Academy conversions without a Commercial Transfer Agreement

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Can a school convert to an academy without a Commercial Transfer Agreement (CTA)? Helen Snow and Sophie Thring consider the issues where local authorites push back against entering into the contract.

In any academy conversion, the transfer of the school’s assets and contracts is usually dealt with in a written document, a CTA. The CTA addresses the issue of pre and post conversion risks, and who should bear the cost of these risks.

The DfE has a model CTA and the DfE guidance confirms that the local authority and the academy trust must sign the CTA before a school can convert to an academy. In practice however, we are seeing an increasing reluctance from local authorities to enter into a CTA. But what happens to the staff, assets and contracts in these circumstances?

Staff

The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) apply to academy conversions, so the staff of the school will automatically transfer to the new academy on the same terms and conditions of employment. The new academy will also inherit any liabilities in relation to these employees, for example, historical employment claims relating to action taken by the old employer. The key issue for the academy trust here is that it will not be indemnified against any losses relating to these liabilities.

Assets

As part of the conversion process, all assets should also transfer over to the academy trust on conversion. This will usually include all property, undertakings, logos, domain names, rights and assets used or held by the local authority or the governing body for the purposes of the school. The CTA transfers the legal and beneficial interests in these assets to the new academy. In practical terms, there may be no issue with the new academy continuing to use these assets after conversion (for example, the local authority is unlikely to remove furniture belonging to it from the school). However, in the absence of a CTA, what will physically transfer is uncertain. An alternative mechanism for effecting the legal transfer of these assets will be necessary to ensure that the right assets transfer on conversion and that these are free from any encumbrance. This will also require the parties to carry out a clear due diligence exercise to identify the transferring assets. Without this, the position is unclear and could lead to a costly dispute over the use/ownership of these assets later down the line.

Contracts

Consideration must also be given to transferring contracts such as service level agreements, to ensure that the academy inherits the contracts in full, i.e. the rights, benefits and liabilities. In the absence of a CTA, the parties must carry out a due diligence exercise to identify the contracts that need to transfer, ensure that such contracts are capable of being transferred and take any steps required to obtain the relevant consent to assign the contracts. Parties will also need to consider what will happen to any contracts that can’t be transferred, for example can these contracts be terminated? Is there a penalty for this? If so, who will be responsible for this?

In cases where the school is part of a contract covering other schools, the position is more complicated and as such, it may be necessary to assign or vary the part of the contract applicable to the new academy.

Conclusions

Undoubtedly, the absence of a CTA is likely to make the conversion process more complex and will require parties to carry out an in depth due diligence process and, ultimately, take a commercial view on risk. A CTA provides a one-stop-shop to deal with the transfer, providing certainty and clarity for all involved. The absence of the CTA requires each asset and contract to be considered and dealt with separately in preparation for the conversion. This will be a far more time-consuming and risky process.

In relation to staff, the absence of a CTA will not prevent the new academy from inheriting the staff, and any historic liability in respect of them, due to the application of TUPE, but there will be no protection for liabilities arising from historic acts of the outgoing employer. This is not particularly satisfactory from the academy’s point of view, who will want to ensure that any pre-conversion liability remains with the outgoing employer and a commercial discussion will need to be had by the parties to resolve these issues of liability.

This article was originally published in Local Government Lawyer.


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