Contents of Main Description

Land Trust Standards and Practices
State Law
   Rules Vary by State
   §5546 “Purchase, sale, mortgage and lease of real property” of Pennsylvania Title 15
      Clarifications
      Interpretation Questions
         Is 2/3 a Quorum Requirement?
         Can Transaction Approvals be Bundled?
Other Legal Requirements
   Other Transactions
   Rule Applicable to Membership Organizations
      Membership or Not?
      The Default Rule
      Changing the Rule via the Bylaws
   Special Approvals: Charitable Assets
      Attorney General
      Orphan’s Court
      Board Approval
         Acquisition
         Disposition
Approval Procedures under Bylaws
   Resolution for Adoption at Board Meeting
   Consents Without a Meeting
   Delegation to a Committee
      Standing Committee
      Ad Hoc Committee
Bridging the Information Gap
   Fully Negotiated Contract
   Approval in Stages
      Tentative Approval Followed by Ratification
      Conditional Approval
      Approval Based on Limited Information and Delegation
Crafting Resolutions for Adoption
   Delivery Prior to Meeting
   What is the Board being Asked to Authorize?
      Description of Transaction
      Consistent with Policy
      Ongoing Negotiation
      Further Decisions
   Who is Authorized to Sign Documents?
      Authorized Officer Needed
      Attester is Not Signer
      Number of Signers
      Titled Staff Members May Not be Officers
      Transfer of Signing Power to Others
      Vice-President
Closing Certificate

Land Trust Standards and Practices

Standard 3, Practice F. of Land Trust Standards and Practices (2004 edition), published by the Land Trust Alliance, states the following:

Board Approval of Land Transactions. The board reviews and approves every land and easement transaction, and the land trust provides the board with timely and adequate information prior to final approval. However, the board may delegate decision-making authority on transactions if it establishes policies defining the limits to that authority, the criteria for transactions, the procedures for managing conflicts of interest, and the timely notification of the full board of any completed transactions, and if the board periodically evaluates the effectiveness of these policies.

State laws may be more or less restrictive than this practice.

State Law

Rules Vary by State

The rules regarding obligations of nonprofit governing boards vis-à-vis real property transactions vary by state. This guide was developed within the context of Pennsylvania law. Although much of the guide's content has relevance nationwide, readers should be careful to apply the laws of their states in their organizational policies and actions.

§5546 “Purchase, sale, mortgage and lease of real property” of Pennsylvania Title 15

Title 15 (Corporations and Unincorporated Associations) of the Pennsylvania Consolidated Statutes provides the following in §5546 titled “Purchase, sale, mortgage and lease of real property”:

[N]o purchase of real property shall be made by a nonprofit corporation and no corporation shall sell, mortgage, lease away or otherwise dispose of its real property, unless authorized by the vote of two-thirds of the members in office of the board of directors or other body, except that if there are 21 or more directors or members of such other body, the vote of a majority of the members in office shall be sufficient. No application to or confirmation of any court shall be required and, unless otherwise restricted in the bylaws, no vote or consent of the members shall be required to make effective such action by the board or other body. If the real property is subject to a trust the conveyance away shall be free of trust and the trust shall be impinged upon the proceeds of such conveyance.

Clarifications

Note that, regarding the 2/3 majority requirement, it is a majority of the members in office, not simply of those board members present at the board meeting. Also, “real property” includes conservation and other easements.

Some land trusts may find it difficult to foresee whether a sufficient number of directors will be present at any particular meeting when a real estate transaction is on the agenda. The strategies discussed below are intended to help facilitate compliance.

Interpretation Questions

Is 2/3 a Quorum Requirement?

Is the reference to 2/3 in the statute a quorum requirement? If so, then that number of directors must physically attend the meeting or, if permitted by the bylaws, attend via teleconferencing. If not, then written consents of other directors not in attendance (if permitted by the bylaws) may be collected if needed to meet the statutory requirements. Although the statute uses the phrase “vote” in one place and “vote or consent” in another, the likely interpretation is that any means of approval permitted under the bylaws meets the requirements of the statute.

Can Transaction Approvals be Bundled?

Does the statute apply to each transaction separately, or (if permitted by the bylaws), may the board approve, at a meeting at which the requisite number of directors is in attendance, a number of transactions in a project area and delegate negotiation of the specifics of each transaction to a committee? Counsel for the organization may reasonably find the statute ambiguous on this point and, if so, then (absent further guidance by the courts or legislature) the initial authority to pursue certain projects will suffice for purposes of meeting the statutory requirement. When the specifics of the transaction are known, final approval only needs to follow the requirements of the bylaws.

Other Legal Requirements

Pennsylvania nonprofit corporations must take appropriate measures to conform to §5546 of Pennsylvania’s Title 15; however, the actions governed by that statute (purchase, sale, lease, and other dispositions) are not the only real estate-related actions that must be properly authorized on behalf of the corporation. Furthermore, the vote required under the statute may not be the only approval required to properly authorize a real estate transaction.

Other Transactions

As a general rule, any transaction outside the ordinary course of business of the organization must be brought before the board for approval. Moreover, the bylaws usually provide guidance as to what kinds of transactions may or may not be entered into by officers without the need for specific board approval. Acquisitions of land or easements not covered by §5546 of Pennsylvania’s Title 15 (most obviously, donations of property interests) ordinarily require board approval under legal requirements generally applicable to boards and board members: board members have a right and responsibility to be informed of the benefits and risks of accepting the asset; and the board, as a whole, must make a reasonably prudent decision on behalf of the organization whether to accept ownership of land or responsibility for enforcement of an easement.

Rule Applicable to Membership Organizations

Membership or Not?

A nonprofit corporation in Pennsylvania may be formed as a membership or non-membership organization. Many nonprofit corporations have members in the sense that contributors to the organization are called “members” and may have privileges associated with their member status; however, these contributors are not necessarily members in a legal sense. A corporation’s membership or non-membership status may be determined with a review of the corporation’s articles of incorporation.

The Default Rule

If the corporation is a membership organization, then (unless the bylaws provide otherwise) applicable law provides that:

• The affirmative vote of 2/3 of its members (if there are fewer than 21 members) is required to approve transactions covered by the statute; or
• If there are 21 members or more, a majority vote of the members (not only those present at the meeting) is required to approve transactions covered by the statute; or
• If §5546 of the statute does not apply to the transaction, then each member is legally entitled to one vote when approval of the transaction is otherwise required under generally applicable principles of law.

Changing the Rule via the Bylaws

Calling a special meeting of the membership to approve real estate transactions can be a time-consuming project; thus, the bylaws of a membership organization typically vest a variety of powers in a board of directors elected by the membership. The board then exercises those powers without the need to obtain approval of the membership. It is important to check the bylaws to see that the board has the power to acquire and dispose of real estate, whether or not outside the ordinary course of business, without membership approval.

Special Approvals: Charitable Assets

Whenever charitable assets are the subject of a transaction, the careful practitioner will check the records of the corporation to see if the property is the subject of any special protections under applicable law; for example, a transfer of property that was donated to the organization to advance a specific charitable purpose. If there is any question about whether the asset is restricted to a charitable purpose, the practitioner should consult with legal counsel to determine the appropriate course of action.

Attorney General

Transfer of assets dedicated to a charitable purpose may require notice to the Attorney General for the Commonwealth of Pennsylvania, who acts on behalf of the public’s interest to ensure that money or property donated or committed to a charitable purpose is properly administered.

Orphan’s Court

Pennsylvania law also provides that the Orphans’ Court has jurisdiction over property committed to charitable purposes.

Board Approval

Acquisition

Because transfer of an asset restricted to charitable use can be problematic, the careful practitioner will be sure to inform the Board, when it is asked to approve the acquisition of real property, whether or not any charitable restrictions have been, or will be, imposed on the gifted property.

Disposition

The board will want to condition its approval of a sale or other disposition of a restricted asset upon obtaining such further approvals as are required for the sale or other disposition of the charitable asset under Pennsylvania law.

Approval Procedures under Bylaws

Resolution for Adoption at Board Meeting

An important function of all bylaws is to set the procedure for the governing body (usually a board of directors or trustees) to consider and approve (or reject) proposed transactions. The procedures must allow the board members to receive all information that is necessary and relevant to assist them in carrying out that responsibility and must allow the board, as a whole, the opportunity to make a reasonably prudent decision on behalf of the organization. Absent other alternatives that may be addressed in the bylaws, that requires presentation of a resolution to the board at a regularly scheduled meeting at which a quorum (the minimum number of directors required to conduct business) is present.

Consents Without a Meeting

Modern bylaws often provide for other means to obtain the consent of directors to an action; for example, by written consent, by a teleconference, by e-mail, or other electronic forms of messaging. Careful attention, however, should be paid to assure that all of the directors have the opportunity to review pertinent information about the transaction and exchange their views with one another.

The ability to obtain requisite consents by electronic means may be extremely helpful when quick action is needed; for example, at the end of the due diligence period when quick action is needed to decide whether to proceed or not.

Delegation to a Committee

If permitted by the bylaws, delegation to a committee can be a useful tool to allow the board to approve a transaction before all of the information needed to make a prudent decision is known. See “Approval Based on Limited Information and Delegation” below.

Standing Committee

The bylaws may permit the board to delegate decisions as to a certain class of real estate transactions to a permanent committee identified in the bylaws (often referred to as a “standing committee”) that is part of the governance structure of the organization.

Ad Hoc Committee

Whether or not standing committees are authorized to act on behalf of the organization, the bylaws may provide the board with the latitude to appoint a committee from time to time (called an ad hoc committee) to exercise specific authority delegated to it in the board resolution by which the ad hoc committee was formed.

Bridging the Information Gap

Fully Negotiated Contract

As discussed above, board members need adequate information to discharge their duty to make an informed decision on behalf of the corporation. When the material terms of the transaction have been set before board approval is requested, the board is in a position to exercise its discretion, approve the transaction at a regular meeting at which a quorum is present, and authorize the proper officers to do all things necessary for the transaction to be completed in accordance with approved terms.

Approval in Stages

At times, the board may be asked to approve a transaction before all of the material terms of the transaction have been fully negotiated. More often, the board approval is obtained at a time when all of the information produced by the due diligence investigation may not be available. The strategies discussed below may be used (if and to the extent permitted by the bylaws) to facilitate obtaining requisite approvals of the transaction as information is developed.

Tentative Approval Followed by Ratification

The board may tentatively approve a transaction so as to permit its authorized representatives (either certain officers or an identified committee) to negotiate and, exercising their reasonable business judgment, enter into a purchase agreement on behalf of the corporation subject, however, to a condition for board approval of the fully negotiated contract within some period of time following execution. The board then has the option to ratify or reject the fully negotiated contract.

Conditional Approval

The board may approve a transaction on condition that the yet to be negotiated terms fall within certain parameters; for example, the agreed upon purchase price does not exceed a specific maximum or a value to be verified by appraisal. Representatives of the organization (officers or board committee) are directed in the resolution to continue negotiations and, if the missing term(s) fall within the parameters, enter into the transaction on behalf of the organization (without further approval). If the negotiated terms do not fall within the parameters, the matter must be returned to the board for further action.

Approval Based on Limited Information and Delegation

The board may approve a transaction based on then-available information and delegate to a committee the authority to make such changes and take such actions as the committee, in its reasonable discretion, determines are necessary or desirable. Material information may not come to light until the end of the due diligence period and critical decisions must be made quickly: to proceed with the transaction, or not, and under what re-negotiated terms? A committee of board members authorized to make these decisions on behalf of the entire board can facilitate prudent but speedy decision-making on behalf of the corporation.

Crafting Resolutions for Adoption

Delivery Prior to Meeting

If a project is being presented to the board for approval, the authorizing resolution should be included in the agenda items delivered to the board members prior to their meeting. The resolution should either be prepared by the board member responsible for governance issues (usually the secretary) or be approved by the member prior to delivery.

What is the Board being Asked to Authorize?

A well-crafted resolution should include the following key points:

Description of Transaction

The description of the transaction does not need to be detailed but should include basic information such as: location, acreage, conservation values, anticipated investment of organizational resources, funding sources and potential risks.

Consistent with Policy

The offered resolution should inform the board whether the acquisition is consistent with the policies of the organization and, if not, what aspects are at variance with policies.

Ongoing Negotiation

Documents that may be made public, such as board minutes or resolutions, should be limited to facts and avoid opinions of value or negotiating strategies. If a transaction is being approved prospectively but is still under negotiation, it is important to spell out who is authorized to make final decisions: Is it necessary to bring the fully negotiated transaction back to the board for approval? May a committee -- either a standing committee such as the executive committee or an ad hoc committee formed for this purpose -- approve the final terms? Are there constraints on that authority? Is it appropriate to delegate complete authority to the executive director or other staff member?

Further Decisions

During the due diligence period, who will review and evaluate the due diligence reports? If title, survey or environmental risks are uncovered, who in the nonprofit has authority to exercise rights of termination (and perhaps lose the deposit)? Or negotiate a purchase price adjustment in exchange for assuming some risk? The resolution should address these questions. There is usually no time to convene a special meeting of the board and, unless covered by the initial resolution or delegated to a board committee by the by-laws, no one may have clear authority to act on behalf of the organization.

Who is Authorized to Sign Documents?

Authorized Officer Needed

In Pennsylvania, documents to be recorded must include the signature of a duly authorized officer of the corporation.

Attester is Not Signer

Until recently, Pennsylvania law required an attestation by the secretary or assistant secretary of the organization. As a result, corporate resolutions sometimes mistakenly elevate the secretary from an attester to a signatory, authorizing "the President and Secretary or Assistant Secretary" to sign. The safest verbiage is "the President or any officer" -- don't even mention the secretary.

Number of Signers

A phrase such as "the President and any Vice-President may sign on behalf of the organization” means that two persons must attend closing and sign documents. Do not use "and" unless that is the desired result. If only one officer's signature is desired, and the intent is to widen the scope of possible signers, use the word "or" as the connector; for example, "the Executive Director or any officer...."

Titled Staff Members May Not be Officers

Nonprofit organizations use a variety of titles to describe various staff positions. The executive director may run the organization but, if that position has not been officially proclaimed an office, either in the by-laws or by adoption of a board resolution pursuant to authorization in the bylaws, the executive director is not authorized to sign documents on behalf of the organization. A resolution authorizing the president or the executive director to sign may be sufficient if the by-laws allow the board to create other offices besides those named in the by-laws and the resolution is understood to appoint the executive director as an officer (at least for this transaction).

Transfer of Signing Power to Others

Officers may not delegate their power to sign documents to those not properly authorized to sign under the governing documents of the organization. A common misconception is that an officer, such as the president of the board, can sign a power of attorney to authorize someone else to act for him in his capacity as officer when he is unavailable. That doesn't work in Pennsylvania and many, if not all, other states.

Vice-President

By-laws are usually written to authorize the vice-president to act for the president. If the by-laws do not address this but state nothing to the contrary, the vice-president is authorized by Pennsylvania’s Non-Profit Corporations Statute to act for the president in his absence. Thus, if a board resolution specifies that the president must sign, the resolution may be effectively authorizing the vice-president as well.

Closing Certificate

At the closing, delivery of a certificate by the secretary or other authorized officer of the organization is typically required by the title company (and may be required by the seller, purchaser or donor as well) to furnish assurance that the transaction has been duly authorized by all requisite action on the part of the governing board of the organization. The Pennsylvania Land Trust Association has published a sample certificate [pending] that includes a model resolution authorizing a conservation acquisition.

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