Charities may still be facing the worst effects of the recession after suffering mixed fortunes during 2009, say practitioners looking ahead to the coming year.A survey by the National Council for Voluntary Organisations in December 2009 found that charity leaders feared the full impact of funding cuts had yet to hit and recovery in the third sector would lag behind the rest of the economy.

Over the last year, the number of charities fell by about 8,700 to 159,600. With government spending making up about one-third of the sector’s income, the crunch is expected after the general election, when swingeing public sector spending cuts are forecast.

‘In my view, the sector hasn’t yet seen the worst of the recession,’ says Anne-Marie Piper, head of charities at City law firm Farrer & Co. ‘Lawyers are doom merchants – it is our job to see what can go wrong – but I think 2010 is going to be worse than 2009.’

But some charities proved impressively resilient last year, says Piper. ‘We gave a lot of employment advice and clients, like other businesses, let staff go early this time,’ she says. ‘But I haven’t had to give a lot of insolvency advice. There were a lot of cutbacks, but those with good management survived. There have also been more mergers, including some "fire sale" mergers that were really acquisitions. What recessions are good at is flushing out things that aren’t working well.’

Charities also marketed themselves quite well, she says. ‘There is a feeling that they benefited from the vulgarity of the "noughties" and the bonus culture – people were reluctant to cut back on donations because they could see a lot of people were suffering,’ says Piper.

‘However, we are living in a fantasy land. Whoever wins the general election is going to have to make huge cuts. The Office of the Third Sector has poured millions into the voluntary sector and that funding just isn’t going to be there. Charities that are heavily dependent on government funding are going to have to find other sources, merge, or form strategic partnerships.’

Julian Blake, partner at London firm Bates Wells & Braithwaite, says the momentum that had built up in the sector before the banking crisis and recession helped sustain activity last year at a higher level than it might otherwise have been.

While charities are used to fluctuations in the funding climate, Blake says the real impact of the recession is still to come, with the threat of universal public sector spending cuts. ‘It is not yet clear what this will mean,’ he says. ‘While politicians declare that health and education services will not be scaled back, we have clear indications that cuts will be a priority in less popular areas, such as immigration and asylum.’

In-house charity lawyers also fear that 2010 will be at least as bad, if not worse, than 2009.

Eleanor Boddington, senior solicitor with the Wellcome Trust, the largest charity in the UK, is also co-chair of the In-House Charity Lawyers Group. Charities learned from previous recessions, says Boddington, and acted quickly ‘with some quite radical restructuring and redundancies, so they took the pain early on and were in a better position to weather the storm’.

What can’t be forecast, she says, is how much worse this year is going to be. ‘The general election will be the turning point,’ says Boddington. ‘I don’t think anyone is under any illusion that whoever gets in will have any money.’

It certainly takes time for charities to feel the full force of the recession, says Fiona Wilson, partner with London firm Hempsons and chair of the Charity Special Interest Group UK of the Society of Trust and Estate Practitioners. ‘I am not sure we are out of the woods yet, so I rather suspect 2010 is not going to look much better, if at all, than 2009,’ she says.

Peter Steer, partner of Salisbury-based practice Wilsons, specialises in contentious work for charities, including the RSPCA and RNLI. He says 2009 was a ‘mixed experience’ for charities: ‘Executors of estates where property had to be sold were forced to accept lower offers, while the banking crisis hit the portfolios of many estates where shares were still being held by executors.

‘Having said that, many charities still seem to be reporting positive news in terms of legacy income and notifications of new legacies. There is a school of thought, however, that there may be worse to come, as it can sometimes take a year or more for estates to be wound up and distributed.’

Ros Harwood, head of the charities and independent schools group at north-east firm Dickinson Dees, says: ‘Last year wasn’t as bad as some were expecting – though it was bad enough.’ There were not as many mergers as anticipated, she adds, though there were more collaborations with a view to possible merger later. ‘I also dealt with a good number of incorporations, so trustees could take advantage of limited liability protection – again indicative of the times and trustees being more aware of their potential liabilities.’

As far as 2010 is concerned, she expects more of the same, with some smaller charities merging or possibly winding up.

Heather Lamont, client investment director at CCLA, the UK’s leading manager of charitable funds, believes the extent of the damage to some income streams has not yet become evident, though for some charities plummeting interest rates have reduced their income from cash deposits by as much as 90%.

But there are also some positive aspects to the recession. For Lamont, it has encouraged trustees to consider the balance of risk between their assets, while Alison Paines, chair of the Charity Law Association, says it has resulted in a ‘considerable amount of innovation, including greater collaboration between like-minded organisations and a good amount of hard-nosed renegotiation of suppliers’ terms and property rents’.

It has also offered wealthier charities the opportunity to pick up some bargains, says Wellcome Trust’s Boddington, though Hempsons’ Wilson observes: ‘I did hear that one charity was considering purchasing properties as an investment, but I am not sure whether they have actually gone down that route – I suspect not.’

When it comes to corporate giving and personal donations, the picture is mixed. The 2009 UK Giving Survey found donations had dropped 11% adjusted for inflation, by £1.3bn to £9.9bn – and there had been fewer large donations. Nearly 27 million adults (54% of the populace) donated monthly to a charity in 2008/09, 2% less than in 2007/08 – in real terms this equates to 774,000 fewer donors in a typical month.

A recent survey of medical research charities found investment income and corporate giving had been hardest hit, followed by public donations and legacies.

Paines, who is also head of charities at City firm Withers, says some of her firm’s clients lost corporate sponsorship, with arts-based charities hit especially hard, but on the whole their voluntary income seems to have held up, or even increased (the numbers are not yet in).

It is still the case that ‘those who ask best, get’, says Piper. ‘There is no easy money out there, but those who are good at donor relations are successful.’

When it comes to individual donors, Andrew Goldstone, a partner in City firm Mishcon de Reya’s private client department, says the ‘super rich’ are still keen to set up their own personal foundations. He says: ‘If you come down a level, I think the new 50% tax bracket will prompt an increase in donations as people would rather give to charity than to the government.’

What is interesting, he adds, is the increasing trend among charities to litigate: ‘Their justification is that they need to defend their legacy income and shouldn’t be seen to be a soft touch. Anyone drawing up a will should be very careful if they are taking instructions which disinherit obvious family beneficiaries. One option may be to encourage the person to write a letter of wishes explaining why they are doing it.’

Two big cases last year saw family members successfully go to court to overturn legacies left to the RSPCA and the National Osteoporosis Society. However, in Re J (deceased), an estranged daughter lost her bid to benefit from her mother’s will after the judge decided J’s decision to leave her entire £486,000 estate to three charities was reasonable.

Mark Keenan, partner in Mishcon’s private client group, specialises in trust and estate litigation for both individuals and charities. He acted for Dr Christine Gill, who successfully challenged her mother’s will, which bequeathed the family farm to the RSPCA. The court decided her mother had been coerced into signing the will by her husband and Dr Gill had a reasonable expectation of inheriting after working on the farm and caring for her parents.

‘This case has prompted a debate in the charity sector about whether they are legally obliged to pursue a claim,’ Keenan says. ‘My answer is no – charities are the same as any other commercial litigant. It also backfires in terms of negative publicity. The Gill case will inevitably lead to more challenges from disappointed family members who will be buoyed by her success.’

The case, which may go to appeal, raised funding issues after the trial overran. Keenan says Dr Gill considered third-party funding, but the funder’s cut could have cost her the farm. They arranged a partial conditional fee agreement backed by after-the-event insurance, which inspired the firm to launch Mishcon Protect at the end of last year to help their clients gain access to litigation funding.

‘These cases are of interest to insurers,’ he says, ‘though perhaps less so to third-party funders. The difficulty is that you don’t have the principal witness there to question so it is hard to predict with any certainty what is going to happen.’

According to Paines, charities are not more litigious, but they are more likely to seek advice on their position if challenged by family members, because they are concerned to act properly and protect charity assets.

Charities have always been ‘caught between a rock and a hard place’ when it comes to litigation, says Wilsons’ Steer. ‘You are damned if you challenge a claim and damned if you don’t,’ he says. ‘Charities can’t just roll over, but litigation is inherently unpredictable and it can result in negative publicity. But, equally, most supporters of charities would feel aggrieved if the charity simply paid out money legitimately left to them in a will.

‘However, while the trend towards more litigation is increasing, my gut feeling is that these cases are not terribly recession-driven. Until recently, property and share prices have increased so estates are worth more, there is more to argue over and there is a greater willingness by disappointed beneficiaries to go to court.’

He doesn’t believe the alternative funding market is making a significant impact yet. ‘I think 2010 will continue to see the market for these products evolve, but the legal profession is inherently cautious and it will take time for the market to mature,’ he says. ‘It seems there is a strong likelihood of more satellite litigation about costs and the premiums being charged for cover.’

When it comes to letters of wishes, Steer says: ‘A will is a very formal document setting out a person’s wishes. We still have the right to leave our estate as we wish, even if it seems perverse to others.’

Whatever the impact of the recession, work for charity lawyers has held strong. However, says Wilson, while this ‘is certainly the case on the legacy front, like all clients, there is understandably a higher focus on value for money and only seeking professional help where appropriate’.

Paines says it remains a very busy sector. Last year saw changes in regulation and protections for vulnerable adults and children, while 2010 will see a new consolidating charities bill and changes to the substantial donor rules and gift aid.

Charity in-house lawyers, unlike their private practice counterparts, are as busy as ever, says Boddington: ‘There have been some redundancies where charities have chosen to make cuts across the board, but, more generally, it is a case of a freeze on new posts.’ She also has a cri de Coeur from the perspective of the in-house charity lawyer – she hopes the Solicitors Regulation Authority will take up a recommendation of the Hunt Review: that in-house lawyers should pay less for their practising certificates because ‘these make up a significant proportion of legal departments’ budgets, and this is a change long overdue’. She says: ‘We have effectively been subsidising lawyers in private practice, who are the ones likely to be sued for malpractice.’

But, Boddington says, the third sector is a ‘pretty resilient’ one, which lends more hope to 2010. ‘People are in [charities] because they are committed – they are not fly-by-nights – and they will just become more creative to ensure things get done.’

Tough times tough talk


2009 – the verdict
‘There has been a "perfect storm" of lower-than-expected income, yet increased demands on many of our clients that directly provide services to beneficiaries. Although the government has responded by pump-priming the availability of public funding in some areas, this will be relatively short-lived and we expect a significant reduction in coming years.’
Alison Paines, Withers; chair, Charity Law Association

‘So far, this financial year hasn’t been as bad as members may have feared, but they are expecting another hit later this year as public service cuts begin to bite.’
Simon Denegri, chief executive, Association of Medical Research Charities

‘Charities which are linked to tourist destinations, such as the National Trust, have had a good year because lots of people [holidayed at home], while the weak pound attracted overseas visitors. But even charities that did well last year are preparing for a poor year this year. Most have a freeze on head counts and pay.’
Eleanor Boddington, Wellcome Trust; co-chair, In-House Charity Lawyers Group

Donations
‘I have a number of clients who have strong desires to benefit a wide range of charities and there have been no thoughts as to reducing those gifts in the main. I suspect, however, older people may be more cautious, particularly with falling house prices, and this could have a significant impact, bearing in mind some charities rely on legacies for up to 80% of their income.’
Fiona Wilson, Hempsons

‘Some members are saying they are getting a better response than usual to direct mailing, though the amounts people are giving are lower. What is difficult is to get new donors, therefore campaigns are more expensive because you have to do more.’
Eleanor Boddington

Disputes
‘I hate litigation. I am of the "bang their heads together" school of lawyering. People are more receptive to reaching a deal because they don’t want to spend money on lawyers. There is no appetite for a fight.’
Anne-Marie Piper, Farrer & Co

piggy bank

‘What is crucial when drawing up a will is to avoid litigation in 10 or 20 years’ time when it all comes home to roost. Too many solicitors see wills as a cut-price job, but there are increasing issues of capacity to judge and lawyers are not doctors.’
Andrew Goldstone, Mishcon de Reya

Grania Langdon-Down is a freelance journalist