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Parliamentary Commissioner for Administration

Selected Cases and Summaries of Completed Investigations - April to September 2000

Volume 3 - 3rd REPORT - SESSION 2000-2001

Chapter 1

CHARITY COMMISSION

1. Case No. C.406/99

Delay and misleading communications to a charity

Summary

A charity complained of misdirection and delay by the Charity Commission for England and Wales in providing them with guidance on how best to transfer the asset value of certain of a foundation's land and buildings associated with a school to a managing company. More specifically they complained of: frequent changes in the Charity Commission staff involved in dealing with them; delay and poor response times; misleading advice most notably at a meeting in March 1995; and misdirection - especially the lack of a definitive statement from the Charity Commission at the outset that a lease arrangement was unlikely to be authorised. They sought compensation for expenses incurred in that connection during the period June 1994 to May 1995.

The Ombudsman found there had been delay and poor service together with communication failures and mixed messages to the charity. He regarded the explanations and apologies offered by the Charity Commission, together with the offer of an ex gratia payment to the charity of £23,000, to be a suitable outcome to a partly justified complaint.

Full text

1. A charity, the trustees of a foundation, complained of misdirection and delay by the Charity Commission for England and Wales (the Commission) in providing them with guidance on how best to transfer the asset value of certain of the foundation's land and buildings associated with a school to a managing company (the company). More specifically the charity complained of: frequent changes in the Commission staff involved in dealing with them; delay and poor response times; misleading advice most notably at a meeting on 17 March 1995; and misdirection - especially the lack of a definitive statement from the Commission at the outset that a lease arrangement was unlikely to be authorised. They sought compensation for expenses of £45,372.30 incurred in that connection during the period June 1994 to May 1995.

2. My investigation into the charity's complaint began once comments had been obtained from the then Chief Charity Commissioner following the Member's referral of the complaint. I have not included in this report every detail investigated by the Ombudsman's staff but I am satisfied that no matter of significance has been overlooked. The foundation and the company were each registered charities in their own right.

Background

3. The Commission have a general responsibility to give advice to and to further the work of charities. The Commission draw a distinction between advice which they might give relating to the legal constitution and powers of charities and trustees, and that relating to their business activities which the Commission regard as matters for the charities themselves and on which the charities may need to obtain professional advice. Section 29 of the Charities Act 1993 (the Act) gives the Commission power to give an opinion or advice on any matter affecting the performance of a trustee's duties.

4. Sections 13 and 16 of the Act gives the Commission power to make schemes for the administration of charities. A scheme is a legal document by which the Commission may amend, replace or amplify a charity's governing document, eg by extending a charity and its purposes if the existing purposes have failed or can no longer be effectively carried out or by amalgamating the charity with others having similar purposes or by giving trustees powers they do not already have. It may deal with all aspects of a charity's administration and become its governing document or may deal with some aspect such as authorising a particular transaction. The time taken to make a scheme varies because each is different. For a charity established as a company limited by guarantee, certain alterations relating to the application of its property are ineffective without the Commission's prior written consent.

5. Under section 26 of the Act, the Commission may make an order to sanction an action which they consider expedient in the interests of the charity. Actions authorised could include engaging in a particular transaction or meeting specified expenditure out of capital or income. Under section 36 of the Act, the Commission may make an order where trustees cannot otherwise satisfy the statutory requirements of that section. That power is also relevant where a charity seeks to dispose of an asset to a connected person where the disposal would otherwise be precluded as being in the interest of the connected person rather than that of the charity. The Commission may not authorise by order an application of a charity's property which is at variance with its governing document. Only a Commission scheme (the more elaborate procedure - paragraph 2.4) can effect that.

6. The income and property of a charity must be applied for the purposes set out in its governing document and for no other purpose. Permanent endowment is property belonging to a charity which cannot be spent for the purposes of the charity; usually only the income arising from it may be spent. Trustees have a duty to preserve and invest permanent endowment in such a way as to produce a good income while safeguarding the real value of the capital. If land forms part of the permanent endowment of a charity the proceeds of disposal (where that has been permitted) will also normally themselves become permanent endowment.

7. A charity requires an order of the court or of the Commission to authorise the grant of a lease to a connected body or person. That does not prevent a charity leasing premises to a beneficiary to be occupied for the purposes of the charity. Subject to certain safeguards, the trustees of a charity may grant a mortgage or charge over charitable land as security for money borrowed.

8. In April 1996, the Commission published a target to reply to general correspondence within 20 working days. They had not previously published a target.

Jurisdiction

9. The Ombudsman is precluded under section 12(3) of the Parliamentary Commissioner Act 1967 from questioning the merits of a discretionary decision taken without maladministration by a body within his jurisdiction. This investigation has been confined to the Commission's administrative handling of the affairs of the foundation (see paragraph 2.10) and the company. Bankers and firms of solicitors, accountants and surveyors acting for some of the parties referred to in this report are not within the Ombudsman's jurisdiction and I mention them and their actions only to put into context the administrative actions of the Commission.

Historical background to the charities

10. A donor appointed the charity as trustees of a school and of the foundation which held land and buildings used by the school and other assets in trust. Over the years a number of schemes (paragraph 2.4) were made to administer the foundation. In 1986 the Commission suggested a further rationalisation and that led to a 1987 scheme. In general, it provided that all of the powers of the company were exercisable by the governors of the school who were responsible for its day to day management and were members of the company. Accordingly since 1987 the school, which is the principal beneficiary of the foundation, has been managed by the company which is itself a registered charity and a company limited by guarantee but not having share capital. The charity, as trustees, had a large measure of control over the governing body of the school and therefore of the company. The school has rights of occupation over land and buildings owned by the foundation but maintained by the company. The company has power to borrow money as necessary for the proper administration and management of the school.

Investigation

11. 1991 In 1991 the charity reviewed their relationship with the school. A matter they then had under consideration was a proposal to make over land and buildings held by the foundation to the company to enable the governors of the school to better manage those assets and have them reflected in the company's balance sheet.

12. 1992 In March 1992 a firm of solicitors acting for the charity, whom I call solicitors X, sought guidance from the Commission about a proposal for the company to borrow money from a bank to fund an expansion of the school, charging as security part of the land and buildings occupied by the school but owned by the foundation; the company were to be required to service the interest payments arising. An alternative proposal which solicitors X mentioned (but said they did not wish the Commission to consider at that point) was for the foundation to lease to the company the land and buildings the school occupied. On 23 April the Commission agreed in principle to the proposed borrowing but suggested that a more straightforward arrangement would be for the foundation to borrow money from the bank and then loan it to the company. Solicitors X told the Commission that their suggestion would create an unnecessary administrative burden. The Commission maintained their view (suggesting that the administrative burden might be eased by the company repaying the bank direct) but did not demur when pressed saying on 28 July that any Commission consent applied for should be in the names of the foundation, the charity and the company to avoid any problems with potential lenders.

13. 1993 In 1993, after internal discussion which noted the complexity of the matter and the correspondence with solicitors X, the Commission issued an order which authorised the trustees of the foundation (i.e. the charity) to mortgage or charge property forming part of the school's grounds and buildings. On 7 September solicitors X approached the Commission about a proposed variation of the order combining the borrowing and mortgaging facilities of the foundation and the company into a single secured facility. They saw that as advantageous to the foundation and the company in that it would reduce interest charges and release some of the foundation's properties from existing charges. The loan would be taken out by the company but it would be the charity as trustees for the foundation who would mortgage the land, not the company. In a second separate letter of the same date (7 September), solicitors X (picking up on the point the charity had had under consideration in 1991 - paragraph 2.11) proposed on behalf of the charity that the foundation should make over to the company the assets occupied by the school as the company was in the difficult position of having responsibility for maintaining buildings it did not own. A member of the Commission's staff, whom I refer to as officer A, sent solicitors X a holding reply on 27 October. On 9 November he said that the Commission were prepared to vary the terms of the 1993 order but would not be prepared to establish such a scheme as had been proposed as the school buildings were permanent endowment of the foundation (paragraph 2.6) and therefore could not be transferred to the company which although also a charity was a limited company and not permanently endowed. Solicitors X wrote to the Commission on 10 November about the variation of the 1993 order sought and separately about the proposed transfer of assets from the foundation to the company. They said that the charity were joining in the proposed loan arrangement to charge the foundation's assets so that the charity would secure a loan which the company would repay; they also said that the Commission had mistakenly read references to the company in the papers as though they were to the foundation. In a separate letter, solicitors X told the Commission that transferring the control and ownership of the assets occupied by the school from the foundation to the company would improve the management of the school. They added that the charity wanted to rationalise the very complicated structure of the foundation but were not seeking to depart from the trusts. Solicitors X reminded the Commission on 30 November of the need for a response on the transfer of assets point.

14. 1994 On 15 January solicitors X reminded the Commission of the urgency of a response to their proposals. Officer A sent a holding letter on 28 January in which he explained the reason for the delay and apologised. He replied substantively on 4 February saying that, while the Commission did not object in principle to restructuring the foundation, the school property was permanent endowment (inaccurately as only part of it was) and must remain so. It could not be transferred to the company. He added however, that the Commission would consider appointing the company as trustee of the school property and hiving off that property as a separate (new) school charity. Officer A asked why there would be financial benefit for the school in the company having greater control over the assets and asked to see a copy of their business plan.

15. On 25 March, officer A told a colleague (whom I refer to as officer E), that he thought they had managed to put off the idea of varying the various schemes of the foundation for the time being but he said he suspected that solicitors X and the trustees were trying hard to put a case together for the Commission to consider. On the same day a supplemental order to that of 1993 (paragraph 2.13) was sealed authorising the trustees of the foundation to increase the charge over the school property.

16. On 12 April solicitors X received advice from accountants acting for both the company and the foundation (the accountants) that setting up a separate charity to hold the school property would not assist as it would not be possible to incorporate those assets into the accounts of the company. Considering other possibilities, the accountants advised that the assets of the company could not be transferred back into the foundation as it had been created to provide a vehicle to limit the personal liability of the foundation's trustees. Also because permanent endowment could not be sold without the Commission approval, the assets concerned had been included in the assets of the foundation at nil value. In those circumstances the accountants proposed that the foundation should grant the company a long lease over the school property. They considered, provided that the Commission did not impose restrictions that would make such a lease valueless, it could be independently valued and included in the company's accounts at a value which would be written off over the life of the lease. (The charity later said that they had agreed with the company that the important objective of the restructuring was that capital value needed to be created in the company's balance sheet to provide security for bank finance.)

17. By this time (spring 1994), so the charity later said, the need to find a solution was becoming acute, with the accountants saying that the company's accounts for the 1993/94 might need to be qualified. (The school was planning to launch an appeal for funds in April 1995 for which it would need to be able to show a healthy balance sheet.)

18. On 17 May solicitors X wrote to a then Charity Commissioner, whom I refer to as Commissioner B, seeking an urgent meeting with him to discuss the advice their firm and the accountants had given to the charity that to satisfy the charities' overall aims the foundation should lease the school property to the company. The Commission's approval was said to be required by mid-August and the solicitors said that given past delays by the Commission in dealing with routine matters they were seeking an urgent meeting. On 3 June, by way of preparation for the meeting, solicitors X wrote to Commissioner B explaining the background to the proposed lease. Given that the Commission had already ruled that the school property could not be transferred out of the foundation as it was permanent endowment (paragraph 2.14) they proposed that a lease should be granted by the foundation to the company. They believed that nothing in the existing schemes relating to the foundation authorised leasing the property; they enclosed draft heads of terms for a proposed lease; and they sought the Commission's formal approval for the lease arrangements.

19. On 13 June, Commissioner B and officer A met representatives of the charity, the company and solicitors X. Commissioner B told the representatives that nothing said in the meeting should be taken as being advice under section 29 of the Act (paragraph 2.3). According to the Commission's note of the meeting, Commissioner B explained that the Commission would not authorise the transfer of the school property to a charitable company; the representatives present had accepted that and had said they would be happy to comply with the Commission's advice. Commissioner B had said he did not wish to be unreasonable or enter into lengthy correspondence and that he was happy for the Commission to take a more pragmatic view and to consider making an order under sections 26 and 36 of the Act (paragraph 2.5) to authorise the proposed lease. The envisaged heads of terms of the proposed lease were discussed in some detail with Commissioner B expressing anxiety about some of the terms: particularly the proposed term of 150 years; the permitted user conditions; and alienation. The Commission noted that the permitted user and alienation terms would have to be in accordance with the provisions of the existing schemes of the foundation. The company were recorded as being concerned that that would restrict the use and possibly therefore the market value of the property. Commissioner B said that for the land and buildings used by the school (the school property) to be used for purposes other than as a school would be a breach of trust but the Commission would consider varying the existing schemes of the foundation to a degree which would be within the Commission's powers; however that would involve further time consuming work in drawing up a new scheme before the lease could be authorised. An order would be required to authorise the lease and a case for doing so would have to be made out but the Commission would be prepared to comment on a draft lease if it was submitted for approval.

20. Solicitors X's own note of the 13 June meeting noted that there was agreement that the best way to proceed was on the basis that if granting a lease could be stated to be expedient and in the interests of the foundation then the Commission would find a way to achieve that. The means would be by way of an order by which a specific right to lease property would be conferred on the trustees of the foundation. Solicitors X noted that the Commission had agreed they would consider: varying the existing schemes as the existing user provisions for the school property were too restrictive; and making a suitable scheme variation enabling the envisaged lease to contain a provision for use of the land and buildings as a school or such other use as the foundation might permit from time to time. Similarly, if the ability to alienate was made subject to the trustees' consent, that too would be broadly satisfactory to the Commission. (Solicitors X later said that Commissioner B had indicated that a variation to the scheme would be considered to allow the lease to be granted.) Solicitors X noted officer A as having said that it would take about two weeks to produce a draft scheme once the charity had set out for the Commission why it was in the interest of the foundation for it to be permitted to grant the company a lease. (The parties did not exchange copies of their respective notes of the 13 June meeting until late 1997, over three years later.)

21. On 23 June solicitors X formally applied to the Commission for an order - and if necessary a new scheme - to enable the charity as trustee of the foundation to lease to the company the school property, they provided reasons why it was in the interests of the foundation to do that, adding that many of those reasons applied to the company also. They said that the Commission had indicated that the best way to achieve this would be through a combination of an order under section 26 of the Act combined with a separate order or a scheme to give the foundation the necessary powers to grant a lease. They acknowledged that the proposed lease would have to contain covenants which, inter alia, would restrict use of the land and buildings occupied by the school to being used other than as a school or for "such other purposes as may from time to time be permitted by the trustee and/or the Commission". Solicitors X said the matter was of the utmost urgency and they were pleased to have been given officer A's assurance that a draft scheme would probably take only two weeks to produce.

22. On 24 June officer A telephoned solicitors X to ask for a draft of the proposed lease so that the Commission could be satisfied that the lease would be executed in the form that had been discussed. Officer A explained that the Commission needed sight of the draft lease to be satisfied that what was being proposed was indeed in the interests of the foundation as well as being expedient.

23. Solicitors X sent a copy of the proposed lease on 28 July. Solicitors X explained to the Commission that the company had engaged separate solicitors (whom I refer to as solicitors Y) to advise them in connection with the draft lease, the principal aims of which were: to enable the company's capital expenditure to be reflected in its balance sheet and to facilitate the effectiveness of the foundation and the company, allowing the latter as much responsibility as possible without needing to refer to the charity. The draft lease contained expanded provisions concerning permitted user and assignment which, solicitors X said, were designed to provide the company with value for balance sheet and borrowing purposes; they said that without those expanded provisions the value of the lease to the company would be dramatically reduced and the whole exercise would become uneconomic. They again stressed the urgency of the proposals. The permitted user provisions in the draft lease were: use as a school and, if the lease was assigned, as " .... a school university other academic institution training establishment offices hotel hospital sports or leisure centre and/or other commercial and/or institutional and/or residential use approved by the landlord (i.e. the foundation) such approval not to be unreasonably withheld". Officer A referred the matter to a colleague, whom I call officer C, for legal advice on 10 August saying that the Commission needed to reply to the letter within two weeks of receipt (i.e. within 2 weeks of 29 July). He said he had expressed to solicitors X his deep concern that they had not complied with the advice given at the 13 June meeting as the draft lease contained user provisions that went beyond those permitted in the trusts of the foundation. He said it would not, in his opinion, be too harsh for the Commission simply to state that the draft lease did not conform with the advice given at the meeting; he believed the Commission could not authorise the lease as drafted.

24. Officer C noted that, under pressure from the charities, the Commission had agreed to a meeting. On 26 August she and officer A met representatives of the charity, the company, and of solicitors X and Y. According to the Commission's note of the meeting, Officer C explained at the outset that the Commission were not disposed to authorise a lease as a lease could only transfer the permanently endowed land into the temporary trusteeship of the company. The Commission would however be prepared to make a further scheme to detach the school property from the charity (I take this to mean the foundation) and make the company the trustee of a new charity which would have legal title to the school property. The Commission could not and would not release permanent endowment from its trusts. The note records the representative of the company as saying that the company wanted a lease that could be valued not only for the purposes of the school but which could be realised if necessary for a greater sum. A lease providing for use of the property only by the school would be worth up to £1m but one with unrestricted user provisions could be worth £2-3m. The intention of the envisaged lease was to enable the school to continue to function but, if the school should fold, to provide a basis for the lease to be realised, to pay debts and return the balance to the foundation - a side agreement would declare trusts over the proceeds of sale of the lease. According to the Commission, the conclusion reached was that any leasehold must be held on trust with the company as trustee; the solicitors would revert to the Commission with a revised draft lease. A note of the meeting made by solicitors Y covered much the same ground but said that the assignment provisions of the lease had been developed since the meeting with Commissioner B. The charities felt that officer C was retreating from the position taken by Commissioner B. They thought the conclusion of the meeting had been that they would review the proposed lease and draft a side agreement which they would present to the Commission - but with no guarantee of the Commission's approval. (The Commission have since said that while a side agreement was discussed they do not accept that they had agreed to deal with the objections to the proposed lease by means of a side agreement.)

25. On 7 October, officer C replied to officer A's minute of 10 August. She said she did not consider the draft lease, or any lease, (my emphasis) to be appropriate to achieve the company's desire to streamline the management of the school. The Commission's view had been for a number of years that a separate trust should be established by way of a scheme to hold the foundation's property that pertained to the school. She said she had told solicitors X that any lease from the foundation to the company could only be within the terms of the trust so that the company would hold the lease as trustee. Officer C added that a similar problem had arisen with the charity in another case and said that the Commission, if and when they ever had the time to do it properly, should attack the question head on and insist that the charity apply for suitable schemes in this and any similar case.

26. On 3 November solicitors X wrote thanking officer C for the meeting on 26 August and very much regretting their delay in following it up. They referred to what they saw as the encouraging meeting with Commissioner B (paragraph 2.19) and sought a reply in time for a meeting of the school management on 26 November, or a further meeting with officer C or Commissioner B. They restated the aims of the charities in seeking authority for the proposed lease arrangement and they advised that not all of the land potentially subject to the lease was permanent endowment. An enclosed map showed the permanent endowment to be mainly where the principal buildings of the school were situated, but to be under 10% of the whole site. They said that the company had expended over £2m in improving the foundation's property; it was questionable whether the improvements made by the company to the permanently endowed property were themselves part of the foundation's permanent endowment. They proposed that the foundation should grant a lease to the company which would declare itself a trustee of the lease; they saw that as following a suggestion made by the Commission at the August meeting (paragraph 2.24). They said the draft lease had been amended to take account of the Commission's concerns; more flexible provisions for permitted user would only arise if and when the school's occupation of the property terminated; and the proposed declaration of trust would attribute some part of the value of improvements made by the company to them, which both charities agreed was fair and equitable. They emphasised in conclusion that the charities agreed that the company needed to show sufficient asset value in their current accounts in order to operate efficiently in future.

27. On 15 November, officer A told solicitors X over the telephone that the Commission could not reply before 26 November and asked what was the source of the land that was not permanent endowment. (Officer A's note of the call records that solicitors X asked if the Commission could advise as soon as possible, in officer A's intended absence, of any similar queries so as to save time.) Accordingly on 24 November another Commission officer (whom I refer to as officer D) told solicitors X that the Commission "would not find [the proposed lease] particularly objectional" but that the main sticking point for the Commission would be the proposal for the company to take £2.25m out of the proceeds of any sale of the school property. Solicitors X continued to press for a substantive reply to their letter of 3 November and on 21 December Commissioner B told officer A that he had spoken to solicitors X and had "sown the seeds of doubt about whether we can agree to widening the terms of the lease." His note records that solicitors X had said that their clients might want to have a meeting to try and persuade the Commission - Commissioner B said he had told them it was unlikely that they would succeed.

28. 1995 On 5 January 1995 solicitors X told the Commission they had been waiting for over two months for a reply to their 3 November letter. In response officer A sent a holding reply on 6 January. He promised a substantive reply within the next four weeks and said that the matter had been referred to another member of the Commission's legal staff (whom I refer to as officer F) for consideration. His letter concluded: "If, your query is urgent ... please let me know". Solicitors X assured officer A on 12 January that the matter was urgent - his remark had come as a surprise to them - as the urgency had been made clear at the meeting on 26 August and in previous correspondence. They asked for a reply well within the four weeks specified and offered to discuss matters with officers A, C or F or Commissioner B.

29. Also on 6 January officer A minuted officer F asking for a reply to be sent by 6 February and saying: "I am constantly being hassled by the solicitors that they wish to have a reply to their last letter (received 4/11/94) otherwise they will take up the matter with Commissioner B. As you can see I have not taken these threats seriously. ... we are hoping that you will be able to knock some sense into the trustees and their solicitors and persuade them to apply for a scheme to hive off the school from the rest of the charity ... Both I and [officer C] are of the opinion that the proposals ... are not acceptable because any lease ... would be restricted to the trusts of the Foundation, which the trustees do not wish to have." Officer A said that he and officer C were no longer responsible for the case. He suggested that it should be handled by the Commission's legal division.

30. On 3 February, officer F told solicitors X that he could not authorise the lease as it stood (my emphasis) because the permitted user clause was unacceptably wide for application to permanent endowment. Officer F added that a further complication was that the objects of the foundation were wider than those of the company. He said he fully agreed, however, that some means should be found to set up an endowment for the school. He offered as a temporary solution to authorise a lease subject to more restricted user provisions, while at the same time pressing on with a scheme to provide the school with an endowment - that he saw as taking a further three months but it would resolve matters for the future. On 9 February solicitors X replied by fax welcoming officer F's agreement that some means should be found of providing the school with an endowment. They said that the assignment provisions in the permitted user clause of the draft lease were meant to act as a check on the wider use provisions whose inclusion was felt to be essential in commercial terms. They requested some idea of the details and mechanics of a scheme to endow the company and in particular if such a scheme would attribute to the company the value of the improvements they had made to the property over the years. On 20 February solicitors X requested a meeting and reminded the Commission again of the charities' need to make quick progress.

31. On 7 March, according to solicitors X, officer F met them; I have seen no record of that meeting or of the outcome of that discussion. (The Commission say they have no record or recollection of a meeting on that day.) On 13 March officer F confirmed to solicitors X that a meeting would be held on 17 March and he enclosed a note as a basis for discussion of a new scheme for the foundation.

32. On 17 March officer F met representatives of the charity, the company and solicitors X and Y. He was accompanied by another (new) Commission officer (whom I refer to as officer G). The Commission made no record of the meeting. (The Commission acknowledge it is clear that a meeting took place on that day.) According to a note of the meeting provided by solicitors X, officer F commented that the scheme drawn up by the Commission in 1987 had not proved as helpful as it might have done and that that should now be remedied. The company's representative said it appeared to him that there had been little progress with the charities' present application since June 1994 when Commissioner B had encouraged the parties to pursue the idea of a lease by the foundation to the company. The company's accounts lacked assets of significant value and were therefore in danger of being qualified; that would be a major difficulty as the school planned to make its appeal for funds. Following officer F's letter of 3 February (paragraph 2.30), the bank had believed that the grant of a lease was imminent and had agreed to advance funds to carry out works anticipating the receipt of appeal funds without which the company would be placed in difficulties. The note records officer F as not ruling out the grant of a lease, possibly on an interim basis, followed by a revised scheme to place both the foundation and the company on a more appropriate footing for the future. Officer F was also noted as saying that his only objection to the proposed lease was that the permitted user clause went beyond the charitable purposes of the foundation. The bank could be referred to the terms of the scheme which would relate to the whole of the land occupied by the school, effectively hiving off the school land and buildings as a separate charity from the foundation. Officer F was also noted as saying that he was well aware of the delays in dealing with the matter in the past and was keen to press ahead; agreeing to provide a "kick about" consultation draft scheme by 24 March and that as part of a 'two stage' proposal the solicitors would submit a revised draft lease to the Commission to be approved by order. Officer F was reported to have agreed that the legal costs of the foundation were properly a first charge on the trust capital and could therefore be met out of that; there is no recorded reference to their subsequent recoupment from income.

33. On 29 March officer F sent a 'discussion draft' scheme to solicitors X and asked for comments to be provided to officer G. On 3 May solicitors X told officer F that the terms of the envisaged lease had been agreed between the charity and the company; other than alterations to the user clause there were no substantive alterations since the Commission had last seen a draft. They asked when the enabling order could be issued and asked for forewarning if it was unlikely to be after the end of next week. Officer F minuted officer G that the user clause of the draft lease was acceptable (my emphasis). (Officer G appears to have had a telephone discussion with solicitors X which communicated that view on 3 or 4 May.) On 11 May solicitors X wrote to officer G setting out the charity's views on the destination of the property to be transferred to the envisaged new school charity in the event that the school itself should fail. On 15 May solicitors X wrote to officer G with a few minor amendments to the draft lease and expressed the hope that they would not delay the granting of the order authorising the lease which they said remained as urgent as ever; they asked for a telephone call with news of the order. On 17 May solicitors X provided information to the Commission and some suggested amendments to the proposed scheme. They asked for the order authorising the grant of the lease and wording of the proposed scheme to be agreed by the Commission by 16 June at the latest.

34. Officer G passed management of the case to another Commission officer (whom I refer to as officer H) on 22 May saying that the order was required by the end of the week and the scheme needed to be taken up during the following week. He said he had told solicitors X that officer H was new to the case and would need time to familiarise herself with it; officer H spoke with solicitors X the following day.

35. On 25 May Commissioner B and solicitors X discussed the case in detail. The Commissioner made a lengthy file note of their two conversations that day. Commissioner B's note records that he had explained that the matter was under review and that he was involved. He asked by when the proposed lease had to be approved as it seemed to the Commission that the proposed scheme would meet all the problems more tidily than the lease. Solicitors X had told him that the operative date would be 16 June. Commissioner B had said that the Commission would be writing to ask for further evidence that the school was viable. While it was easy to see why the proposed lease would be expedient for the company, it was less easy for the Commission to see why it was in the interests of the foundation. There were risks for the charity and the foundation if they were to enter into a lease without an order, especially if the school was going down hill financially; the permanent endowment would be at risk. Commissioner B said that solicitors X had protested "quite reasonably" that the request looked like a very late demand for further information at odds with officer F's indication at the 17 March meeting (paragraph 2.32) that the Commission would be able to make the order authorising the lease. Commissioner B said he had apologised but the information sought was still essential even though the earlier assurance had come from a senior member of the Commission's legal staff. Solicitors X had queried whether what the Commissioner was saying would affect the valuation of the lease which valuers were about to undertake. Commissioner B had said that the terms of the draft lease concerning user and disposal of the leasehold premises were rather wider than had been envisaged at the meeting in June 1994 (paragraph 2.20). Commissioner B said that the Commission had been quite consistent about that and it was only when officer F had come on the scene that the Commission had made any allowance in that direction. He held to what he said was his original view that the lease could not allow activities which were outside the purposes of the foundation. Commissioner B concluded that he would arrange for another Commission officer (whom I refer to as officer I) to write to both solicitors X and Y explaining the problems.

36. Officer I wrote to solicitors X and Y on 25 May (though the Commission later said he wrote on 26 May), saying that proposals for a lease and a scheme were under consideration. For a lease to be granted prior to making the scheme an order from the Commission would be needed. The Commission had to be satisfied that the lease would be expedient and in the interests of the foundation and in that connection the Commission needed to have a copy of the company's cash flow forecast for the next year and a five year business plan. He added that if the lease was to be granted some changes to the terms - including a prohibition against assignment and a user requirement more in line with the trusts - might be appropriate. The Commission appreciated that the matter was urgent and would expedite consideration of it when the information requested was to hand.

37. On 26 May solicitors Y protested to Commissioner B that officer I's letter had come as a bombshell. The charity were said to be furious at what they saw as a last minute objection to proceeding in a way which they saw as having been agreed in principle over a year before and which had cost thousands of pounds of professional fees to implement. They felt that officer I's letter seemed to have been written without regard to the background or negotiations which had taken place. Solicitors Y sought a further urgent and definitive meeting with the Commission which they hoped Commissioner B would agree to chair.

38. Commissioner B replied later the same day saying that the charity's reaction would be understandable if it were accurately based, but it was not; the basis for the proposals now on the table, and about which the Commission had reservations, was not that which had been discussed a year earlier - there were important differences which were in part the cause of the problem. His recollection, which the Commission's notes of the June 1994 meeting confirmed, was that the Commission had said it would not be possible for the lease to go outside the provisions of the existing scheme of the foundation - that remained the Commission's view whatever other suggestions may have been made in the interim. If an order was to be made it was essential for the charities to demonstrate that it was in the interests of the foundation. He apologised that officer I's request had been made late in the day but he presumed the information sought must be readily available. The Commission were prepared to continue trying to find practical ways round the problem and had always done so. Commissioner B also said he had asked another member of the Commission's staff, whom I call officer J, to meet with the solicitors on 31 May to deal with the areas of divergence and the practicalities of putting the Commission in a position to make an order. He suggested a temporary loan of assets from the foundation to the company while a scheme was being made as a possible way forward.

39. On 31 May representatives of solicitors X and Y, along with representatives of the company met with officers J, K, I and H to discuss the proposed lease. According to the Commission's record, officer J apologised for the fact that, "contrary to earlier indications" there remained some substantial difficulties about proceeding with the order authorising the lease, a draft of which had already been forwarded to the Commission. (The charity later said he also began by apologising for the way the Commission had handled the case but hoped that the charities would accept that there was then a new team in place who would do everything possible to find a practical solution.) The Commission's note records that the Commission had said they had to be satisfied that the school was viable and that the proposed lease was consistent with the terms of the charities' trusts. The Commission were told that the school was viable and had a healthy future notwithstanding its substantial borrowings. However, there was a real risk that the accountants would qualify the company's accounts because the charity had withdrawn a general guarantee for the debts of the company. The company thus required a substantial asset, which the proposed lease would provide, before the accountants (in their role as auditors) could certify the company's accounts. The Commission's note recorded that it was agreed that there would be a further meeting the following week with the accountants present in the hope of removing the accounting deadline and thus also removing the need to grant the lease as soon as possible. The charities had been concerned that the Commission had indicated that the lease arrangements would be acceptable and subsequently appeared to be saying something else; the Commission had confirmed they were content to authorise a lease but its assignment and user provisions would have to conform with the charities' trusts.

40. According to the Commission's note all parties were agreed that what was really required was a scheme which would formally appoint the company as trustee of the school site. The site did not then appear on the accounts of either the foundation or the company. The Commission had suggested that the school would have a right of indemnity against the site, in relation to monies expended there with the consent of the charity, despite the fact that the foundation and not the company owned the site. The charities had been concerned that the Commission had not been clear about its position in relation to the proposals to grant the lease; the Commission had apologised for the lack of effective case handling.

41. The note of the 31 May meeting prepared by solicitors X said that the company had been concerned at the time seemingly wasted in preparing a lease, a step which they all understood to have been approved as a possible solution by Commissioner B in June 1994. The time lost had had serious consequences for the company as it brought the prospect of the accountants being unable to sign off the 1993/94 accounts of the company without qualification; that in turn had affected the company's ability to launch their major appeal (it had already been put off). The company needed a strong balance sheet as a firm foundation for the proposed appeal and in their dealings with the bank. Without the expanded user clause the lease would have little value and would not be worth proceeding with. Subject to the outcome of the planned further discussion, the Commission would revise the draft scheme prepared by officer F. (Neither party shared their note of the meeting with the other.)

42. On 8 June a further meeting was held attended by officers J and K for the Commission as well as by solicitors X and Y, also by representatives of the charity and the company. The Commission's note of the meeting records that as the charity were then ready to indemnify the foundation, who in turn were willing to give an indemnity in relation to the liabilities of the company, the difficulty with the company's 1994 accounts was removed. The proposed appeal had been postponed for other reasons. The Commission's note also records that the way to proceed was for the Commission to make a new scheme to constitute a new charity (very much along the lines the Commission had originally proposed) with the company as corporate trustee holding the school property on trust. The Commission would use their best endeavours to get the scheme established by 28 November, a key date for the company. The lease idea was recorded as having been abandoned. Considerable professional costs had been incurred over a two year period and paid by the charity who wished to recoup them from the capital of the foundation rather than from income; the Commission agreed to consider a formal proposal to allow that and would expect the cost to be recouped from income over time.

43. Solicitors X also made a note of the 8 June meeting. It was consistent with that of the Commission in all material respects except for: the appeal had been postponed as a direct result of the time lost trying to secure the Commission's approval to the proposed lease; and, the Commission would try to make the scheme by 14 [the Commission's note had said 28] November. The solicitors also noted [it appears correctly] that officer F, at the meeting on 17 March (paragraph 2.32), had said that the foundation's professional fees could be met from capital but that the present Commission team were then indicating that the expenditure should be recouped from income over time (which the Commission say would have been the norm).

44. On 14 June solicitors X, and on 16 June officer J, asked officer H about progress with the scheme. She sent the solicitors a holding reply on 20 June followed by a revised draft scheme on 28 June. On 18 August solicitors X commented on the draft scheme. On 30 August solicitors X enquired about progress by the Commission. Following further telephone conversations, officer H met solicitors X and Y on 21 September. The Commission agreed 28 November as the target date for completion of the scheme. On 27 September solicitors X sent officer H a memorandum listing which areas of land constituted permanent endowment and which freely disposable property - using acres which the Commission converted to hectares. After further exchanges of correspondence, officer H sent solicitors X a further revised draft scheme. On 31 October a firm of chartered surveyors (the surveyors) pointed out to the charity that the conversions of acres into hectares made by the Commission were incorrect. The Commission had set the decimal point in the wrong place so their measurements were incorrect by an order of magnitude. The charity provided officer H with a corrected schedule of the foundation's land on 21 November, after that had been verified by the surveyors. On 27 November the Commission made the new scheme for the foundation - whereby the property specified (i.e. the land and buildings used by the school) would be administered as a separate charity (the school charity) with the company as trustee - and approved by a special resolution for the company. (The Commission say that the essential ingredients of the scheme were in line with the principles set out in the Commission's letter of 4 February 1994 - paragraph 2.14.)

45. 1996 On 10 April 1996 the Commission made an order sanctioning expenditure from the foundation's permanent endowment of up to £84,831 to meet the costs of its restructuring. On 17 April the then chief executive of the charity wrote to the then Chief Charity Commissioner complaining about the Commission's handling of the matter and asking him to investigate the matter personally. The charity sought financial reparation from the Commission for the time and costs they saw as having been thrown away through no fault of the foundation, some £45,372.30 of the total cost of restructuring having been spent in connection with the abortive lease. The then charity chief executive referred to the 13 June 1994 meeting with Commissioner B who, though he had said the meeting was informal and not constituting advice under section 29 of the Act, had said that if a lease was the best way to add asset value to the company's balance sheet then the Commission would find a way to do that. The then charity chief executive said that negotiations on the draft lease had proceeded with the Commission and others; there had been a long delay by the Commission between November 1994 and February 1995 before a meeting with officer F had taken place on 17 March 1995 and yet the matter had been very urgent as the school's fund raising appeal had already by then been postponed. As a result of the 17 March meeting a draft lease had been submitted to the Commission for approval and a court order obtained. Yet on 23 May the Commission had queried some of the terms and therefore the value of the lease; Commissioner B had then thrown doubt on some of the solutions suggested by officer F. The idea of a lease had been abandoned after further meetings in May and June 1995, at the first of which officer J had apologised for the way the matter had been dealt with by the Commission. The school's delayed fundraising appeal would be launched in May 1996. In response the then Chief Charity Commissioner agreed to look into the matter personally.

46.On 23 May the then Chief Charity Commissioner promised a full response within the next two to three weeks. He replied on 4 July saying that, after personally examining the papers, he could not accept the complaint about the way the matter had been handled by the Commission. He said that the charity had first approached the Commission with their initial proposals in June 1994. Throughout the Commission had shared the wishes of both the foundation and the company to find a practical solution that would be in both their interests. The June 1994 proposal to authorise a grant of a lease had posed a difficulty as the school property was subject to the trusts as provided by the schemes of the foundation. Any lease for which authority was granted would have had to be confined to the terms of those original trusts and would have had little commercial value. It had seemed to the Commission that the best solution was to appoint the company as trustee of the school property on the basis of the original trusts, a proposal eventually realised with the making of the scheme in November 1995. Doubts about the lease proposal had been raised by Commissioner B in June 1994 and the eventual trustee scheme solution had first been suggested by officer C in August 1994. The Chief Commissioner said that if the Commission's suggestion had been taken up at the outset much of the delay and expense could have been avoided. He regretted that the matter became so protracted but the Commission's advice (that a lease inconsistent with the foundation's trusts could not be authorised) had been consistent throughout. He accepted that officer J had acknowledged that the case might have been better handled in that the Commission should have taken a firmer stance over the right way forward. Officer J, like other Commission staff, had always been clear that the problem had been caused by the failure (of the charities and their advisers) to recognise the deficiency of the lease approach.

47. The charity replied on 3 August continuing to complain that, on the basis of advice given by the Commission, considerable time had been spent and professional fees incurred on a lease project which the Commission had later called into question by officer I's letter of 25 May 1995; there had also been considerable delays by the Commission. The charity did not accept that the Commission's advice had been consistent throughout. Specifically they said that on 13 June 1994 Commissioner B had been prepared to consider modifying the then existing scheme to allow a lease to be granted, further work had been done and a draft lease had been submitted to the Commission on 28 July 1994. On 24 [sic - it was 26] August 1994 officer C had agreed to deal with the objections to the proposed lease by means of a side agreement and further work had been carried out. On 17 March 1995 officer F had advised that it would be possible for the foundation to grant the company a lease. As a result much intensive work had been done before the Commission had indicated on 25 May that they would not agree the draft lease without alterations which would drastically reduce its value. The charity hoped the then Chief Commissioner would accept they were unlikely to have pursued the lease as they had done in the face of clear and consistent advice to the contrary from the Commission. The Commission had indicated that the concept of a lease was itself acceptable and could be carried through subject to alterations to the scheme governing the foundation. The importance of proceeding expeditiously had been made clear to the Commission from the outset and the very long time it had taken to resolve matters had necessitated the postponement of the school's important fund raising appeal. The long delays in correspondence and the ten or so different Commission officials dealing with the matter had been a grave frustration to the charities. The charity invited the then Chief Charity Commissioner's further comments.

48. The then Chief Charity Commissioner sought advice from colleagues on the charity's letter of 3 August and replied on 26 September. A protracted correspondence then followed: the charity replied to the then Chief Charity Commissioner's letter on 19 November requesting a meeting; on 25 November the then Chief Charity Commissioner asked which points remained in dispute and how a meeting would resolve them where correspondence had failed; the charity responded on 6 December again asking for a meeting.

49. 1997 On 3 January 1997 the then Chief Charity Commissioner said he would arrange a meeting if it would help but he was still perplexed as to what the charity were requesting. On 20 January the charity again repeated their request for a meeting; they enclosed copies of file notes of past meetings to support their view that a meeting would be preferable to lengthy correspondence. The then Chief Charity Commissioner did not reply until 8 April when he said that an unstructured meeting would result in a diffuse discussion; he asked the charity to propose an annotated agenda. The charity replied on 22 April yet again asking for a meeting and a contribution to the charities' additional costs previously put at £45,372.30. On 1 May the then Chief Charity Commissioner said he was surprised that the charity were only then indicating that they were seeking payment and for a precise, but unexplained, sum of £45,372.30. On 15 May the charity reminded the then Chief Charity Commissioner of their letter of 17 April 1996 (which had advised of costs incurred of £45,372.30) and once more they repeated their request for a meeting. The then Chief Charity Commissioner replied to the charity on 19 May denying any responsibility for fees they had incurred but saying that the Commission accepted they would have to proceed to a discussion.

50. At a meeting held on 29 September attended by the then Chief Charity Commissioner and officer J for the Commission, and by representatives of the charities, the then Chief Charity Commissioner said he was at a loss to understand the complaints being made by the charity. The charity sought a contribution from the Commission for the additional costs incurred which they said had been caused by the Commission's handling of the case. The Commission denied that any payment was merited. It was agreed that the Commission thought the charities had pursued a lease despite their contrary advice; the charities and their advisers felt that the Commission had agreed in principle to a lease in a form that would satisfy the company's commercial requirement. The then Chief Charity Commissioner asked for a detailed response to the points made by the Commission in correspondence and a breakdown of the charities' costs and he agreed to consider a request by solicitors X for copies of the Commission's file notes of their various meetings.

51. Further exchanges of correspondence ensued, with the charity and solicitors X continuing to press the Commission for a contribution to the professional fees that had been incurred in respect of work on the abortive lease. In that correspondence solicitors X accepted that the Commission's letter of 4 February 1994 had contained "part of the eventual solution but not the whole answer" [their emphasis]. Also solicitors X said that at no stage prior to the 31 May 1995 meeting had the Commission indicated that a lease could not be granted which had an inherent value. In response to that the then Chief Charity Commissioner said on 8 December that the Commission had carried out several thorough reviews of their files but their view remained unchanged.

52. 1998 On 27 March 1998 the charity referred the matter to the Member following earlier contacts with him. They complained of maladministration between June 1994 and May 1995 citing: frequent changes of Commission personnel; frequent poor response times; misleading advice, most notably from officer F on 17 March 1995; and the lack of a definitive statement from the outset that the granting of a lease that would enable the school to show a valuable asset in its balance sheet was unlikely to be a viable proposition. They said that the eventual solution had emerged at their suggestion on 31 May 1995 (paragraph 2.40) and that that solution was not the same as the suggestion made by officer A in February 1994 (paragraph 2.30).

The Charity Commission's comments on the complaint

53. The then Chief Charity Commissioner sent me the Commission's response to the complaint on 2 November 1998. The Commission denied that they had been culpable of misdirection or unreasonable delay. They said their advice had been consistent throughout and that a lease could only be authorised by an order given by the Commission if the user terms of the lease were limited to the original trusts of the foundation. The Commission said that the optimum solution, and the one eventually pursued, was for a scheme to be made by the Commission relating to trusteeship of the school property as raised by the Commission in February 1994; and that despite that the charities and their advisers had persisted unreasonably with their proposals for a lease.

54. The Commission went on to say they had not given misleading advice; they had given clear advice at the outset - the June 1994 meeting - that a lease had to be restricted to the trusts of the foundation; they had only continued to respond to the lease proposals because the charities and their advisers had persisted with it; and even then they had been very clear about the restricted terms of any lease they could authorise. The Commission said the correlation between the user provisions in the lease and the value of the lease were well known to the parties (they referred to solicitors X's letter of 28 July 1994 (paragraph 2.23) as evidence of that); having pointed out the restrictions that would have to be imposed on the lease if the Commission were to authorise it then the implications from a valuation point of view were clear. The Commission went on to say that their role was to give advice relating to the legal constitution and powers of charities and to vary trusts or authorise transactions to make charities' work more effective - but that the administration and business activities of charities were matters for the trustees of the charities concerned and their professional advisers.

55. The then Chief Charity Commissioner said that the Commission did not accept that they had mishandled the case. They had expressed regret that it had taken so long to resolve but the delays had not all been on their side. The charities had persisted with the idea of a lease despite the difficulties which the Commission had raised with them; the Commission could not impose the scheme solution on the charities and had been bound to deal with the lease proposed as it had been put to them. They saw the matter as having become protracted because of that.

56. In so far as the numbers of Commission staff involved with the case was an issue, the Commission said that from 1993 until early 1995 the case officer had been officer A (apart from a temporary allocation for a short period to officer G), he was then succeeded by officer H. Officer A had taken legal advice from officer C, then officer F; officers I and J as senior legal advisers had become involved in May 1995 in an effort to resolve the impasse that had by then been reached. Commissioner B had become involved by way of responding to direct approaches to him by the foundation's solicitors. The Commission did not accept that the difficulties in the case had been exacerbated by the numbers of staff involved. There had only been two principal case officers involved from 1993 to 1995, others had been involved only to give legal advice and to assist in resolving the issues that had arisen.

57. Officer J subsequently told the Ombudsman's staff that the Commission operated case teams consisting of a case officer supported by a legal advisor. The original case team had been replaced for organisational reasons. The replacement team's handling of the case had been inappropriate and they had been replaced by a third and more senior team who had brought matters quickly to a conclusion that had satisfied the needs of both the charities and the Commission. While the Commission accepted that many hands had played a part in the matter and that the charities had sometimes found that difficult, they considered that the Commission had given consistent messages throughout. The Commission said they had always insisted the terms of any lease must be consistent with the charitable trusts. Although, with hindsight, it would have been better to be less forthcoming in discussing possible variations in the trusts; it would have been possible to vary them but the charities would have had to make a case for doing so - which they never did. The Commission felt that there were some instances of delay by the charities and their advisors as well as by the Commission.

58. The Commission said they could authorise a lease if persuaded that it was expedient for the charity concerned (paragraph 2.5). The trustees' case was essentially that a long lease to the company would enable the company to raise finance by bringing a capital asset onto the balance sheet. The grant of any lease which was broader than the trusts of the foundation, and/ or gave an indication that the lease could be assigned to third parties for value, was beyond the Commission's powers. User and assignment provisions could have been drafted not only to satisfy the Commission's requirements but to also be sufficient to allow the lease to be treated as a capital asset by lending bankers. If that were so the Commission could have considered whether a scheme could be made which would broaden the trusts of the foundation so far as the school was concerned and allow broader user provisions to go into the lease. Any scheme of this kind would have had to satisfy the requirements of sections 13 and 16 of the Act (paragraph 2.4), ie a case would have had to be made that the trusts had failed or ceased to be a suitable and effective method of using the property. No case was put and so the Commission could proceed with no such scheme. At the June 1994 meeting (paragraphs 2.19, 2.20) it was said that a lease option would be technically possible if a case could be made but subsequent technical examination indicated difficulties about this. As an alternative, a scheme under section 16 (paragraph 2.4) could have been made appointing the company as trustee of the foundation so far as the school was concerned. The Commission said this was the course proposed by officer A in February 1994 (paragraph 2.14) and by officer C on 26 August 1994 (paragraph 2.24) and which was adopted by the parties in June 1995 (paragraph 2.40). The Commission accepted they had misdirected the charities in March 1995 in saying that the user clause in the draft lease was acceptable when it was not. Officer J said that he and Commissioner B had discussed matters on or about 25 May 1995, at about the time when Commissioner B had begun to encourage the charities and their advisors to turn away from the lease option. (The Commission are unable to provide any record of this decision.) A lease had always been a viable way forward for the charities, and one which they could legitimately adopt, but the Commission said they had always believed it was not the optimal approach. The Commission say they believe that should have been immediately apparent to the advisors if not to the trustees. The Commission say they only continued discussions on the lease, in the light of their philosophy of customer care and in the knowledge that the exercise of their powers in this regard is consensual, because the charities were adamant that a lease was what they wanted. The Commission said their approach had to be reactive, responding to the charities' proposals; they said they could not be proactive and urge a different course of action upon the charities where the charities had clearly rejected an alternative course. Commissioner B told the Ombudsman's staff that his remarks (paragraph 2.19) about the Commission taking a more pragmatic approach did not mean, and were not intended to mean, overriding legal requirements; he was sure that would have been well understood by solicitors X at the time.

Findings

59. I consider first the charity's complaints of delay and of frequent changes of personnel by the Commission. Although I have not seen evidence of gross delay in dealing with any single piece of correspondence there was a consistent pattern of delayed responses.

60. Early in the sequence of events the Commission's letter of 4 February 1994 was a reply to a letter from Solicitors X of 10 November 1993, sent almost three months previously. The Commission accept that the time taken to reply was too long, particularly as solicitors X had indicated that the matter was urgent (paragraph 2.14). The charity and solicitors X continued to emphasise why matters were urgent. Regrettably, however, although officer A received solicitor X's letter of 28 July 1994 the next day he did not pass it to officer C until 10 August, saying then that she needed to reply within two weeks of receipt, i.e. within two weeks of 29 July - the next day. Although the matter was taken forward at a meeting held on 26 August, officer C did not reply to officer A's 10 August enquiry until 7 October (paragraph 2.25). Neither of them contacted the charities or their advisers until some time later.

61. Later, officer A sent a holding reply to the solicitors' 3 November 1994 letter (paragraph 2.26) on 6 January 1995 promising a reply in four weeks and asking to be told if the matter was urgent - which solicitors X assured him promptly and with understandable irritation that it was (paragraph 2.28). Officer A referred the matter for advice to officer F asking him to reply within four weeks, a disappointing timescale given the two months' delay that had already occurred; officer A finally replied on 3 February. (Officer A's remarks to his colleague about him being "hassled" - for a reply to a letter that had gone unanswered for two months - were also unjustified.)

62. The Commission's delays continued even after the eventual issue of the new scheme in November 1995. On 17 April 1996 the charity complained to the then Chief Charity Commissioner about the Commission's handling of their case (paragraph 2.45). There was subsequent delay in the ensuing correspondence on the Commission's part and it was not until 29 September 1997 after repeated requests from the charity that a meeting finally took place.

63. However, the Commission have told me (paragraphs 2.55 and 2.57) that the delays were not all on their side. I acknowledge that. For example, when officer A asked for sight of the draft lease on 24 June 1994 solicitors X did not send it until 28 July (paragraph 2.22); on 3 November 1994 solicitors X wrote to officer C to follow up the 26 August meeting, regretting the delay; but solicitors X did not comment on the draft scheme of 28 June 1995 until 18 August (paragraph 2.44). Even so, those delays which were not the fault of the Commission apart, I see the charities and their advisers as not receiving the prompt service from the Commission to which they were entitled. I criticise the Commission accordingly.

64. Turning next to the charity's complaint of the number of Commission personnel who were engaged in their case, I accept at the outset that any organisation may have to deal with unavoidable changes of personnel. No criticism should arise from that. However I set out in the table below which Commission personnel attended which of the meetings held during the period June 1994 to May 1995.

Meetings attended by officers A-K and Commissioner B, June 1994 - May 1995.
Date of meeting	A	B	C	D	E	F	G	H	I	J	K
13/6/94
26/8/94
7/3/95
17/3/95
31/5/95
8/6/95
21/9/95

Team 1: case officer A and legal adviser C
Team 2: case officer G and legal adviser F
Team 3: case officer H and legal adviser I

65. The table shows that no one of the eleven Commission people involved attended more that two of the six meetings that were held - some of the Commission staff involved did not meet the charities at all. While I note the Commission's comments (paragraphs 2.56 and 2.57) - and their objection that their staff operated in teams of a case officer with supporting legal adviser and that only the second change of team was unplanned and then made for good reasons - I see the complexities inherent in the issues and in the structure of the charities as imposing a steep learning curve on each new entrant upon the scene. The Commission accept that many hands played a part in the matter and that was unsatisfactory for the charities (paragraph 2.57). I consider that the Commission should have done more to maintain continuity; in that respect too, therefore, the level of service the Commission provided to the charities was below that which they were entitled to receive. The Commission's third and final team brought matters to a conclusion that appears to have satisfied the charities' aspirations.

66. Turning to the nub of the outstanding issues, the charity complained that the Commission gave no clear statement at the outset that the grant of a lease enabling the school to show a valuable asset in its balance sheet was unlikely to be feasible. The Commission referred to the proposal in their letter of 4 February 1994 (paragraph 2.14) and said in their response to the complaint (paragraph 2.54) that they did give clear advice at the outset (at the 13 June 1994 meeting) that a lease would have to be restricted to correspond with the trusts of the foundation. They have said that they only continued to respond to the lease proposals because the charities persisted with them - in the Commission's view unreasonably - and that the implications for the value of the lease of the restricted terms they could authorise were well known to the parties and their professional advisers.

67. The problem that the charities faced was that the company ran the school on property which the foundation owned. When the company improved the property, the benefit accrued to the foundation and not to them. The company had no substantial asset in their balance sheet although the charity were effectively guarantors for them. That mattered little for day to day purposes but became a concern once the accountants saw a possible need to qualify the company's accounts. That gave rise to a pressing difficulty as the company wished to borrow substantial funds from their bankers and to launch their important appeal for funds in order to expand the school. Both matters needed the company to demonstrate that the school had a promising future and was financially sound. The Commission knew the charities' aspirations in general terms from 1992 (paragraph 2.12) and that they regarded the matter as urgent by May 1994. They were aware of the fund raising appeal by March 1995 (paragraph 2.32). The idea of a long lease was proposed to the company by the accountants in April 1994 and specifically put to the Commission soon afterwards (paragraph 2.18). Solicitors X told the Commission from the outset that the charities recognised that they could not depart from the terms of the trusts (paragraph 2.13). I consider that the charities and their advisors took proper steps to advise the Commission of what they wished to achieve and the reasons for that.

68. I see the 13 June 1994 meeting with Commissioner B as pivotal. There are some differences in the Commission's account of the meeting and that of solicitors X. It is unfortunate that those differences were not exposed until some time later after the event. With hindsight, it is clear that a contemporaneous exchange of the respective notes of the meeting might have avoided many of the subsequent misunderstandings. According to the Commission's account of the meeting (paragraph 2.19), Commissioner B said that the Commission were happy to consider an order to clear the way for a lease and would not be unreasonable in their approach. He cautioned that the provisions of the schemes of the foundation must constrain the terms of the lease and he was anxious about the proposals from the charities in that respect. However, he did offer to be "pragmatic" and to consider a case for varying the schemes to suit the proposed lease - by making a further scheme if within the Commission's powers if necessary - though he did not welcome that as it would be time consuming. He also said that the Commission would comment on a draft lease. That meeting, and the commitment by a very senior member of the Commission, I see as setting a pattern for most of the next year with the charities taking encouragement from the Commission's high level assurances of pragmatism and Commissioner B's offer that the Commission would comment on a draft lease. From that point on I see the Commission's officers as being effectively constrained to follow the Commissioner's lead and to accept the principle of a lease, within the limits set by the trusts. The Commission's apparent willingness to consider some form of lease and to adjust the existing schemes I see as having encouraged the charities and their advisers to pursue the lease idea as a pragmatic and realistic solution. While officer C on 26 August clearly had reservations (paragraph 2.24), I do not see evidence that she or other Commission staff clearly and unambiguously ruled out the idea of a lease as a practical proposition (given what the charities had already made clear that they wanted to achieve) or communicated that to the charities and their advisers until officer I's "bombshell" (as the charities saw it - paragraph 2.36) of May 1995. What the Commission did, however, was to flag up internally their objections to the concept of a lease arrangement in principle. (Officer C's minute of 7 October 1994 is an example.) The Commission failed to communicate their views promptly and gave mixed messages when they did.

69. The Commission's comments to me on the case have concentrated on the advice they say was given by all Commission representatives, including Commissioner B on 13 June 1994 (paragraph 2.54) that the lease had to comply with the trusts of the foundation. The Commission say that - apart from a few weeks in spring 1995 - they were not guilty of general misdirection of the charities. I agree, but making due allowance for the complexity of the issues and the presence of professional advisers I do not see the Commission as making their position as clear as they should. I also see the Commission as having underestimated the formative influence on the expectations of the charities and the actions of Commission officers of Commissioner B when pledging pragmatism and in discussing the proposed lease at length with the charities; although he did say that a case would have to be made if a scheme was found to be necessary because of the user restriction under which the lease would have to be granted. I regard it as reasonable that the charities were encouraged by that (as evidenced by the Commission's own account of the 13 June 1994 meeting and more so by solicitors X's account) to persevere with the lease idea. Subsequent correspondence showed that if Commission staff were strongly opposed to the lease idea they did not tell the charities. The Commission have told me (paragraph 2.53) that they had advised the charities since February 1994 of the optimum solution (the one eventually adopted) to their problem. I agree that the Commission had given that advice. I do not see that the Commission were themselves consistently clear on the need for a scheme (see paragraph 2.15 for example).

70. That the Commission gave some very mixed messages in June 1994, and in subsequent correspondence, I see as leading the charities to entertain what ultimately proved to be false hopes that the proposed lease could represent a feasible way forward which the Commission would support. The lack of clear direction - which was not helped by the subsequent actions of Commission staff - has led me to conclude that the Commission did not make as plain as they should their objections to the lease proposal. I consider this aspect of the charity's complaint to be fully justified in respect of the period between 13 June and 26 August 1994. I do not see matters as being so clear cut after the 26 August meeting. The Commission had, according to their note, orally (although at a level junior to that of the Commissioner) given advice that they were not disposed to grant a lease. However, that was not directly followed up by a written explanation of their position, and when officer F wrote on 3 February 1995 matters were still expressed in terms of a lease not being authorised as it stood (paragraph 2.30). That, coupled with officer F's further comment that some means should be found to set up an endowment for the school leads me to conclude that even after 26 August 1995 the charities and their advisers would still have had reason to believe that their lease proposals were not being ruled out on principle. I deal with the period after 17 March below (paragraph 2.72).

71. The Commission have said that the implications of the restricted user provisions of the lease for its potential commercial value were well known to the charities (paragraph 2.54). I find that that was well recognised by both the Commission and the advisers to the charities - see for example paragraph 2.23 - at all relevant times. I find no fault on the part of the Commission in not pointing it out to them.

72. A specific aspect of the charity's complaint was that misleading advice was given by the Commission on 17 March 1995. In their initial response to me about the complaint the Commission made only a brief reference to the 17 March meeting but agreed that officer F had misdirected the charities in saying the user provisions of the draft lease were acceptable. I found no record of either the 7 or 17 March meetings in the Commission papers I have seen. Accordingly I have had to rely on the account by solicitors X. Commissioner B, who made an extensive file note of his discussions with solicitors X on 25 May 1995, apologised that an assurance given by officer F on 17 March that the lease could be authorised had been premature and could not be honoured without the charities providing the Commission with further information (paragraph 2.35). It seems that officer F had sought a pragmatic way forward and had not ruled out the grant of a lease, possibly as an interim measure, followed by a revised scheme to fit the charities for the future (paragraph 2.32). (I recognise that he had warned that the user clause could not go beyond the foundation's charitable purposes.) In providing a draft scheme officer F paved the way for the eventual solution. He agreed, however, to the charities submitting a further draft lease for the Commission to approve by order. On 3 May officer F told officer G (who it seems passed the information to solicitors X) that the user clause of the draft lease was now acceptable (paragraph 2.33). On or about 25 May 1995, Commissioner B and officer J met and agreed that the Commission should no longer support the lease option (paragraph 2.58). Also on 25 May Commissioner B and a further member of Commission staff, officer I, told solicitors X that, despite what officer F had told them on 3 May, the user terms of the draft lease were not yet acceptable. They asked for additional information.

73. A further meeting took place on 31 May 1995 at which yet another Commission lawyer, officer J apologised that difficulties still remained with the proposed lease (paragraph 2.39). It was agreed at that meeting to move directly to a scheme and at a further meeting on 8 June the idea of a lease was finally abandoned (paragraph 2.42). I find that as a result of officer F's efforts to resolve the situation - although they were well intentioned - the charities were misdirected by the Commission from 3 May until the position was finally clarified at the meeting of 31 May. Between 17 March and 3 May, officer F had not departed significantly from the position of Commissioner B and his colleagues in progressing the lease option and I recognise that he had advanced matters helpfully by bringing forward the draft of a new scheme which was the eventual solution.

74. On 17 March 1995 officer F apparently told the foundation that they could meet the professional fees they had incurred in the transactions from the capital of the foundation (paragraph 2.32). (The Commission say that they had always assumed, and say they believed the charities' advisors should have known from the Commission's publications, that these sums would later be recovered from income. I have found it difficult to read that interpretation into the papers I have seen.) However the Commission subsequently challenged that and asked the foundation to put a formal proposal to them for consideration (paragraphs 2.42 and 2.43). I see the Commission as having initially misdirected the foundation in that matter.

75. I accept that the affairs of the charities were highly complex and that an eventual decision that a particular path is not viable does not of itself mean that it was culpable to have examined it. I accept too that the Commission have a difficult balance to strike in giving advice to charities and their advisers. That said, while I do not see general misdirection by the Commission I do see misdirection in respect of the specific matters I have mentioned at paragraphs 2.72 and 2.74, and I see them as at fault, for longer periods in delaying and acting with insufficient clarity and consistency. The charities have said that between June 1994 and May 1995 they incurred costs of £45,372.30 in pursuing the abortive lease option and have sought compensation from the Commission for that sum. I asked the present Chief Charity Commissioner if, in the light of my findings, he would look again at that claim and at the part the Commission had played in the charities incurring those costs with a view to considering appropriate redress. He said that in the light of my findings he had concluded that it would be appropriate to offer, without prejudice, an ex gratia payment of £23,000 in full and final settlement of all claims arising from this case.

Conclusion

76. I regard the explanations and apologies offered by the Commission, together with the offer of an ex gratia payment to the charities of £23,000, to be a suitable outcome to a partly justified complaint.

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Last updated: 4 April 2005