14. Use of conditions to protect discount
14.1. As explained in previous sections, public sector organisations are required to achieve Best Value in their property transactions. In the case of asset transfer to community bodies, disposal at less than market value, or with other support or concessions, may be justified by reference to the expected benefits to be delivered by the project. In that situation, relevant authorities sometimes seek to protect themselves against the risk that the benefits may not be delivered by including clauses in the contract requiring some form of restitution if the project fails.
14.2. It is for relevant authorities to determine whether it is appropriate to include such conditions in the contract (and for community transfer bodies to decide whether to accept the transfer on those terms). The aim of this guidance is to ensure that, if conditions are used, it is done in an appropriate and proportionate way. This form of protection may be supplemented by maintaining relationships with the community transfer body and supporting it to develop its capacity and deliver the project effectively.
14.3. Any conditions which the relevant authority proposes to impose to protect discount should be included in the decision notice, in sufficient detail that the community transfer body is able to decide whether they are acceptable or not. As a result, the community transfer body could seek to challenge them through the review and appeal process.
14.4. Where ownership of the asset is transferred, the main ways of protecting the discount are:
- where a reduced price was agreed in recognition of the benefits to be delivered, the community body may be required to repay the difference in price if the benefits are not delivered.
- where the price was based on a lower valuation for a particular use, conditions may be imposed to return any increase in value to the authority, if the use of the property is changed or the expected benefits are not delivered.
- if the property itself is important to the community, for example due to its heritage or location, arrangements may be made to enable the authority to recover the property if it is no longer used by the community body for the agreed purpose (or the community body is wound up).
14.5. The usual triggers for the implementation of these protections are if the project fails, the community transfer body is wound up, or it seeks to dispose of the property, either by sale or lease, for a purpose other than was expected at the time of transfer. The terms set out in the contract must be clear, setting out the trigger points for the condition to be activated and the basis for calculating any repayment.
14.6. Relevant authorities should note that the constitution of a community transfer body must include provision that its surplus funds or assets must be applied for the benefit of the community. A community transfer body eligible for ownership must have provision that on winding up any surplus property, after the satisfaction of liabilities, passes to another charity or community body (the details depend on the legal form of the community transfer body). This means that any property acquired by asset transfer cannot be used or sold for the private profit of the members of the group. A community transfer body's constitution could, however, allow property to be sold to raise money for the group's activities, if the property is no longer needed or appropriate for delivering those activities. In some cases this is a planned part of the original proposals, that part of the land will be sold to provide funding for other developments, and any conditions would need to recognise this.
14.7. A range of legal mechanisms are used by authorities seeking to protect their interests, including standard securities, and minutes of agreement, which may contain a range of provisions and be linked to standard securities. Some relevant authorities also have powers to create certain types of real burden on title, under the Title Conditions (Scotland) Act 2003. A different range of options will be needed to reflect the individual circumstances of each case.
14.8. Any relevant authority seeking to create a real burden should consider carefully whether it will be appropriate and effective in achieving the desired result. Guidance is available from Registers of Scotland https://rosdev.atlassian.net/wiki/display/2ARM/Types+of+Personal+Real+Burdens+-+Real+Burdens+Part+1
14.9. In most asset transfer cases, there will be other organisations providing funding to the project in addition to any concession given by the relevant authority. Like relevant authorities, funders have a responsibility to ensure that their grants are used effectively and in accordance with the purpose for which they are granted, and they seek to secure this through a range of legal agreements. Where there are multiple contributors each requiring security for their investment then there is likely to be the need for a ranking agreement so that each party understands its position should the project fail, recognising that such a position may not enable each party to recover in full what it has funded.
14.10. OSCR has confirmed that protective mechanisms as described above do not conflict with the requirements for charities. The charity's trustees would need to be satisfied that the arrangements were in the best interests of the charity before agreeing to them. However, on winding up, such arrangements would be dealt with as liabilities or contractual obligations to be settled before any remaining assets are distributed for charitable purposes.
14.11. If the relevant authority has a long-term interest in retaining the property, or does not have the power to sell it, a lease may be appropriate. Long leases (which can be up to 175 years in Scots law) are common for commercial property and may be appropriate for community bodies in such cases. Shorter leases may also be appropriate for a community body that wants to develop its capacity before taking on the responsibilities of ownership. However, relevant authorities should keep in mind the Scottish Government's ambition to increase community ownership, and the fact that key funding programmes may not provide grants for leasing.
14.12. Any mechanisms used to protect the relevant authority's interest must be appropriate and proportionate. Excessive requirements for repayment or conditions on development or change of use could make a project unviable, or restrict the ability of the community transfer body to increase its capacity and develop new projects over time. Proportionality should take into account:
- the value of the concession granted
- the scale of the authority's contribution within the overall project, and
- the time within which benefits are expected to be delivered.
14.13. In some cases the contribution provided by funding bodies may be substantially greater than the value of the concession granted by the relevant authority, or even greater than the value of the property, especially when there is significant redevelopment or new-build planned. Any mechanisms used should therefore recognise the scale of the relevant authority's interest within the overall project.
14.14. The duration of the protection mechanism should reflect the amount of discount compared to the expected benefits. It may be appropriate for the amount to be returned to reduce over the period within which the benefits are expected to be delivered. Any mechanism which restricts the use of the property should take account of the community body's need to develop in the longer term; for example, it should not last longer than the expected remaining life of a building which is transferred.
14.15. Authorities must also consider the level of risk that the benefits will not be delivered, and how effective the chosen mechanism is likely to be in enabling the authority to recover its investment. If the risk of non-delivery is considered to be particularly high, it may be necessary to revisit the decision to agree the asset transfer request. (Any conditions on the transfer should be included in the Decision Notice, and therefore considered before the decision to agree the request is final.) The community body may need to provide more assurance of its ability to deliver, or more support may need to be provided. In the case of a project failure where it is not possible to recover the full amount funded, a robust, documented process will help to show that the initial decision was taken appropriately.
Collaboration and monitoring
14.16. It will often be helpful for the relevant authority to work directly with funders to agree a balance of legal mechanisms to secure the interests of all those involved. There can be misunderstandings about the requirements of different organisations which are best clarified by making direct contact. While these discussions are likely to take place between lawyers, community bodies should be reassured that the aim is to produce a better result for them, with fewer overlapping conditions.
14.17. Where any mechanism is put in place, by a relevant authority or a funding organisation, to ensure that benefits are delivered or property is used for a particular purpose, monitoring of those requirements is also essential. If difficulties arise with a project, support may also be necessary to help the community body get back on track. Where there are several organisations with similar interests, it may be possible to establish an agreement whereby one partner undertakes monitoring on behalf of all, providing other partners with sufficient confidence to reduce the need to impose multiple protective mechanisms. This would also benefit the community body, in reducing duplication of monitoring.
Email: Jean Waddie
Phone: 0300 244 4000 – Central Enquiry Unit
The Scottish Government
St Andrew's House