Ignore the partnership agreement at your peril
30th June 2014
Approximately 130,000 farms are farmed as partnerships, of which only a third have a written partnership agreement in place. Of those who do have a written agreement, less than half are reviewed and updated on a regular basis. This may be fine when everyone is getting along; the trouble begins when a partner dies, people fall out or a partner behaves in an unexpected way. When this happens, often partners or their immediate families will have no idea where they stand and uncertainty will quickly lead to insecurity and distrust. An already difficult situation is often exacerbated by the high value of the assets on the balance sheet, particularly the value of agricultural land.
If there is no partnership agreement in place then the position is governed by an Act of Parliament that has changed very little in 124 years. Provisions including no mechanism requiring a retiring partner to leave their share to the remaining partners, no mechanism as to how capital is to be valued and the immediate dissolution of the partnership on death. The latter could leave the remaining partners having to buy the deceased partner's share, now inherited by his widow or a non-farming family member, at full market value.
Even if you can locate that all important written agreement, in many cases, it was signed twenty or thirty years ago and includes partners who have long since died or terms completely out of date with modern farming and the value of their assets. It is for these very reasons that in the last few years there has been a marked increase in farming families being involved in expensive litigation to resolve disputes that could have been easily avoided.
In the recent Court of Appeal case of Ham v Ham and another (2013) EXCA Civ 1301 an elderly couple had spent their lifetime building up a thriving 440 acre dairy farm. They brought their son into the partnership and there was a written partnership agreement. The son worked alongside his parents until 2009, when he withdrew and his parents sought to buy him out. The agreement stated that the remaining partners could purchase the outgoing partner's asset share at its "net value". They argued that was the book value as shown in the accounts, the son disagreed. The Court of Appeal held that the son was entitled to one third of the market value of the partnership property including the farmland. The out of date and "by no means clear" drafting of the agreement had given rise to expensive litigation, anxiety for the family and potentially damaging for the business.
The farming partnership case of Drake v Harvey (2011) EWCA Civ 838 also illustrates the importance to ensure the partnership agreement does what the parties think it does and that any Wills of the Partners are drafted in conjunction with the agreement. Again, the partnership did not specify whether book or market values apply on dissolution and high values were involved. The partnership consisted of Mr and Mrs Harvey and their two adult children. Sadly one son died of cancer and shortly thereafter both parents lost mental capacity. The Wills of the parents did not take into account the provisions of the partnership which potentially would have meant that on their deaths their partnership share or the cash equivalent would have passed to non-farming family members. The Court of Protection decided that codicils should be entered into to safeguard the farming daughter's inheritance. An expensive and time consuming legal procedure which would have failed if one of the parents had died before the new codicils were completed.
There are many good reasons to be in a farming partnership not least of all the tax advantages including the potential availability of Business Property Relief on non-farming assets. It is, however, important that you seek legal advice on the creation of the agreement and for it to be reviewed on a regular basis. Not only to ensure that it reflects modern farming and your own fiscal and family circumstances but that it also dovetails into other legal documentation such as your Will. Not to do so runs the risk of expensive litigation, irreparable damage to family relations and the loss of a lifetime's hard work.