Getting farm partnerships right

We recently ran a seminar in Kent about farming partnerships fit for the 21st century. The seminar was based around a scenario which would be recognisable to many farming families; one of the younger partners stops pulling their weight on the farm, distracted by a love interest elsewhere. In the scenario the partnership agreement does not cover the issue, nor does it make clear provision about how someone can be made to leave the partnership or how they can leave of their own accord. The partners are thrown back on the default provisions of the Partnership Act 1890. This results in considerable distress for those partners who want to continue the farming business but are held to ransom by the absent partner; he threatens to serve a notice dissolving the partnership, with all the potential consequences that bring (sale of the farm, CGT/SDLT becoming payable/an unviable business etc.)

The seminar brought home how vital a well-drawn up partnership agreement is. Below is a list of matters that, as a minimum, a good partnership agreement should cover.

Farm Partnership Basics

Who owns what?

• Be clear about:
  • what assets belong to the business: land/kit/entitlements/intellectual property;
  • each partner’s contribution to and interest in the capital of the partnership.
• Often found in the accounts, but with new partnerships initial contributions (and the way capital profits on particular assets are to be treated) should be listed in particulars/schedules of the partnership agreement.
• Keep any declarations of trust involving partnership property with partnership papers.
• If land being transferred is a partnership asset, ensure that is noted on the transfer.

How can the partnership be brought to an end?

• Default position:
  • dissolution on death of a partner, assets realised under Partnership Act 1890;
  • a partner giving notice can determine the partnership.
• Decide grounds on which partnership can be brought to an end, and whether it can continue on death, bankruptcy, incapacity or retirement of a partner (and agree mechanism).

What happens when the partnership ends or someone leaves?

• Be precise about how an outgoing/deceased partners’ shares (and particular assets) are to be valued on partial or general dissolution (see case of Harvey v Drake [2011] EWCAm Civ. 838).
• Spell out the mechanism by which continuing partner(s) can buy out the share of a deceased/ outgoing partner; specify notices to be served, timescales, payment periods, interest payable.

What is required of the partners?

• Be clear about duties/time-commitment   - avoid “…as is from time to time requisite”?
• Cover attendance at meetings/involvement in other businesses/whether a partner can charge any part of his interest in the partnership etc.

How is the partnership to be run?

• Agree decision making/voting rights – they can be different for different matters. Default position under the Partnership Act 1890: ordinary matters are decided by a simple majority.
• Deal with whether, how, and on what conditions, new partners (e.g. children/spouses) can be introduced.

How are ‘issues’ to be dealt with?

• Deal with whether there should be a right to expel, on what grounds and by what mechanism/ what happens when there is mental incapacity or long-term sickness/how disputes of all or particular kinds should be resolved.
• Very important: deal with how partners can leave/on serving what notice, and how their partnership shares can be bought out/over what period/with what (if any) interest is payable on capital etc.

If you have any questions at all about farm partnerships, feel free to get in touch with Julie Robinson, Jarred Wright, Peter Cusick or your usual contact at Roythornes.