The British Columbia Supreme Court recently released a decision, Re Mulgrave School Foundation, which discusses charitable gifts that are made for a specific charitable purpose and whether it is possible to change that purpose. Unfortunately, in this case the donors and schools had restricted their gift to be an endowment for scholarships and they did not have in the agreement a power to amend the restrictions.
The school foundation received two generous gifts from donors with conditions that the funds be used as a endowment to support the scholarship program at the school. Eventually the school started a capital campaign for a building project and the donors consented to the charity using their gifted funds to assist with the building project.
The Court notes: " However, when the Mollers, Mr. Kirkwood and Ms. Levitt gave the Donated Funds to the Foundation, they placed two conditions on their gifts: that the funds be used to create an endowment (the “Endowment Condition”) and that the endowment be used to support scholarships at Mulgrave School (the “Purpose Condition”)."
Perhaps most importantly " The donors did not retain or reserve any legal rights in the Donated Funds, nor did they indicate any reservation of a right to suggest an alternative or additional use of the Donated Funds by the Foundation at a later date."
In this case all the donors expressly consented to changing the restriction or releasing the funds.
The charity brought an application for an order allowing the charity to use the donor funds for the building project instead of the scholarship program, but the application was dismissed. In the BC legislation covering court ordered changes to charitable restrictions (cy pres) you need to show that the original restriction was "impossible or impracticable to perform". No evidence was provided that scholarships were no longer required etc.
The court determined that the restriction could not be lifted and therefore the gifts would need to be used for the discrete purpose originally agreed upon (income from the endowment for the scholarship program).
What can we learn from this decision?
1)Courts are very reluctant to grant cy pres orders to change restrictions - although the standard may be defined as being "impossible or impracticable" the courts are leaning more towards impossible.
2)It does not matter that the donor agrees with the change to the restriction. If there is no amendment or variation clause it is not helpful that the donors and the charity later agree to the change.
3)Charities need to be very careful before agreeing to "endowment" gifts which are really perpetual endowments. Can you manage them for 400,000 years? Actually perpetual is longer than that, but you get the point! Some fundraisers may think they are doing a good thing for the charity because it may be easier to bring in money with some donors when you say to them that the money will be used "in perpetuity" and consequently their name will be remembered perpetually. Practically, however, in many cases very little of the money donated will be used for the charitable mission every year. This can be very frustrating for some, including the donor, who a few years later may come to the realization that they want to see impact during their lifetime and almost none of their money is actually being used. Yes, you may say 'what did the donor expect?' Well, it is the job of the fundraiser or charity administrator to either have ESP or to understand point 4 below.
4) The biggest mistake in this case was not having a clause in the gift agreement that allows for changes to the restrictions. At a minimum such a clause would provide that such changes are with the donor's consent, or that of the personal representative of the donor, but otherwise the change could be with a decision of the board of directors of the charity.
5) The world is constantly changing - donors and charities need to understand that well intentioned and seemingly brilliant restrictions, can really degrade the value of a donation or in some cases make the donation almost worthless. They can also undermine a charity. How many charities have funds on their financial statements that make them look wealthy (and therefore not really needing any further funds) but they cannot use the funds for what is needed? Make sure that your charity's gift agreements have the necessary flexibility. Although the decision does not discuss gift acceptance policies it is important for charities, especially those with endowments and restricted gifts, to have a gift acceptance policy and agreements should generally be subject to the gift acceptance policy as modified from time to time.
6) This case reiterates that there is probably a need for some law reform on the provincial level to make cy pres order easier. However, I would not hold my breath on that. It is the relatively simple solution right now that charities be careful what they agree to in gift agreements and have the necessary clauses in place to make changes if the situation requires it.
7) In this case the fact that the funds will have to be used for scholarships and the charity will have to borrow more money from the bank to fund construction is by no means the end of the world. But in other cases one can imagine that the lack of availability of funds can mean the charity will fold or it will have a huge negative impact on the programs of the charity.
Here is a copy of the full decision in Re Mulgrave School Foundation. A small amount of legal help before finalizing gift agreements can be helpful in providing flexibility to the charity and making it more likely that the donors gift is appropriately, efficiently and effectively used.
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Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.