Sarah Thompson, Public Services Team, Dickinson Dees LLP:
Since the implementation of the Academies Act 2010 governing bodies of primary, secondary and SEN schools all (subject to performance) have the option of applying for new Academy Status. There is now a bit of momentum behind the programme and the number of schools looking to convert is increasing quite rapidly. Whilst being a PFI school is not a barrier to becoming an Academy, the process of conversion is more complicated than for non-PFI schools as the parties need more time to consider and negotiate issues arising out of the additional layer of contractual documentation required.
In this post, Sarah Thompson considers one such common issue, which is how the authority’s obligation to pay the Unitary Charge will be affected by the conversion.
How can a PFI school convert to an Academy?
The basic approach taken to convert a PFI school to Academy Status involves keeping in place the existing PFI contractual arrangements between the authority and the PFI Contractor, with the authority and the Academy Trust entering into a development and school agreement (DASA). The DASA is a back-to-back style agreement which flows down the authority’s obligations, rights and liabilities under the PFI project agreement (and, if relevant, any associated ICT Contract) where it is appropriate to do so.
What issues need to be considered?
Some of the key issues which must be addressed in the DASA include the following:
- The issues previously addressed in the governing body agreement (GBA) (which will fall away on conversion, as the governing body of the school will cease to exist after the date of transfer). The authority should also consider if there is any need to reassess any of the provisions agreed between the parties in the GBA to reflect that the school will now be operated by a separate legal entity outside of the authority’s control.
- How the ongoing relationship between the parties will function, including how the rights, obligations and liabilities under the project agreement will be apportioned. Particular thought needs to be given to the allocation if the school converting is part of a multi-school PFI scheme.
- How any project specific PFI issues will be flown down to the Academy Trust.
- How the authority’s payment liabilities will be addressed. It is essential that careful consideration is given to the flow down of all of the authority’s payment obligations and liabilities (including any funding gap) to ensure that the Authority is not left financially prejudiced either immediately, as a result of the school becoming an Academy, or, in the longer term as a result of all of the authority’s schools (whether PFI or otherwise) being taken out of community control.
The key issue: liability to pay the Unitary Charge
The authority will be liable to make several payments to the PFI contractor under the terms of its project agreement. These payments will range from, for example, the obligation on the authority to pay monthly payment to the PFI Contractor for the services received during the term of the Project Agreement (the Unitary Charge), to payment liabilities triggered by Emergencies or Authority Changes (as defined in the project agreement).
The Authority will continue to be liable to make the Unitary Charge after the school has converted to Academy Status. Prior to conversion and, from the Services Availability Date at the school, the governing body is normally responsible for making a contribution to the Unitary Charge in accordance with the terms of the GBA. Post conversion, the DASA should provide that the Academy Trust retains responsibility for this payment (referred to as the “Relevant Proportion” or the “Academy Contribution”) and will set out a mechanism as to how the payment will be calculated.
The model form DASA available from the Department for Education envisages that the Academy Contribution shall be both subject to indexation and varied in accordance with the terms of the agreement. For example, providing that the Academy Contribution may be increased to incorporate a Change (as defined in the project agreement) requested by the Academy Trust or, to cater for any increase to the Unitary Charge arising out of any benchmarking or market testing exercises. It is fundamental that the authority ensures that all rights of the PFI Contractor to increase the Unitary Charge in the project agreement trigger an analogous right of the authority to increase the Academy Contribution in the DASA, to the extent the increase is attributable to the Academy.
Payment liabilities are not the only consideration
If an Authority is notified that one of its PFI schools has applied to convert to new Academy status, there are a number of issues that it must consider. Whilst the management of payment liabilities (and risk) will be one of the most important contractual considerations for the authority there are many other issues which can vary greatly depending on issues such as:
- Where the school is at in the construction programme.
- Whether the project pre-dates the Building Schools for the Future standard form project agreement.
The issues highlighted in this post mean that particular care needs to be taken when overseeing the conversion of a PFI school to Academy status.