When the Trustees of a charity want to dispose of land or property under Section 36 of the Charities Act 1993, they must ‘obtain and consider a written report from a Chartered Surveyor’ to satisfy the Charities Commission.
This valuation (known as a Section 119 report) differs from formal valuations for loan, security and other purposes. There are also additional requirements if the property is sold at auction or is subject to an overage clause (when a seller – in this case a charity – may be contractually obliged to make a payment to whoever they originally bought it from when certain events occur, usually a time deadline).
When are Section 119 valuations undertaken?
There’s no requirement to obtain professional advice from a qualified surveyor when a charity is acquiring a property, although it’s recommended.
A report must be obtained from a qualified surveyor where a charity is disposing of an interest in land exceeding a term of seven years. This therefore covers sales or longer leases.
Who should undertake the valuation?
This is fundamentally important. If a report is requested for an acquisition it’s understandable that the valuer instructed has knowledge of the charity and its requirements, but they’ll be required to maintain independence and objectivity, therefore usually the surveyor and their firm will have no other interest in the transaction.
Where an asset is being disposed of it’s common practice for the charity to ask for a Section 119 report to be undertaken by the selling agent. The onus is on the Trustees to ensure the surveyor has the appropriate experience, but many Trustees have limited understanding of this process and will require advice on who to instruct.
The key point is that whoever undertakes the valuation is qualified, independent, and objective. That person may well be within the same firm as the selling agent, however it would be hard to justify the same person being both selling agent and valuer. Where independence and objectivity cannot be maintained, a qualified surveyor not involved in any aspect of the disposal should be engaged.
How do Section 119 Reports differ from other valuations?
Overall, there’s an obligation upon the surveyor to report more than just the property’s value to a charity and how they reached that number. For example, the report needs to consider if there are any repairs or alterations the Trustees may need to undertake, the estimated costs of these, and whether it’s sensible for the charity to sell the property. A report dealing with a lease needs to address whether the terms and the obligations of the lease are fair and reasonable to the charity. The Trustees should expect lots of feedback above and beyond a standard valuation.
On disposal, the surveyor must understand the marketing process and be confident that the charity’s selling agent has adequately advertised and marketed the property to achieve the best price. The agents should be asked how long the property has been marketed, where it’s been advertised, and how many viewings and offers were received. The surveyor must be alert to any fraud or negligence and feel confident that the property has been fully marketed and not sold to a developer who has a relationship with the selling agent.
Importantly, and different to other valuations, the surveyor must also stand back and advise the charity on whether it’s in their best interest to alter the property or make adaptions before sale, or whether the land or buildings be divided up, to achieve optimum value.
Selling at auction
If a property is in poor repair auction can be the best method of disposal. In this situation the report needs to consider the setting of a reserve price. The valuer needs to scrutinise the auctioneers’ reasoning behind their recommended price, understand the planning position of the property and whether any offers have been received before the auction. Again, the valuer needs to be objective, but can be from the same firm as the auctioneer if independence can be maintained.
Overage clauses
Tax complications arise where the disposal of a property is subject to an overage clause. The valuer needs to consider the value of the clause, but this isn’t straightforward; in effect, they have to provide an opinion at the date of disposal of the likelihood of the overage clause being activated. Overage clauses are regularly used where there is some certainty in planning potential and for a valuer to give this opinion many assumptions need to be made. A good knowledge of the property is needed and with a clear understanding of its planning position.
Further information
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