Legal locksmiths: locking and unlocking charitable gifts and bequests

Two recent Acts of Parliament have highlighted issues surrounding the altering of conditions attaching to gifts and bequests, particularly where charities are involved.

The Burrell Collection (Lending and Borrowing) (Scotland) Act 2014 perhaps placed the issue more in the spotlight than the City of Edinburgh Council (Leith Links and Surplus Fire Fund) Act 2014 (“the CEC Act”). However, the CEC Act offered a close examination of aspects of the “reorganisation provisions” contained in the Charities and Trustee Investment (Scotland) Act 2005. The Burrell Act centred on removing a restriction on overseas lending of items in the collection, whereas the CEC Act revolved around a change of purposes and transfer of charitable assets to another charity.

Both Acts show that unlocking restrictions can happen, can be positive and can support the original aims of a gift (the legal basis for the majority of the Burrell Collection), or bequest (largely legally irrelevant to the Burrell Collection, despite much coverage about altering Sir William’s will), or charity (key in the CEC Act and relevant to about 80 items out of the collection’s circa 9,000). Importantly, these Acts are of note not only to those seeking to modernise and/or amend a gift, bequest or charity, but for those framing conditions and restrictions attaching to such philanthropic actions.

Purposive approach

The parliamentary scrutiny of the Burrell Act highlights that where a party seeks to “unlock” conditions, they must understand and address two key issues: first, the true rationale for the condition being put in place; and, secondly, whether or not there have been societal, economic or technical changes in the intervening period which merit a review of the condition. In the Burrell Act, the evidence pointed towards Sir William being a regular lender of art, but also a person very concerned with transportation risk. That risk was greater in the context of overseas lending (understandable given his background as a shipping magnate having who suffered shipping losses), as well as the gift to Glasgow City being made at a time of world war – the collection being gifted in April 1944.

With the evidence indicating that the restriction’s purpose was properly focused on international transportation risk rather than lending, the issue in the Burrell Act became one of considering whether technical advances had taken place which would mean the condition could, in a 21st century context, be properly removed whilst maintaining the spirit of Burrell’s original lending powers in the 1944 gift. In other words, Sir William was in favour of lending as a concept, but given the technical risks, restricted that lending to Great Britain. If the risk could be mitigated it would therefore be in keeping with the spirit of the gift to allow global lending, subject to following modern museological standards to mitigate risk.

Reorganisation issues

The CEC Act arguably informs one more about the appropriate process to follow in certain situations, rather than the substance underpinning the changes to the purposes. The preliminary stage report provided a detailed overview of s 43 of the 2005 Act. Section 43, in a rather convoluted way (via the Education (Scotland) Act 1980), prohibits charities established by an enactment from using the reorganisation provisions, and instead directs them to use the appropriate legislative mechanism (e.g. Holyrood private bill, Privy Council etc). The report (at para 65) concluded that s 43 does indeed mean that a legislative route is correct, as opposed to the statutory charity availing itself of the Office of the Scottish Charity Regulator (“OSCR”) process. The report also noted that those giving evidence on this issue agreed that the reorganisation provisions are “ambiguous and… interpretation is difficult”.

This writer has previously considered the issues associated with s 43 (“Acts of Kindness”, Journal, July 2010, 46), following an earlier charity promotion of private legislation – the Ure Elder Transfer and Dissolution Act 2010, and maintains that the complexities of s 43 are one reason that the reorganisation provisions in ss 39 to 43 require to be refreshed in order that the statutory basis for reorganisation matches the positive experience of this OSCR process in practice.

The report did support the aims of the CEC Act to provide a modern basis for the proactive and effective management of the charitable assets for the future. Again, the proposed amendments reflected the objectives of the original purposes (originally from 1824, via statutory modifications in 1927, 1967 and 1991), while creating a modern framework – an important combination for consent under s 16 of the 2005 Act and the parliamentary scrutiny and approval process.

Lessons for drafters

As noted above, the Burrell and CEC Acts are also instructive for those drafting conditions relating to, and restrictions on, philanthropic gifts. The drafter of a will, gift or contract must consider whether any restrictions should attach, how the restrictions and conditions should be crafted, the consequences of breach or complete failure, and mechanisms for review and amendment (or not). If the Burrell and CEC Acts looked at cutting keys many decades later, the drafter of a restricted or conditional gift or bequest has the opportunity proactively to be a locksmith.

The drafter designs the lock and should also consider the role of any future key(s) and how a key may be fashioned. Those drafting wills, for example, need to provide a sufficiently robust lock to avoid assets being used beyond, or even against, the wishes of testators. At the same time they do not want to create a situation where the bequest “implodes” due to undue inflexibility. The history of initial failure of cy-près applications is cautionary (see, e.g. Burgess’s Trs 1912 SC 387; Tod’s Trs 1953 SLT (Notes) 72, with R S Macdonald Charitable Trust Trustees 2009 SC 6 perhaps showing what will now be a rare modern example of the cy-près regime and an instructive comparator with the OSCR process).

Whether in a will, gift or contract, it should be made clear how modifications can be made, and by whom. Is there a power to modify? Who needs to approve change? What powers do executors and trustees have, and when can they exercise them? Are there review dates? Under what circumstances can amendments be made (e.g. tax, societal, economic, technical changes, or changes to the recipient body)? If the lock is to be particularly robust, or if certain conditions are “red lines”, it should be made as clear as possible in the original documentation. Such information would be particularly important in a reorganisation application for a “restricted fund” under the Charities Restricted Funds Reorganisation (Scotland) Regulations 2012 (on which see “Funds Less Restricted”, Journal, January 2013, 30).

The CEC Act shows the lengths that may need to be taken to implement change where no mechanism is incorporated into the original constitution. It highlights procedural issues as well as a reason for revisiting the drafting of the 2005 Act’s “reorganisation provisions” to make clear which charities can and cannot use the OSCR process. The Burrell Act is more substantive in nature. It underlines the need for identified reasons to change which are in keeping with the aims and intentions of the original gift. Both Acts are reminders to drafters of wills, gifts and contracts that the possibility and scope for future updates and amendments should be considered at the outset where restrictions and conditions are attached. To overlook that could lead to the donor’s intentions being undermined, the assets in the gift being lost to the charitable sector (or less efficiently or effectively used), and/or more complicated, cumbersome and unpredictable legal processes being required to effect change than are strictly necessary.