OPERATIONAL GUIDANCE

APPLICATION OF PROPERTY CY-PRÈS

THE USE OF THE CY-PRÈS DOCTRINE WHERE THERE ARE SECONDARY TRUSTS

OG 2 B2 – 18 March 2008

Purpose

This guidance applies to charities with secondary trusts. It explains how to apply the cy-près doctrine in the case of unworkable primary trusts even if it involves causing a failure or postponement of secondary trusts which remain workable.

Functional responsibility

For information

All Staff

Contents

1. Introduction
2. Both the primary trusts and the secondary trusts are impracticable
3. The trustees want to change the primary trust before the condition terminating that trust has taken effect
4. The condition which gives rise to the secondary trust is not necessarily linked to the failure of the primary trust
Glossary of Terms used in this Guidance

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The Law	Refer to a lawyer	Refer to an accountant

1. Introduction
	Charity trustees have the duty to hold property for a particular purpose - the primary trust. Sometimes the governing document of the charity will indicate that if the primary trust becomes unworkable for any reason, the property should be used for a gift over; that is, a secondary trust.
	An example of a primary trust is one for the distribution of coal to three poor widows in the parish of X. In the event of the trustees not being able to distribute the coal, or not able to find three poor widows, the primary purpose would fail. If there is a secondary trust, the trustees would have the duty to apply the trust fund for whatever purpose is stipulated for that secondary trust.
	However, in situations where the primary trust has failed, trustees may ask us to make a cy-près Scheme under s.13(1) of the 1993 Act to change the objects, even though there are secondary trusts which are still workable. We should consider such a request very carefully, as we have to weigh up whether the intentions of the founder, and social utility, are better served by modifying the primary trusts, or by requiring the beneficiaries of the secondary trust to be preferred.
	We should consider whether, for this or any other reason, the Scheme may be controversial and whether the trustees or representatives of the beneficial class under the secondary trust should be given the opportunity to comment on any changes through formal publication of the scheme. The options and considerations for publishing our intention to make a scheme are set out in OG 1 B4 Publication of our intention to make a Scheme.
	In assessing cases where there are secondary trusts, the Commission has applied the principles of Re Hanbey (1956) Ch 264. These principles are modified by s.13(1A) of the 1993 Act, as explained below. It is clear from Re Hanbey that we have the discretion to substitute new cy-près trusts for unworkable primary trusts, even if that involves causing a failure or postponement of secondary trusts which remain workable. We also, of course, have the discretion to refuse to make a Scheme, thereby simply allowing the secondary trusts to take effect. (This was, in fact, what the court decided to do in the particular circumstances of Re Hanbey, but the principles of the case demonstrate the different options that we have discretion to consider in each case.)
	Re Hanbey identified two significant factors to bear in mind:
	the intentions of the founder; and
	social utility.
	In addition to the principles of Re Hanbey, Sections 13 and 14B of the 1993 Act (as amended by the 2006 Act) also direct the Commission to take into consideration both the spirit of the original gift and current social and economic circumstances (which is analogous to social utility), in deciding whether a scheme is needed and in deciding how to alter trusts (for further detail see OG2 A1).
	This widening of the triggers for a cy-près occasion may allow trustees and the Commission to consider the need for a Scheme at an earlier stage.
	Ascertaining the intentions of the founder (the spirit of the original gift) may be complicated where there are secondary trusts. It might appear that simply allowing the secondary trust to take effect would always be more consistent with the intention of the founder, rather than allowing the primary trust to continue in a different form. But normally, the founder would be more concerned with the primary trust than with the secondary one. If the primary trust could be amended without altering it in any real substance, that might seem more consistent with the founder's intentions than allowing the secondary trust to take effect, particularly if the secondary trust was substantially different to the primary one.
	These considerations must of course be balanced by social utility. As explained in OG 2 A1, there is no point in preserving trusts that will not allow the charity’s property to be applied suitably and effectively in the light of current social and economic circumstances.
	We also, of course, have the discretion to alter the primary trusts cy-près, and (if those altered trusts are susceptible of failure) to preserve the secondary trusts so that they arise on the occasion of the failure of the altered trusts, instead of on the occasion of the failure of the original primary trusts.
	If the Scheme is to be fully regulating, but not in fact overhauling the objects, it needs to make it clear whether or not the secondary trusts will still apply. See OG 1 B3, section 2.4.
	In all cases, consult Legal Division before making a decision.
	The next three sections describe some situations which caseworkers may encounter.

2. Both the primary trusts and the secondary trusts are impracticable
	In this situation, the primary trusts should be altered cy-près.
	Consider the need for advice from Legal Division on what the most appropriate cy-près application should be - for example, should it reflect more closely the primary, or the secondary trusts, or both?

3. The trustees want to change the primary trust before the condition terminating that trust has taken effect
	If the trustees are aware that the primary trust is still viable, but will become unworkable in the near future (eg because, in the example given in section 1 above, they cannot find any more poor widows to replace their beneficiaries when they die, or because they are becoming aware that people do not use coal any more), they may apply to us for a Scheme to amend the primary trust before it becomes unworkable.
	The making of a Scheme cannot itself terminate the primary trust, and the objects of a charity cannot be altered simply because the trustees would like to use the funds for some worthy but different purpose without one or more of the factors in section 13(1) of the 1993 Act existing. However, trustees of failing charities should be encouraged to look for a more beneficial use of their income, and if a case for making a Scheme altering the primary trust has been made to us before the terminating event has occurred, we should consider making the Scheme, taking account of current social and economic circumstances which the trustees have brought to our attention.
	Any change we might agree to before the primary trust fails should continue to ensure that the dwindling/failing class of beneficiaries continues to have priority.
	The effect of making the Scheme may be that the terminating event can never occur, and any secondary trusts will therefore be destroyed.
	In all cases, consult Legal Division before making a decision.

4. The condition which gives rise to the secondary trust is not necessarily linked to the failure of the primary trust
	An example of this situation is the nationalisation or municipalisation of the service to which the primary trust is connected. So trusts for the benefit of hospitals sometimes had secondary trusts which took effect on the transfer of the hospital from trustees to the NHS, or as a result of redundant hospital buildings, ie nurses' homes being sold off, or demolished.
	In such a case, the normal approach would be to let the secondary trust take effect. Indeed, there may be no cy-près occasion at all in relation to the primary trust, where the terminating event is not linked to the failure of the primary trust. Here, letting the secondary trust take effect is the only option available.
	In all cases, consider the need for advice from Legal Division before making a decision.

Glossary of Terms used in this Guidance
	1993 Act
	2006 Act
	Cy-près
	Scheme
	Trustees

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