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Unwritten Partnerships

View profile for James Cornforth
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Many farming clients come to us with issues regarding a partnership that they have made with their business partners, who are often also family members. In many cases, there is no paperwork in place to confirm the terms of the agreement.

Such arrangements are generally taken on trust, with the parties keeping to their word and family ties. However, most people do not realise that this may have created a partnership which does not reflect their intentions behind the arrangement.

In the absence of a written agreement, where you have a family running their farming business for profit, a number of matters are assumed to be included within the agreement by the Partnership Act 1890. In many cases, these are not desirable and can create problems.

The Partnership Act 1890 will assume and impose the following default provisions:

  • All partners will have an equal share in the profits of the business and have unlimited liability for any losses of the partnership. However, this might not be appropriate for all partnerships. For example, it might not reflect what each party has brought to the partnership; the partners might wish to gradually introduce children into the partnership; and have the partners considered the effect of a marital breakdown on the partnership.
  • Where no fixed term of the partnership is agreed, any partner can give notice to leave the partnership, which effectively ends the partnership.
  • Likewise, if one of the partners dies, the partnership will need to be dissolved, regardless of whether the other partners want to carry on.
  • A partner cannot be removed from the partnership unless there is express agreement from all the partners (including the one that is intended to be removed).

Even when a written agreement is produced which covers the above points, legal advice should be sought on the rest of the provisions to ensure that it deals with other important matters. An example is clarifying how to treat the land on which the farming partnership is run from - is it a ‘partnership asset’ or a ‘separate asset’? There are differing tax consequences depending on the answer and professional advice should be obtained to confirm the implications.

An area where it is particularly helpful to include specific provisions is in relation to what happens when a partner leaves the partnership, either through retirement, death or sale to third party (if permitted). Should the outgoing partner’s share be offered to the remaining partners first and how should the value of the share be determined?

Written agreements benefit all parties as they provide clarity on how the partnership works and can include specific provisions relating to the introduction and removal of partners, how profit and drawings are to be treated and how the partnership is managed on a day-to-day basis. There is also the opportunity to ensure that the provisions of the partners’ Wills are reflected in the agreement, as the general rule is that the partnership provisions override the terms of a Will.

Our agricultural team at Crombie Wilkinson provide clear, concise and thorough advice on Partnership Agreements, Wills and other agricultural matters, so please do not hesitate to contact us on 01653 600070.