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Farming Partnerships - The importance of a written agreement
Partnerships are a popular way to structure a farming business. However, as the partners are often family members, it is common for the arrangement not to be effectively documented in writing.
Partnership arrangements are more complicated than they first appear, especially where valuable capital assets are involved and the lack of a written agreement can cause significant problems. For example, on the death of a partner, will the partnership continue and what happens to that partner’s share in the business?
A partnership agreement will set out the rights and responsibilities of the partners, confirm how the profits will be split and how decisions are made and will also set out the process to be followed if a partner retires or dies. However, if there is no written partnership agreement in place, the Partnership Act 1890 rules apply.
Under that legislation, a partnership will automatically dissolve on the death of a partner where:
- there is no written partnership agreement;
- there are only two partners in the partnership;
- there is a written agreement, but the agreement does not state that the partnership will continue after the death of a partner
If a partnership dissolves on the death of a partner, that partner’s personal representatives (PRs) may acquire the partnership to wind it up and sell the assets. As farming partnerships are usually made up of family members, and the responsibility of being a PR is often left to a family member, this can create obvious issues. For example, if the PR is also a partner of the partnership, that individual would have a conflict of interest between its personal interest as partner and its role as a PR.
To avoid this issue, a partnership agreement can be drafted to clarify that the partners intend the partnership to continue on the death of a partner. The agreement could also provide:
- an option for the remaining partners to purchase the deceased partner’s share in the partnership, with the details of the purchase to be agreed. The purchase can then be dealt with by the continuing partners whilst the business of the partnership continues.
- confirmation that one or more continuing partners will receive the deceased partner’s share for market value. Unlike the purchase option, the continuing partner(s) do not have any choice in these circumstances, they must purchase the deceased’s share.
Therefore, a written agreement should be put in place to set out the partners’ intentions following certain events such as death, retirement or bankruptcy. Without a written agreement, the partnership will be governed by the Partnership Act 1890 by default and, for the reasons explained above (and others), this is not a desirable position.
It is important to remember that, in the absence of a written agreement, regardless of what the partners think they have agreed to, disputes and difficulties can, and are likely to, arise.
If you would like to discuss your farming partnership, or if you have any queries as to the most appropriate structure for your business, please contact our Agricultural Team on 01653 600070.