Welcome to the Spring/Summer 2024 edition of Hempsons’ Charities and Social Enterprise Newsbrief.

We like to set the scene beyond the law, and with a perspective from someone outside Hempsons. In our Spotlight section on Social Club its founder, Craig Dearden-Phillips, looks at the likely environment social entrepreneurs will find themselves working in over the next year.

Where we can most help is by providing guidance on issues which could impact, either for good or bad, on the way you work. We split these into two areas; firstly, where a new regulation is relevant for the sector, eg our articles on procurement law change and the workforce update on the extension of statutory protection for certain types of leave.

Secondly, we look at some perennial issues where there can always be room for improvement, e.g. understanding your repair liability under leases and ensuring you get the best terms available when you contract. These examples emphasise that organisations should assess, and take steps to mitigate, risks in their relationships with third parties.

However, it is often less common for boards to consider how they could deal with relationship and performance problems at the highest level of their governance among directors and trustees. Thus, we look at approaches for managing board dysfunction.

Governance is, or course, much broader than compliance with legal requirements. We are delighted to have a guest article from haysmacintyre, charity accountants, on financial governance in the social care sector.

Finally, as we look ahead, we already have in our calendar our annual free trustee training in September which we are pleased to be hosting once again with haysmacintyre, charity accountants.

I hope there is something for everyone in this edition. Please get in touch if you have any questions or comments.

Most organisations plan for the possibility of dysfunction in their day-to-day operations. An organisation wouldn’t, or shouldn’t, sign a major contract without making provision for recourse if something goes wrong. If clients or users have a problem with how they are being treated, they will often be able to call upon support from the organisation’s complaints process.

Many charities and social enterprises, though, do not prepare for board dysfunction. Why is that, when board dysfunction can have the most serious consequences at the highest level of the organisation, thus preventing it from fulfilling its strategy or keeping to its values? Charities and social enterprises should be wary of the mantra that it could not possibly apply to them.

Board dysfunction can manifest in many different ways; it may be an individual problem or a collective malfunction, which can be more difficult to resolve.

A list of functional problems at the collective level would include:

• where a board is more focused on the operational than the strategic and therefore gives itself insufficient time and mental space to develop strategy
• factional interests on the board leading to voting blocks
• the board consistently not receiving the right type of information they need to develop strategy and to oversee what they have asked to be done
• major divergence on risk tolerance, and what is needed to manage risk, between the board and the senior management team
• the board failing to engage in proper debate and challenge and not keeping its focus as to what is, or is not, in the best interests of the organisation
• failure to integrate equality, diversity and inclusion, both in the composition of the board and the approach to debate and decision-making
• confusion between what the board should do and the roles of others in the organisation
• a poor working relationship between the chair and the CEO, or between the board and the CEO; there needs to be a loop of trust between the board and senior management

Sometimes the board may be working well together, but then the conduct of an individual board member disrupts that. Individuals can cause problems where they:

• do not understand how to approach debate and decision-making at board meetings, namely that their approach should always be to assess what is, or is not, in the best interests of the organisation
• are highly active as volunteers within the organisation, but are not engaged at board level
• will not accept a board decision with which they do not agree, and then brief against it
• will not accept that they have a serious conflict of interest on a matter before the board
• do not respect the authority delegated to senior management and staff and interfere in their day-to-day work
• are not respectful to other board members or staff
• breach their duties as a director or charity trustee

Boards need to be alert to these problems and act on them robustly and swiftly. If directors are employees, there may be recourse under HR policies to deal with the problem. Otherwise, the law does not generally provide organisational remedies for dealing with board dysfunction. If your organisation is a company limited by shares or guarantee, a community interest company or a charitable company limited by guarantee, then the members do have a statutory power by a simple majority vote at a general meeting to remove all, or any, of the directors without having to show any good cause – Section 168 Companies Act 2006. However, for charities and social enterprises set up in other ways, there is no similar statutory accountability to a wider membership.

Thus, it comes down to the responsibility of the board to prepare for board dysfunction.

Boards can start focusing on preventative constructive steps. They should raise awareness of the personal responsibilities of directors and trustees, which can involve a combination of inductions, adherence to Code of Conduct and drilling home the essential principle of collective responsibility.

You should review how information goes to the board. Every report to the board should be clear as to its purpose and think about what information is needed for the board to take a decision or be informed. Having a consistent format for reports, irrespective of who produces them, can be a great aid to Boards. If there is confusion around the role of the board and senior management team, a good starting point would be for the board to review all delegations and, where there is a plethora of these, to fit them into an overarching Scheme of Delegations, which can trim any inefficient overlaps.

If problems stem from a lack of skills or diversity on the board, you should look at new ways of recruiting directors and trustees. However, before you spend too much time doing so, you should always check that your governing document allows you to use different recruitment processes. If it doesn’t, you will need to change it first.

If decision-making is being affected by conflicts of interests where people are not recognising that they exist, or are failing to deal with them appropriately when taking decisions, the board should spend some time adopting a conflict of interest policy, which can give useful steers as to what are likely to be potential conflicts for the organisation and how those will be managed, both at board meetings and in the sharing of sensitive information beforehand.

However, with the best will and having taken these actions, problems can still arise, and boards then are surprised to find that they do not have the tools to deal with them. The governing document (eg Articles of Association, constitution or trust deed) can be that tool, but only if the board has prepared for the possibility of dysfunction and written in appropriate powers.

The general position for corporate bodies is that the board cannot remove a director or trustee unless it has an express power to do so within the governing document.

Examples of powers of the board, which can be written in are:

• to remove for absenteeism from board meetings
• to remove for breaching a Code of Conduct
• to remove for acting contrary to the best interests of the organisation

These are not complicated provisions to insert, and we would recommend that, whenever an organisation undertakes a governance review, it should consider the inclusion of these kinds of powers.

If all directors and trustees (excluding those who are employees) have fixed terms of office then, as long as there is a clear process for reappointment, that gives
the opportunity to consider their performance and contribution and whether they should be reappointed. The governing document can also be a useful tool to deal with collective dysfunction. An obvious example would be to prevent mass resignation of directors or trustees leaving the rump of the board unable to act. A provision could be inserted that a person can only resign if, following that, sufficient number of trustees or directors would remain to form the quorum for board meetings.

Even where boards have prepared for their dysfunction by ensuring they can call upon powers in the governing document, that is not enough. Boards then have a duty to comply with the governing documents and must be of the mindset to govern in the interests of their organisation. That means they must collectively be robust, capable and willing to enforce these kinds of powers.

Financial governance and internal control in social care plays a pivotal role in ensuring the delivery of sustainable and effective services to its stakeholders. The link between financial management and social care governance is essential for fostering accountability, transparency, optimal utilisation of resources and risk management at all levels.

As we see the pressures increase as a result of:

• service delivery cost
• shortage in resources and skills
• increased regulatory and compliance requirements

This article provides useful information on the importance of robust financial governance and internal control in social care, exploring strategies to enhance its effectiveness.

What is financial governance?

In simple terms, financial governance refers to the set of processes, policies, regulations, and practices that guide and control an organisation’s financial management. This is the framework through which financial decisions are made, risks identified and managed, resources allocated and financial performance monitored.

What are financial controls?

Financial control is a key element of the financial governance framework in any organisation. These include a set of policies, procedures, and systems designed to regulate and monitor financial transactions. Financial controls are essential at an operational level to prevent fraud, manage and minimise financial risk and promote transparency over segregation of duties and authorisation of transactions.

In the care sector, a deficient or inefficient financial governance framework poses numerous risks, with potential far-reaching consequences for the organisation. Rather than solely highlighting these risks, our focus here is on providing key areas that demand attention for improvement and fostering effective financial governance within the sector.

What strategies should you consider?

Below we outline some key strategies/ideas that may help social care organisations:

2024 is the year of unprecedented change in procurement law:

1. It is anticipated that in October 2024, the Procurement Act 2023 will come into force.
2. But before that, on 1 January 2024:

a. The Health Care Services (Provider Selection Regime) Regulations 2023 (“PSR”) came into force.

b. The thresholds for the application of the Public Contracts Regulations 2015 (“PCR”) were updated.

The detail for each regime will need to be worked through. We have provided a summary of the key issues below.

The Procurement Act

The Procurement Act has now received Royal Assent. It is expected to come into force in October 2024. We are anticipating secondary legislation early in 2024, to enable a six month implementation period before the Act goes live.

The Act will replace the PCR, but the Act is more evolution than revolution. How processes are run, for example, will change – there will be fewer options for contracting authorities to utilise, but there will still be a requirement to advertise and run a process in most cases.

We will provide further updates in due course.

Before the introduction of the Procurement Act, there have already been two changes in 2024 (both from 1/1/24).

The Provider Selection Regime

The PSR has come into force. In short, the PSR means a more flexible decision-making process when procuring relevant health care services. The consequence of that flexibility; the need for greater transparency. This impacts how all relevant authorities procure or sub-contract health care services. We have addressed some of the key issues below.

Now the PSR Regulations are in force, the procurement of health care services, when procured by relevant authorities under the PSR, has been removed from
the scope of the PCR. The National Health Service (Procurement, Patient Choice and Competition) (No 2) Regulations 2013 have been repealed.

The PSR applies when relevant authorities (NHS England, Integrated Care Boards, NHS trusts and foundation trusts, as well as local authorities and combined authorities) procure relevant health care services (“Health care” means all forms of health care provided for individuals, whether relating to physical or mental health”, which fall within one or more of the CPV codes specified in schedule 1 of the Regulations). There is no minimum financial threshold for the application of the PSR Regulations.

Goods and services that are not health care services in scope of the PSR must be arranged under the rules governing wider public procurement unless they fall within the definition of a mixed procurement set out in the PSR Regulations.

All decision making must take account of the procurement principles. When procuring relevant health care services, a relevant authority must act with a view to:

• securing the needs of the people who use the services
• improving the quality of the services
• improving efficiency in the provision of the services
• relevant authorities must also act transparently, fairly, and proportionately when procuring health care services

There are a number of potential decision-making processes available:

• Direct Award Processes
  • Direct Award Process A
  • Direct Award Process B
  • Direct Award Process C
• Most Suitable Provider Process
• Competitive Process

Some processes must be complied with in certain circumstances. Others are for a relevant authority to determine based on the facts of a particular requirement. Four of the five do not require a competitive process. This may mean fewer contracts are advertised, but in some circumstances, relevant authorities can run competitive processes.

For Direct Award Process C, most suitable provider and competitive processes, a standstill period will need to be run before a contract can be entered into. If aggrieved providers challenge during this standstill period, the relevant authority will (if certain requirements are met) need to review their original decision. If a provider remains unhappy following that review, the provider can challenge to the Independent Patient Choice and Procurement Panel. The relevant authority will then need to make a new decision, taking into account the panel’s advice.

The ultimate remedy for an aggrieved provider is to challenge via judicial review, which will also be available for Direct Award Process A and Direct Award Process
B. Everyone is going to need to get to grips with how processes can be challenged.

In line with other procurement law developments, there is a need for greater transparency by relevant authorities. This comes as a consequence of the greater flexibility the PSR affords relevant authorities.

As with the PCR, there are limits on the extent to which contracts can be modified during their term. The requirements are set out in Regulation 13.

Other procedural requirements are set out in the Regulations.

Sitting alongside the PSR Regulations is the Statutory Guidance published by NHS England. Relevant authorities must have regard to the guidance.

To support relevant authorities, NHS England has also published a number of toolkits, including flowcharts, process maps, and a guide to completing the various notices that will be required.

Working alongside the NHS England policy team and NHS England legal team, Hempsons has advised on the development of the PSR over the past two years. This work has included advising on the PSR Regulations themselves (inputting into the drafting of the Regulations, the drafting of which was led by DHSC), and the development of the statutory guidance and the toolkits developed by NHS England to support the introduction of the PSR. Hempsons is therefore well placed to advise on the implications of this new regime for securing the provision of health care services.

The latest thresholds

The thresholds for when the PCR apply changed on 1 January. These thresholds are inclusive of VAT, and available here:

We will continue to provide updates as the introduction of the Procurement Act draws closer, as well as the PSR develops.

Social entrepreneurs are operating in the worst environment for 15 years, says Craig Dearden-Phillips, who founded an organisation to help them swap experiences and learn from experts.

The squeeze on public finances in areas such as local government and the NHS is having a knock on effect on charities and social enterprises who have contracts with them, says Mr Dearden-Phillips, the founder of Social Club and several social businesses.

“Our organisations are under huge pressure,” he says. “That means they have to be increasingly imaginative.”

He puts part of the blame on an economy which has only grown slowly in the last few years, with Brexit being a key reason. “We are paying a huge penalty – we are reaping the rewards of our decision to withdraw from the EU,” he adds. “I am working with a lot of members at the moment on significant cost cutting exercises. Most members I know are engaged in quite forensic exercises to reduce their costs.

“It is just not possible to function at the level we have historically done in some cases. Mergers are affecting an increasing number of organisations who are looking to share their overheads and we are going to see more and more closures even of good organisations. The environment is probably as hard as it has been since the financial crisis in 2008.

“It is a very difficult period we are going into where only the fittest will survive.” The need to increase wages to help staff cope with inflation – and in many cases to pay the increased minimum wage – will be a particular challenge for organisations offering services where staff make up the vast majority of their costs.

Added to this is the financial pressure on commissioners who can be reluctant to increase the costs of contracts, he says. “Even if Labour win the general election, their funding headroom is extremely limited,” he says.

He points to the House of St Barnabus, a members’ club in London with a mission to break the cycle of homelessness, which recently closed, saying its business model was
“simply not sustainable.” This lack of resilience will affect other organisations which will “quietly call it a day,” he adds.

But there are still opportunities for innovative organisations to win new contracts and find new ways of delivering their services, he says. “It’s a cliché but I say to people never waste a good crisis. It’s an opportunity for organisations to make some basic changes, to shake the tree within their organisation. There’s an opportunity for them to make changes and shape themselves round a new agenda.

“The financial squeeze can be a huge spur to innovation. In a way it is easier if you are a very innovative cost-effective provider to get an audience in an environment where there is financial penury.

“Organisations which are light on their feet and reform what they do will probably do better than those wedded to a model of another era.”

Mr Dearden-Phillips set up Social Club in 2016, after realising many chief executives felt they needed more support from outside their organisation. “I kept having chief executives come to me saying they were isolated without a peer network,” he says. They were looking for support, advice and a community of likeminded people who could meet, share experiences and learn to grow together, he adds.

The organisation has grown to around 75 members, including social enterprises, charities and some spin offs. As well as an annual conference, it offers podcasts, webinars, face-to-face meetings and coaching. The diverse membership also acts as a self-help group with members bringing different perspectives and solutions.

Inevitably, the pandemic was a turning point: Social Club had to swiftly move online. “The day of the lockdown we were already geared up for this,” he says. “During the COVID period we did a record number of events – sometimes two or three a week.”

Since the pandemic eased, it has adopted a hybrid approach with a mix of online and then six to seven in person events a year.

The focus is on some key areas which members are most concerned about – financial management and income, human resources and also governance. But, Mr Dearden-Phillips says, there is also a focus on “the art of leadership” with members using networking to enhance their own abilities.

“It’s a very attractive formula,” he says. “The work is never done, the challenges shift all the times and members are very keen to return to these topics on a regular basis.”

Hempsons has been involved from the start as a sponsor of the organisation but also offering its expertise to members through webinars and hosting meetings at its Manchester and London offices. “For our members it is an opportunity to get a lot of good insight from people at the top of their game in the legal profession,” he says.

Hempsons hosted two events in February focused on “People: what more can we do to attract, retain and motivate them?” with head of employment Andrew Davidson. It has also recently hosted a session focused on governance with Ian Hempseed, head of its charities and social enterprise team, leading a session on “Governance: dealing with dysfunction.”

Cut staff sick days by managing them

In August 2023, ACAS (Advisory, Conciliation, and Arbitration Service) released new and updated guidance on managing sickness absence. The aim of this change in guidance is to try, through better management, to reduce some of the costs caused by employee sickness absence. The guidance has a particular focus on small business owners and employers, including charities and social enterprises, dealing with a variety of sickness related absences.

This new guidance will require employers to review their sickness absence policies and procedures in order to ensure they are up to date and show best practice.

The new guidance covers:

• Holiday entitlement and sick pay
• Proof of sickness and fit notes
• COVID advice
• Time needed off for parents and or dependants
• Time off work for bereavement
• Supporting disabled people at work
• Returning to work after an absence
• Producing absence policies
• Keeping records and reducing sickness absence
• Absence trigger points

Below are some elements of the new guidance in further detail that we feel are of particular interest to charities and social enterprises.

Maternity leave, adoption leave and shared parental leave update

The Maternity Leave, Adoption Leave and Shared Parental Leave (Amendment) Regulations 2024 are due to come into force on 6th April 2024.

The regulations extend statutory protections from redundancy to pregnant women and new parents who have recently returned from maternity, adoption, or shared parental leave.

The extensions now cover pregnancy and a period after return to work.

The key points of the regulations are:

• workers taking this kind of leave must be offered any suitable alternative employment in a redundancy situation
• the protection is for 18 months from either the expected week of childbirth or the placement for adoption
• the protected period can be changed in certain circumstances
• these new protections will apply to pregnancies disclosed to the employer on or after 6 April 2024, and any maternity, adoption and shared parental leave ending on or after 6 April 2024

The eligibility criteria for the special protection are as follows:

• Pregnant women: the protection during pregnancy begins as soon as the employee informs their employer of the pregnancy
• New parents: the extended protection covers new parents who have recently returned from any period of maternity or adoption
• Shared parental leave: the new protection also applies to employees taking at least six weeks of shared parental leave

Employers will need to update their family-friendly policies and redundancy processes to ensure compliance with the extended statutory protection.

Employers will be required to provide suitable alternative vacancies to employees on relevant leave in the event of a redundancy process, and this will need to be factored into any redundancy procedure taking place after 6 April 2024. Employers need to be aware of the new potential risk of claims if they fail to offer the required protection.

ICO Guidance

The Information Commissioner’s Office (ICO) has published guidance on the handling of worker health data with the aim of providing advice and examples of good practice.

The guidance has two main parts. The first looks at how the processing of workers’ health information applies to data protection law; it looks at the principles and the basics for compliance. The second part considers workplace common practice, when processing worker health information and details good practice advice and the legal requirements.

Key takeaways:

The ICO’s definition of “monitoring workers” is any form of data collection/supervision that takes place on an individual undertaking work for an organisation.

Data protection law does not prevent employers from monitoring workers but it must be in a legally complaint way.

When deciding whether to monitor a worker, it’s important to balance the interests of the organisation with a worker’s legitimate expectation of privacy and their rights under data protection law.

Transparency: a worker must be informed about any monitoring, including the nature, extent, and the reasons why. The only exception is for covert monitoring which is allowed in very rare circumstances.

• Only relevant information should be collected and a worker should be made aware as to why it is relevant.
• Clear communication: when informing a worker about monitoring it needs to be clear and accessible. It’s important to explain any relevant policies and any recent updates
• Data protection impact assessment: this is mandatory for any monitoring of a worker or collection of data to ensure any risks are noted and managed. These assessments are crucial when processing any high-risk data.
• Organisations must not use automated decision-making programs to process worker health data unless they have explicit consent, or it is necessary due to a substantial public interest.
• The need to keep worker data secure, and to ensure that employers have a high level of organisational and technical security.
• Workers should be made aware that they can make a subject access request to gain access to any personal information gathered through monitoring.

The guidance states that monitoring workers legally can only be carried out under six lawful bases: consent; contract; legal obligation; vital interests; public tasks; and legitimate interests.

All leases carry with them some liability for repair of the property. If charities and social enterprises are leasing property then understanding the extent of this liability is important as, after the rent, it is likely to be one of the biggest areas for expenditure under the lease.<.p>

Careful consideration of the terms used in the drafting of the lease will be required to understand fully your obligations as a tenant. Various terms are used to refer to repair obligations, and in this article we will explain their meaning and suggest how you may be able to limit and manage your repairing liability.

Full repairing lease

A full repairing lease can be a lease of the whole or part of a building, where the costs of all repairs are borne by the tenant. In a lease of whole, the tenant will normally be responsible for carrying out all repairs itself, from decoration to major structural repairs. If the leased property is part of a larger building, then a full repairing lease again puts responsibility for carrying out repairs to the leased property itself (which may often be the interior of the property only) on the tenant. However, in this scenario it will also make the tenant indirectly responsible for the cost (or a proportion) of repairs to the structure, exterior, and common parts of the building that the landlord will carry out and recharge to its tenant(s) through the service charge.

Internal repairing

An internal repairing lease is typically one of part of a building where the tenant is liable for repairs to the interior of the property. The landlord will usually be required to repair the structure, exterior, and common parts, but in this type of lease the landlord does not pass on the costs of these repairs through the service charge. Consequently, market rents for this type of lease are usually higher as it will include an element for the landlord to cover its repair costs through the rent instead of through a service charge.

What does “in repair” mean?

“In repair” has a wider meaning than you may think. An obligation to keep a property in repair includes an obligation to put the property into repair if it is in disrepair at the start of the lease.

However, an obligation to repair does not extend to renewal to the extent that it would give the landlord back a property that is wholly different from the one that it let. Similarly, the standard and nature of the property must also be taken into account.

It will usually be for the tenant to determine whether to repair damage or replace the damaged part where either option is viable. An obligation to repair does not therefore necessarily also require replacement. In some cases it may also be unclear as to whether any proposed works are repairs or improvements. If what the landlord would get back from the work is recognisably different from what it would get if the disrepair had merely been remedied, and increases the letting value, then that may constitute an improvement. This distinction can be important when it comes to rent review.

It all therefore depends on the circumstances and the precise wording used in the lease as to what work may be required to comply, and what impact it may have. It is thus most important that you should inspect the property (and the building of which it forms part if it is a lease of part) and take a surveyor’s advice to understand fully the extent of any disrepair and assess the costs that will be required to put it in repair.

What about mechanical and electrical equipment, plant and services?

As well as an obligation to repair the property, most leases will also separately oblige the tenant to repair the above items so that they are kept in good working order. This obligation is likely to be wider than just “repair” and require the plant to be able to perform its intended function in a safe and reliable manner. Again, it is therefore important that there is a suitable inspection of these items to check that they are fit for purpose and to assess how much it may cost to keep them that way for the whole term of the lease.

Other obligations

The most usual form of repairing obligation is that requiring the tenant to keep the property in “good and substantial repair” or “good and tenantable repair”. It is thought that these words do not generally add to the tenant’s obligation to keep the property “in repair”, but there are circumstances where they may. Tenants may therefore seek to restrict the obligation to “in repair” only to avoid taking on a more onerous standard of repair. Such amendment though is likely to be resisted by a landlord.

However, an obligation to keep the property in “good repair and condition” is more onerous than one requiring “in repair” only, as this can require works to be carried out even if there is no disrepair.

Impact of repair on other lease terms

As well as an obligation to repair the property, the tenant is also likely to be under a separate obligation to decorate the property. This is an independent obligation that, irrespective of the state of repair, usually requires the tenant to decorate the property as often as necessary, or at intervals set out in the lease (typically every three years for the interior and five years for the exterior).

The state of repair of the property can often cause disputes at the end of a lease when a tenant has to hand the property back to the landlord in the state required by the terms of the lease. The landlord will typically prepare a schedule of dilapidations itemising all the work that the landlord believes the tenant must carry out to comply with its repair obligation, and it is this that is often fertile ground for disagreement.

It is usual for the tenant’s repairing obligation to exclude damage caused by an insured risk. However, that exclusion will not normally apply if the insurance monies cannot be recovered because of something the tenant has or has not done.

A tenant may also be under an obligation to carry out repairs that are necessary to comply with statute as most leases contain a separate obligation on the tenant to comply with all legislation.

Finally, repairing obligations can have a serious impact on business tenants who have security of tenure under the Landlord and Tenant Act 1954, and who want to renew their lease at the end of its term. One of the statutory grounds under which a landlord could oppose such a renewal is if the property is in disrepair.

Limiting your repair liability

Given the potential liability that comes from the repair obligations in your lease then consideration may be given to trying to limit that liability in the following ways:

• schedule of condition – where the building is not new or is in a poor state of repair then take advice from a surveyor and obtain a detailed schedule of condition showing the state of the premises as at the start of the lease. The repairing obligation in the lease should then be qualified so as to provide that the property need not be put into any better state of repair than is shown in the schedule
• new build – where the property is a new build then the tenant may wish to exclude any repairs resulting from defects in its design, materials, workmanship and construction (sometimes referred to as “latent” or “inherent” defects). At the same time, the landlord should be required to deal with these matters at its own cost. As an alternative, the tenant may be offered collateral warranties from the design and construction team. Without suitable provisions for dealing with such defects then a tenant may find itself liable to repair damage caused by them under its obligation to repair
• service charge – where the property is part of a building and subject to a service charge then care
  will be needed in negotiating the terms of the service charge provisions. For example: controls on what improvements can be made or when things can be improved; exclusion of costs for dealing with the repair of inherent defects; or the negotiation of a cap on the service charge
  lease exclusions – exclude matters particular to the property. For example: environmental liabilities where the property was previously used for something that may have caused contamination ( eg as a petrol station)

Managing your repair liability

Repairs can be expensive, particularly with a full repairing lease with (where relevant) no schedule of condition and/or an uncapped service charge. It is therefore important to manage your repairing liability right from the start of the lease and to consider:

• ring fencing funding – can the business put aside a regular sum, so it is a pot to call on when repairs are required and to avoid racking up a large dilapidations liability at the end of the lease?
• regular maintenance – regular inspections and repairs should be undertaken and treated as an ongoing expense of the business

Expensive repairs may be inevitable, but they can be managed by sensible planning and seeking appropriate professional advice before entering into the lease.

Key issues when entering into new contracts

People enter into contracts all the time. The simple act of buying a newspaper from a shop involves a contract being formed without any requirement for written terms, negotiation or thought about legalities. The terms of such a basic contract for the purchase of goods does not require written terms, with the common law and statute governing the relationship in the absence of other terms being agreed.

Contracts are the lifeblood of charities and social enterprises, in which they set out the terms of what they will do, how much they should be paid and what happens if things go wrong. Contracts we have previously entered into may continue to provide benefits we enjoy (for instance, TV streaming services) or burdens from which we wish to escape (a gym membership entered into in early January, perhaps).

In this article we set out some key issues to consider when your charity or social enterprise is entering into a new contractual relationship with a supplier.

Type of contract

There are many types of contract. Contracts for the same item from different suppliers may have very different terms. The first key issue prior to entering into a new contract is to read it!

If you have read the terms of the contract, and do not understand it, the fault is probably with the contract not you. Never be afraid to ask a supplier what a term in their contract means, or to seek legal advice if still uncertain.

That said, contracts are not always an easy read. A non-lawyer may have the impression that they are all written in “small print” and “legalese”. Despite this, it is important to understand the obligations contained in the contracts you are entering into. Whilst there are some limited protections in the law, most contractual terms between charities and social enterprises and other businesses will be enforceable; you do not have the protections consumers now have. If you sign a contract with onerous terms without reading or understanding them, you may find that you need to comply with them.

For charities and social enterprises, there is a concern that most other organisations do not have: namely is the charity able to enter into the proposed contract at all? Charities and social enterprises may only act in accordance with their objects and powers. There are also specific rules applying to charities concerning the disposal of assets (in particular the disposal of land) where legal advice should be sought, and specific procedures followed.

When considering something novel for your charity or social enterprise, you should ensure that what is proposed is permitted by your organisation’s powers and constitutional documents, again seeking legal advice if needed.

Unsigned and expired contracts

Under English law, most types of contract do not have to be written down or signed to be enforceable. Whilst there are exceptions to this, it is not that difficult for an organisation to find itself party to a contractual relationship where the terms are uncertain.

Two relatively common examples which lawyers encounter are: where either a contract has “expired” but the relationship has continued beyond the original term; or where parties intended to enter into a written contract, but the terms were never quite finalised and signed off formally.

The question then arises “is there a contract in force?”– to which the answer is often yes – and then the more important question “what are the terms of that contract?” – to which the answer is not always that simple.

Drifting into a contract can be dangerous and can easily lead to a dispute.

One way in which this can happen is by asking a supplier to provide a service once and then, on being happy with it, asking them to provide the service on several more occasions. In this situation, you may have never had written terms, and the terms of the contract have arisen by custom and practice. Establishing what those terms are, if there is a dispute over what should be done or what should be paid, can prove time consuming and costly to resolve, or simply lead to a breakdown in relationships which could have been avoided.

For most organisations, a key piece of advice is to ensure that contracts are finalised before work commences under them, to ensure terms are clear, and to manage the expiry of contracts, with a clear process to renew them or re-procure the services being provided.

You may not seek legal advice on a low value contract for a basic service but it is still a good idea to read any proposed terms which are offered to ensure you understand them, and agree to them.

Rolling terms

A query we regularly receive from clients concerns what may be called “rolling contracts” or “auto renewing contracts”, also known as contracts with “evergreen” clauses.

These contracts are typically entered into for a fixed period. You may wish to contract with a supplier for the provision of services for a period of three years. You may forget about this contract over the next 36 months, other than noting that you will need a new provider at the end. You may, in month 35, dust off the contract and prepare to procure a new supplier. However, if the original contract contains a clause which provides for the contract to renew automatically for a further period, you may (unless notice has been given in the right way and at the right time) be stuck with the current supplier for a further period.

The precise terms of such clauses vary from contract to contract. Typically, they provide that if no notice is given by a specified date before the expiry of the term (for example three months before the expiry date) then the contract shall automatically roll on for a further specified period. If you enter into a contract containing such a clause, then a key aspect of contract management is to ensure you know when and how much notice is required to be given to bring the ‘fixed term’ contract to an end without an automatic renewal occurring.

Payment provisions

You should always look at any payment provisions carefully. Do you know what you are paying, when and (if the contract is for the provision of services over a number of months or years) are there clauses regarding, for example, increases in payments?

For a number of years inflation was fairly low, but recently the figures for inflation have been a lot higher. Consequently, contracts with built-in increases in payments for inflation have seen significant increases in costs. Often such clauses are linked to an index and the index may have nothing to do with the actual increases in costs for the provider but could be set at an advantageous rate for the provider. For example, the retail prices index (RPI) is higher than the consumer prices index (CPI).

If you are entering into a long-term contract with limited options for termination (see below) then you should ensure you understand how the prices under that contract may change over time.

You should also check what interest may be charged and what other implications there are if payments are late.

Limitation of liability clauses

A limitation of liability clause is a clause that limits the amount of money that a business can be required to pay if a legal claim is brought under the contract. The two most common approaches are capped liability and exclusion of liability. There is a complicated array of rules and laws governing these types of clause.

With capped liability, a party may seek to limit the liability which might arise to a capped amount. Options seen in contracts, and often fiercely negotiated in large transactions, include a single aggregate cap, annual caps or event caps. Often seen in ‘standard’ contracts is a clause where liability is limited to the amount paid under the contract (or a variant of this, for example 120% of the value of the contract). When entering into a contract with this sort of cap, you should consider whether this limit
is appropriate. For many contracts it will be fine, as the chance of damages being incurred will be low. For other contracts, such as contracts for professional advice or services, negligent or poorly given advice could lead your organisation to suffer significant losses.

The value of caps on liability in such contracts must be considered very carefully.

Exclusion of liability clauses seek to say that certain categories of loss, such as indirect and consequential losses, cannot be claimed from the other party. Damages for breach of contract are never recoverable if they are too “remote”. This is a legal term which means that the loss is of a type the parties could not have foreseen when they made the contract. Exclusion of liability clauses often list types of loss which may, or may not, be considered too remote. However, these clauses can be used to try to limit what might otherwise be considered to be a “direct” and recoverable loss.

The complicated array of rules referred to earlier can make interpretation of the effectiveness of these clauses difficult. For example, a term which you may consider to be unfair may, or may not, be caught by the Unfair Contract Terms Act 1977 (UCTA). However, UCTA does not apply to all contract terms and many commercial contracts are outside of its scope.

In an important or high value contract, where there is significant risk of harm arising, these clauses require special attention.

Termination clauses

We have commented on ‘rolling’ contracts above, but more generally you should be aware of whether and how you are able to terminate a contract. Many contracts are for a fixed term, with relatively few options to escape, except in the event of serious breaches. This can mean that you are stuck with a supplier for a period of time, even if you find that the services are not quite what you expected or wanted. The key advice is to do proper due diligence on suppliers and what they are offering before you sign their terms.

Other clauses

This article has only looked at a few of the key terms to consider. There are many more areas and issues which can arise in different contracting scenarios. For example:

• the key terms in a contract to design your charity’s website may be the intellectual property clauses – do you own the copyright in what is designed?
• the key terms in an insurance contract are what perils/risks are covered and, importantly, what is excluded. The litigation which has followed the pandemic, and the range of drafting (with different implications) for the cover provided by ‘business interruption insurance’ has shown the variety of terms available for seemingly the same cover.

The key advice is to read the contract you are entering into and ensure you understand it and are comfortable with the terms on offer. In high value, complex or important contracts, it may well be worth taking advice on any areas where you are unsure.

We will once again be running our free annual trustee training online in September 2024. We will be joined by haysmacintyre, charity accountants, who have supported our trustee training for a number of years.

We will be sharing experiences of some of the governance lessons that charities have learnt over the last couple of years as they have had to re-focus their strategy and priorities. These include an acceleration in decision-making and implementation. Organisational speed of response has been enabled by streamlined, focused delegation and greater board entrustment of staff and volunteers. Other efficiencies can include proportionate reporting to the board on the core areas they need to measure.

The programme has been designed for charity trustees and chief executives and is suitable for those new in post as well as the more experienced who are wanting a refresher. Our aim is to give practical tips to help improve your governance.

Split into three separate sessions, the training can be attended as a full programme or individually. The sessions are interlinked and build on each other.

Webinar one: Legal duties and responsibilities of charity trustees – 10 September

The legal duties and responsibilities of charity trustees, including managing conflicts of interest. We will explore the need for trustees to take responsibility for their organisations including virtual, hybrid and face to face meetings.

Webinar two: Improving governance at board & senior management level – 17 September

Making governance work better at board and senior management level, looking at board effectiveness and its role, how this relates to the work of the chief executive, efficient delegation and how to approach taking the difficult decisions.

Webinar three: Trustees’ responsibilities for financial governance – 19 September

Trustees’ responsibilities for both external and internal financial reporting, examining key areas such as the different types of funds and how they can be spent and the linking of reserves policy to strategy.

If you have any questions please contact our events team at events@hempsons.co.uk