If your charity is planning a merger, you may need to bring together and manage different property portfolios. Isabella Hendrie from Gerald Eve shares advice on where to start and what to look out for when merging property portfolios.
The number of charities merging has reached a record high according to the Good Merger Index (GMI), fuelled by the Covid-19 pandemic, cost of living crisis, and resulting drive for efficiency.
As charities, social enterprises and other not-for-profit organisations seek to increase their impact and cut costs, property interests can play a pivotal role in the strategy of a merger.
While the benefits for charities of a merged property portfolio are clear, the process can be fraught with administrative headaches and complex decision making.
To best navigate the property side of their merger and meet their fiduciary duties, trustees should be prepared to plan ahead, conduct due diligence and seek advice, being informed of upsides and downsides to a merged portfolio alongside the below checklist of practical actions to make the most of their future charity estate.
Benefits
Charities merging their property assets can benefit from reduced costs, streamlined operations and, if disposals are required, a source of reinvestable capital to put towards funding their charitable aims.
The post-Covid office is a widely recognisable example of these advantages. As staff enjoy the benefits of flexible working, many charities are reporting offices left half (or over half) empty. In a merger, only one office may now be required and any redundant space can be disposed of, freeing up capital or eliminating a rental obligation while cutting holding costs. Meanwhile, staff at the merged office get to know new colleagues from the partner charity: an all-round win.
Potential problems
However, beneath the benefits might lurk problems to work through. Issues that could arise include: vast amounts of time consuming and costly legal paperwork, sudden acquisition of unfamiliar buildings which may require maintenance or have complex titles, inability to immediately dispose of surplus space due to lease terms, the troubled economic climate could make disposals slow, and potentially disagreements could form between merging charities as to which properties should be retained or disposed of.
What does merging property assets mean in practice for charities?
In light of the potential problems, decisions relating to property interests should form part of early merger discussions. The following checklist of practical steps can help charities to prepare ahead of these:
- Start organising – Identify what property is held by the charity and appraise any information available relating to it. This could include obtaining title registers, plans or leases from the Land Registry and Local Land Charges Registry, and any previously conducted valuations.
- Arrange schedules of condition for each property – Summaries of the current maintenance obligations and any repairs or urgent capex costs are useful to inform decisions taken about budgets or whether a property is retained or disposed of. This may include undertaking building surveys.
- Review legal titles – Undertake a full title review and consider any restrictive covenants, charges or undocumented tenancies which may apply or affect the proposed and future uses.
- Estate Strategy Review – Consider the separate property portfolios of the merging parties as a whole and assess the potential for overlap and consolidation. This will involve considering the charities’ joint objectives and requirements in terms of space and facilities, and their existing properties’ current ability to meet these requirements. If there are surplus properties, decisions will need to be made about the method of disposal and the terms achievable, which in most cases will require seeking advice from a qualified surveyor in compliance with the Charities Act.
- Identify potential for generating income – Letting (or assignment/underletting of leases) of surplus space could potentially generate rental returns.
- Valuations – An up-to-date valuation of the merged property portfolio is likely to be required for accounting purposes and will help inform any strategic decision making if the retention or disposal of properties is under question.
- Check your legal obligations – Mergers usually fall within an exemption to the usual requirements on disposing as the merging entities will have compatible objectives and usually the transfer is not at Market Value. If this is not the case, then trustees will need to obtain a Qualified Surveyor’s Report to support their decision to dispose of any property. Ensure you take legal advice at an early stage.
Conclusion
Forward planning ahead of a merger can lay the foundations for heightened efficiency and new, creative uses of space allowing charities’ funds to be put to better use.
The above checklist is also relevant for standalone charities preparing to review their existing portfolios in the face of financial difficulties and for charities considering sharing properties to adapt for a challenging future.