Charities Act 2022: Ex gratia payments in legacy disputes

This article was first published in the Trusts and Estates Law & Tax Journal (December 2022).

Roman Kubiak, partner and head of Contested Wills, Trusts and Estates and Oliver Rees, solicitor in the team look at the proposed changes scheduled to be brought in regarding ex-gratia payments by the Charities Act 2022 as well as the recent announcements behind its delay.

Introduction

The Charities Act 2022 (‘the Act’) received Royal Assent in February 2022 following a consultation and subsequent recommendations by the Law Commission. These changes are scheduled to be introduced gradually, with a view to the Act being in full force by Autumn 2023.

This article focuses on the proposed changes due to be implemented by sections 15 and 16 of the Act concerning charity trustees’ powers to make ex gratia payments out of charity funds, specifically in the context of settling legacy disputes.

However, with recent reports that the government will now be delaying the implementation of sections 15 and 16 until the government has fully understood “the implications for national museums and other charities” it may be some time, if at all, until charities can actually take advantage of the new rules.

Ex gratia payments

An ex gratia payment is a payment out of charity funds which a charity may wish to make but where there is no strict legal obligation to do so (i.e. the payment neither forms part of the charity’s work nor can it properly be said to be required in the context of any actual or potential legal proceedings).

Such a “payment” may include:

• a waiver by charity trustees of rights to money and/or property to which the charity is legally entitled but may not yet have received;
• a payment by trustees out of the charity’s existing funds; and/or
• a transfer of some existing charity property, other than money, by the trustees.

This is frequently seen in the context of legacy disputes, where a charity receives a legacy under a will but there is, say, a claim by a third party on the basis that the testator’s intentions had since changed, and that some or all of the legacy should be directed elsewhere.

Take, for example, Anne, who makes a will leaving her estate to charity. Before Anne dies, she tells her friend, Brenda, that she wishes to leave her a legacy payment £10,000 and instructs her solicitor to prepare a new will to that effect. Before the new will can be signed, Anne dies and her entire estate is paid to the charity in line with the terms of her last valid will.

On the face of it, and absent any potential negligence claim against the solicitors for delay (a so-called White v. Jones claim), Brenda likely has no standing to bring a claim for that legacy. The charity may, however, consider that these circumstances give rise to a “moral obligation” and may wish to honour the gift promised to Brenda regardless. The charity could then consider making an ex gratia payment of £10,000 to Brenda.

Conversely, if Brenda was dependant on Anne or otherwise an eligible claimant she may be able to brining a claim for financial provision under the Inheritance (Provision for Family and Dependants) Act 1975 or, if she benefitted under an earlier will and the circumstances were such as to justify it, there may be a claim to challenge the last will. However, a settlement in such circumstances does not constituted an ex gratia payment.

The current position

Charity trustees are required to use a charity’s assets to further its purposes and in accordance with its governing document. A failure by charity trustees to do so may amount to a breach of trust as the charity trustees may be considered to be using charity funds for non-charitable purposes. For this reason, charity trustees must usually seek Charity Commission consent to authorise an ex gratia payment irrespective of how big or small that payment is.

This arguably restricts a charity’s ability to reach financial settlements in those instances such as the one described above.

The case of Re Snowden (deceased) [1970] 1 Ch 700, the judge ruled that charity trustees are able to make ex gratia payments in instances where it could be said that if the charity were an individual it would be morally wrong to refuse to make the payment. The court therefore decided that such ex gratia payments may be made with the authority of the court or the Attorney General.

The Charities Act 2011 extended this principle to allow applications to be made to the Charity Commission. The Commission then introduced a further exception to the rule in its operational guidance, being that it would not seek to interfere with “de minimis” payments, i.e. payments of less than £1,000 on the basis that if the Charity Commission were to call payments of such value into question, it would likely incur unnecessary costs which may exceed the value of the payment itself.

These limits on a charity’s powers can impact on their ability to act quickly and reach a quick settlement with legacy disputes. The current law also means that the decision must be made by the charity trustees, with no option to delegate this to the charity’s staff.

Charities Act 2022: The proposed changes

The changes, which are, subject to the government review, to be implemented by the Act should allow charity trustees to make small ex gratia payments without seeking prior approval from the Charity Commission. What can be considered as a “small” payment will vary depending on the charity’s gross income in its previous financial year.

There is currently no set date yet for when sections 15 and 16 will come into force though many are hoping that it will be in mid to late 2023 subject to any changes.

Turning to the current proposed changes, what constitutes a “small” payment can be calculated as follows:

• if the charity’s gross income in its last financial year did not exceed £25,000, the relevant threshold is £1,000;
• if the charity’s gross income in its last financial year exceeded £25,000 but not £250,000, the relevant threshold is £2,500;
• if the charity’s gross income in its last financial year exceeded £250,000 but not £1 million, the relevant threshold is £10,000; and
• if the charity’s gross income in its last financial year exceeded £1 million, the relevant threshold is £20,000.

Charities will need to continue to report these payments in their annual accounts in line with the Charities Statement of Recommended Practice and should continue to seek the consent of the Charity Commission where the value of the gift exceeds those listed above.

The Act as currently drafted also gives charities the option to expressly exclude or restrict this power in their governing document.

These changes will, as they currently stand, afford charities the ability to form their own decision to accept, reject or repay funds – provided that the payment requested falls within the relevant threshold based on the charity’s gross income. By giving charities the authority to make their own decision, this should help to maintain relationships with legacy donors and their families.

In these cases, a charity’s ability to make its own decisions should also help to reduce time previously spent waiting for the Charity Commission to reach a decision, as well as the associated costs of preparing the application. Trustees will be able to delegate the decision of whether to make a payment to the charity’s staff, again saving on costs as well as administrative burden, regardless of the value of the gift in question.

There does still, however, need to be a moral obligation to make the ex gratia payment.

Statutory charities

A small number of charities are statutory charities, meaning that they are incorporated or governed by a specific Act of Parliament. The current law is such that it would be near impossible for a statutory charity to be able to make an ex gratia payment. Reasons given by the court are that it would contravene a statutory provision setting out permitted dispositions of that charity’s money or property, and that the Charity Commission’s power to make an ex gratia payment is based on the Attorney General’s jurisdiction; however, the Attorney General has no such power to authorise such a payment if it is prohibited by statute.

The Act seeks to rectify this so that there is no longer any difference between the treatment of statutory and non-statutory charities in respect of making ex gratia payments. This means that, as with non-statutory charities, they will be able to make small ex gratia payments within the relevant threshold, and to seek authorisation for larger ex gratia payments.

Why the delay to implementation?

It seems that the delay to the implementation of sections 15 and 16 comes off the back of the recent stories of museums returning certain items within their collections to their countries of origin such as London’s Horniman Museum which announced recently that it was returning its collection of Benin Bronzes to Nigeria and the reports that Lord Vaizey will chair a new body with the aim of returning the so-called Elgin Marbles to Greece.

In the light of this and the possibility that museums which are currently precluded by statutes such as the National Heritage Act and British Museum Act 1963 may be able to return some items on the basis of moral grounds, the government has decided to hold back the proposed ex gratia payment changes until Department for Digital, Culture, Media & Sport has considered the position more fully.

For the time being, therefore, and until further notice, the position remains unchanged so watch this space.

Practical advice

For the time being it’s business as usual.

However, subject to any further amendments which, one imagines, would, if implemented, restrict the ability of museums and other bodies to return cultural artefacts on moral grounds alone, where payments fall within the relevant threshold then charities will be able to avoid seeking consent subject, of course, to being satisfied that the payments properly qualify as ex gratia payments and are within the relevant thresholds. Applications for payments that would exceed those thresholds can proceed as normal, as consent will still be required here.

It would be sensible for charities to ensure they have appropriate internal procedures in place for dealing with those lower value ex gratia requests. With any such decision then resting completely with the charity, rather than with the Charity Commission, charities will need to consider carefully each decision either to accept or deny a request reputationally or otherwise. That said, it is hoped that these new provisions, once in force, will help charities stave off any issues early on and ease the administrative burden both on them and the Charity Commission.

While charity trustees will be able to delegate their powers to accept or deny an ex gratia request, it is vital that charities put in place robust internal procedures to supervise and ensure the proper use of this power as the overall responsibility of any action taken will still rest with the charity trustees.

Takeaway points

The key takeaway points to bear in mind are that, subject to any changes, once the new rules are in force:

1. charities will be able to take the decision making process of whether to accept or deny a request for an ex gratia payment into their own hands, provided that such payment falls within the thresholds listed above;
2. there must still be a “moral obligation” to make the ex gratia payment;
3. where requests for ex gratia payments exceed those thresholds, charities should continue to seek the consent of the Charity Commission in the usual way;
4. charity trustees can delegate this power to staff to save on time and costs, though the overall responsibility of any action taken will remain with the charity trustees;
5. it is possible for charities to expressly exclude or restrict the use of the power in their governing documents;
6. charities must continue to report these payments in their annual accounts in line with the Charities Statement of Recommended Practice;
7. charities should review their internal procedures to ensure that appropriate measures are in place to deal with the newly afforded power; and
8. the changes will apply to both statutory and non-statutory charities.

For the time being, charities are advised to monitor the situation.