Law Commission consultation outcomes could seriously impact housing associations

On 17 September, the Law Commission issued a consultation on provisional proposals to reform the law governing community benefit societies.

Community Benefit Society (“CBS”) status is the most popular structure for registered housing associations. As a structure it:

1. provides corporate personality once registered with the Financial Conduct Authority;
2. focuses on carrying on business “for the benefit of the community” aligning with housing association’s aims and ethos;
3. has no principal regulator appointed to regulate charitable CBSs, meaning that regulation is light touch; and
4. means that registered housing associations benefit from exempt charity status so that charitable tax benefits are available but without the need to comply with the obligations in the Charities Act 2011 on disposals of land or on audits.

The Law Commission’s aim is to identify changes to the legislative framework which would modernise the law, and support a more proportionate and effective regulatory environment.

So, if the Law Commission’s proposals are accepted and implemented, what would the impact on registered housing associations be?

Regulation as non-exempt charities

Charitable CBSs cannot currently register with the Charity Commission. The Law Commission’s concern is that there is therefore no principal regulator for charitable CBSs. When the Co-operative and Community Benefit Societies Act 2014 (CCBS Act) was passed, the intention was that a principal regulator would be appointed who could liaise with the Charity Commission when needed, but this has not happened.

The Law Commission has therefore suggested that all charitable CBSs should register with the Charity Commission and become non-exempt charities in order to ensure better regulation.

This would have some significant disadvantages to housing associations currently registered as a CBS. Most notably, the housing associations would no longer be exempt from complying with the rules on disposals of land set out in s117-121 of the Charities Act 2011.

These rules state that a charity cannot dispose of land (and this includes sales, leases, surrenders and deeds of easement) without an order of the court or of the Charity Commission, unless the charity complies with a statutory procedure instead.

This statutory procedure involves the trustees obtaining a written report from a qualified surveyor, estate agent or agricultural valuer on the proposed disposition acting exclusively for the trustees. The trustees must then decide that they are satisfied, having considered the adviser’s report, that the terms on which the disposition is proposed to be made are the best that can reasonably be obtained for the charity. Statements must be inserted into the documents evidencing compliance with the Charities Act 2011. If an order is not obtained or the statutory procedure is not followed, then the transaction can be voidable.

If these provisions applied to housing association, this would cause increased costs and administration in obtaining the report for every disposition, and will increase the time that transactions take to get to exchange.

Help may be at hand, however, with an exemption in the Charities Act 2011 at section 117(d), where housing associations are granting leases to tenants. This allows the granting of a lease to any beneficiary under the trusts of the charity where the lease:

1. is granted otherwise than for the best rent that can reasonably be obtained; and
2. is intended to enable the demised premises to be occupied for the purposes, or any particular purpose, of the charity.

Whilst there is no doubt that the second limb of this test would be satisfied, the rent will need to be assessed on a case-by-case basis. If the best rent is being charged, then the report from the designated adviser will be required. If the rent is reduced, then the report will not be required.

A new statutory definition of a CBS

The current definition of a CBS gives the Financial Conduct Authority (“FCA”) a very large discretion when deciding whether to accept an organisation as a community benefit society. Currently, the only test is whether the society can satisfy the FCA that “the business of the society is being, or is intended to be, conducted for the benefit of the community”. This test will be maintained, but a new requirement will be added that “membership is voluntary and open to all, with one vote per member”.

For housing associations who have based their rules on the National Housing Federation Model Rules 2015 (“NHF Model Rules”), these already include a clause confirming that there is only one vote per member. However, the issue will arise if “open to all” is construed as meaning that a CBS cannot decline new members or limit the number of members. This will conflict with the NHF Model Rules, as these grant boards the power to accept or reject applications for membership in their absolute discretion. A change to this power would dilute the control of the Board and any parent company where it has a CBS as a subsidiary. The intention is that this change would have retrospective effect but there will be an 18-month period for necessary amendments to rules to be made.

Shares

The Law Commission makes several recommendations about shareholding in CBSs. All CBSs have shares, and members’ liability for debts incurred by the CBS is limited to the amount of their shares. The CCBS Act can appear uncertain as to whether these shares are transferable or withdrawable as these are not defined. Withdrawable shares are those that can be “cashed in”, such that the society pays the value of the share to the shareholder in exchange for the share being cancelled or returned. Transferable shares can be passed from one person to another, such that the transferee holds that share in place of the transferor. Clarity on the rules around shares would be welcome and may enable CBSs to raise funds through investment, but the issue of charitable funds being used to pay for withdrawable shares would need to be investigated. An interesting idea raised by the Law Commission consultation is whether a new type of non-user investor share should be recognised by statute to allow investment in a society. If so, what characteristics should this have?

Transfer of engagements

With mergers currently high on the agenda of many housing associations, the changes proposed by the Law Commission could make this easier by allowing any transfer of the CBS’ property when it transfers its engagements to, or amalgamates with, a company to vest without a conveyance. This would align the law with that of a transfer of engagements between societies.

Administrative wins

The proposals suggest two changes that should help with administration. The first is by amending the CCBS Act to expressly allow virtual or hybrid meetings (as well as physically in person). The second would permit a CBS to execute a document by one authorised signatory and a witness rather than the two authorised signatories that the law currently requires. The Law Commission is also proposing that a CBS should be able to appoint an attorney by deed to execute documents on its behalf.

Consultation on these proposals, and the others in the Law Commission’s report, has begun and will run until 23:59 on Tuesday 10 December 2024. Responses to the consultation may be submitted by online form or by email.