Why are lawyers obsessed with writing things down? Not least because memories fade or recollection of what was “agreed” can differ. Writing it down gives professional advisors an opportunity to tease out other issues.
Farming partnerships are an excellent example. Many family farms are run as partnerships. Is there a deed? Has it been dusted off lately? Its often only at certain critical points, death divorce or retirement, that partners even consider it or the issues.
Take, for instance, a farming family of mother, father and two children. The parents were tenants but were able to buy the farm in the 1980s. They bought it with partnership money and the farm is shown on the partnership accounts. At some time after that, mother and father brought their two children into the partnership and gave each of them £50,000 in capital. Each year, the partners drew a modest amount out of the partnership and the undrawn profit was allocated between them in the most tax efficient way, and added to their accounts.
There was no discussion at that time about the children’s involvement and the future. There was no protection considered for mum and dad around the occupation of their home. In this case, the son had other business interests and borrowing. Given that partners have joint and several liabilities for debts and contracts within the partnership, it’s essential to make sure that partnership assets and borrowing are ring-fenced.
Then one of the children, Steve, decided to leave. The partners assumed Steve could leave with his £50,000, plus the profits shown in the partnership accounts. Sadly not.
The partners had not put a written partnership agreement in place and so the Partnership Act 1890 applies. When Steve leaves, the partnership comes to an end and the assets, including the farm, are valued, the profits, including the increase in the value of the farm since the 1980s, are split in the profit shares.
If there are no agreed profit shares, then it is assumed that profits are split equally. Steve could leave the partnership with £50,000, all his undrawn trading profits plus a quarter of the increase in the value of the farm since the 1980s. This could be a substantial amount of money for a farming business to find, and if not found, Steve could force the sale of the farm.
A written agreement could have provided that the partnership did not end on Steve’s departure, and that the three remaining partners could buy out Steve’s partnership share. A provision could have included to pay Steve out over a longer period.
Alternatively, the farm could have been included in land capital accounts with only mum and dad entitled to the capital profits arising from the value of the farm. Steve would then only have been entitled to £50,000 plus undrawn trading profits.
Why did Steve leave the partnership? Discussions around partnership deeds can draw new partners into discussions around their legal rights and hopes for the farm. Steve did not understand the legal structure that gave him a share in the farm and felt he had little certainty.
These concerns could have been addressed. For example, a plan agreed for the gradual transfer of capital interests to the children to tie in with planning around the parents’ wills to leave the reminder to the children and their families.
A little discussion and then a written agreement could have preserved the farm, the family partnership and perhaps the family relationship too.
This article was written for and published in Farmers Guardian December 2020.