law.’
Steer agrees. ‘You can’t dabble in this area with the odd charity client. Our core business is in Salisbury, but we have opened an office in London – an unusual step in a recession but a natural one for us to build our charities practice because so many of our clients are based in the capital.’
In-house lawyers are also finding themselves busier. When it comes to key external lawyers, Boddington says: ‘The majority of IHCLG members get pretty good discounts. I don’t think many would dream of increasing their fees at this time.
‘Some firms are deferring taking on trainees and reducing hours, which raises an interesting opportunity for people to do more pro bono work. We have three trainees every six months on secondment from a major city law firm. The benefits for us are enormous as the law firm pays their salary. It is also a canny way of keeping a client, as people are less likely to go out to tender if there is a cohort of people who know your organisation well.’
Working in-house for a charity may once have been regarded as a soft option, says IHCLG co-chair Mark Harvey, head of legal for the newly merged Age Concern and Help the Aged. ‘But it is very pressured now and much more like being in the commercial world.’
Alongside the fall-out from the recession is the increased legal work created by the Charities Act 2006, which introduced the Charity Tribunal (see panel), intended to be a quicker and cheaper way of challenging Charity Commission decisions. The act also removed the presumption that charities covering poverty, religion and education are acting in the public benefit, thereby putting an obligation on all charities, including fee-charging schools and hospitals, to show that the public do, in fact, benefit from their activities.
Piper says: ‘The act is bedding down, though my own view is we could have lived without it. The public benefit test is making a lot of charities look at themselves and that process of reflection is good. But there is a great deal of anxiety about its impact. The problem is the act, coupled with the new Companies Act, means charities are having to spend a lot of money on lawyers just to stand still.’
The commission is carrying out 12 public benefit assessments which it will publish later this year. Several key provisions of the act - the registration of exempt and excepted charities, the new corporate vehicle, the charitable incorporated organisation (CIO), public charitable collections and fundraising – have still to come into force but overall it is settling in well, says Kenneth Dibble, the commission’s executive director of legal and compliance.
However, it is leaving the commission’s 22-strong legal team, based in London, Liverpool and Taunton, ‘very stretched’, he says.
The introduction of CIOs is unlikely now before 2010. Murray Hallam, a member of the Law Society’s wills and equity committee and a partner at Withers, says: ‘There was a lot of enthusiasm initially but the CIO is turning into a bit of a damp squib because it is still too complicated for small organisations.’
Hallam is also concerned about the substantial donor rules which were intended to prevent abuse but have instead created a huge burden for charities. ‘The current proposal is for the rules to apply if someone gives £150,000 over six years or £25,000 a year. The mischief the Revenue is trying to counter is where a settlor creates a charity, gives money to it and then borrows it back with gift aid. But one or two bad cases are making bad law.
Charities have to check not just the donor but whether anyone connected with them is giving money. If you want to starve charities of major gifts, this is one way to go about it.’
The substantial donor rule has hit the Law Society’s own charity. It no longer funds the Law Society Charity, which has appointed Jill Moffatt as its fundraiser. Chair Nigel Dodds says: ‘Because our funding came from the Law Society we had a low profile and we were able to do good by stealth. But we now have to fundraise from a standing start at the worst possible time.’
One push is to encourage firms to donate amounts of £50 or less from untraced funds. This can be done without the need for approval by the Solicitors Regulation Authority after the Solicitors Account Rules were amended last year. Dodds says that, where donations amount to more than £50 of a client’s unclaimed funds and the SRA has given its approval, they will indemnify the solicitor if the client should materialise.
Imaginative fund-raising ideas will be at a premium as surveys by the commission highlight the deepening impact of the recession on the third sector. However, Boddington believes: ‘We will weather the storm. It sometimes takes something like this to force organisations to make difficult decisions.’
Charity Tribunal applying muscle
The cases include the appeal by the Catholic Care charity against the Charity Commission’s refusal to allow it to amend its objects, so it could discriminate against same-sex couples wishing to use its adoption services. This was rejected by the tribunal earlier this month. It has still to hear the Kidd legacy cases, which could lead to a Tesco superstore being built on part of Central Park in Dartford, Kent. Two local residents took advantage of the rule that allows ‘any other person’ affected by a commission decision to appeal to the tribunal.
McKenna, a former partner with Salisbury law firm Wilsons, says: ‘The big surprise of my first year is that I have spent more time sitting in committee meetings about tribunal reform than I have actually sitting on charity cases. As a member of the Tribunal Procedure Committee, I have learnt a lot and had time to consider our procedures, our transfer to the First-tier Tribunal and run training events, so I have not been idle!’
She says one of the reasons there are fewer applications than expected may be because the commission has revamped its own internal complaints procedure and resolved many more cases. It may also be caused by the economic downturn and charities’ reluctance to incur legal fees in litigation.
Numbers could be boosted next year if the General Regulatory Chamber Rules, which will apply to the charities jurisdiction from September, decide to allow charities to choose whether they go through the commission’s appeals process first or go straight to the tribunal.
Whatever the numbers, Farrers partner Anne-Marie Piper says the tribunal is ‘absolutely necessary’. She adds: ‘There was almost no judicial scrutiny of commission decisions because the price of going to court was so high.’
Alison Paines, chair of the Charity Law Association, agrees. However, she is concerned that: ‘While it is early days, the tribunal appears to be slower, more formal, with a greater level of costs and procedure than anticipated.’
McKenna says she had hoped to operate less formally than the High Court. However, the commission has instructed a QC in every case. ‘Its own in-house lawyers have not represented it at all, which is perhaps rather unusual for a tribunal, but that may be because only the most complex and intractable cases are graduating here,’ she says.
The two appellants in the Kidd legacy case are representing themselves. The tribunal has a pro bono scheme organised jointly by the Bar Pro Bono Unit and the Chancery Bar Association. Charities may also represent themselves, while the tribunal rules operate flexibly to help litigants in person. ‘Solicitors are also welcome to appear,’ she adds.
The final signing of the merger between Age Concern and Help the Aged involved a nine-way conference call between all the lawyers involved.
‘It was quite an emotional moment,’ says Farrers partner Anne-Marie Piper, who acts for the newly formed charity, which has the legal name Age UK. ‘I think it will prove to be the high point of my career.’
The merger is the biggest since the Cancer Research Campaign joined with the Imperial Cancer Research Fund in 2002, which she also worked on. ‘However, this merger had the added element of creating four new charities in England, Scotland, Northern Ireland and Wales within the new regulatory frameworks.’
While the Charities Act 2006 has removed many of the legal obstacles to mergers, it is not a decision to take lightly. There are a huge range of issues involved, including legal, employment, constitutional, due process and objective compatibility. And that’s before you add culture clashes, tax and pension matters, data protection, IP and brand issues, IT, competition and OFT issues – the list goes on and on.
‘The process of merging has been massive,’ says Mark Harvey, head of legal for Help the Aged and now head of the new in-house legal team.
Age Concern England had a staff of 1,200 and an annual income of more than £85m and was part of a federation of 350 Age Concern charities, with sister organisations in Northern Ireland, Scotland and Wales. It also ran one of the largest voluntary sector commercial trading operations. Help the Aged employed more than 1,000 staff, had an income of £80m and comprised three separate bodies in Scotland, Northern Ireland and Wales, each represented by their own solicitors. The two charities also had more than 500 shops between them.
‘The challenge has been to set up a new organisation with a consistent approach that worked across all the nationals, with a brand and name acceptable to all involved,’ he says.
The next tasks are to deal with appointments and redundancies and to agree the final brand, which probably won’t be until 2010, says Harvey. ‘We remain Age Concern and Help the Aged with the agreement of the Charity Commission. One problem is that the merger regulations need amending to deal with legacies in the old charities’ names and how they transfer to the successor.’
Kenneth Dibble, the Charity Commission’s executive director of legal and compliance, says : ‘A difficulty arises where there is a gift to a charity on terms that, if that charity ceases to exist in the lifetime of the testator, the gift will pass to a designated charity. The question is whether the gift passes to the merged charity or whether the gift passes to the designated charity. If the latter applies, some charities may be kept artificially alive to ensure the gift is not lost to the charity. It appears that the Charities Act 2006 did not contemplate this, but we are considering the matter.’
Grania Langdon-Down is a freelance journalist