Kelly Schofield, of the Wright Hassall LLP agricultural disputes team writes:
You want to keep your farm secure and want to avoid future unnecessary costs in relation to your farming business. Our advice is to make sure that your business agreement is captured in the form of a partnership agreement. This will provide security for the business and its partners by way of setting out clearly the intentions of the partners as to any partnership related matters.
The Partnership Act 1890
Without a written agreement in place, the provisions of the Partnership Act 1890 (“the Act”) will provide the regulation of the partnership, whether you like it or not. Sometimes the outcome from this Act can be unfavourable and certainly cannot adequately reflect the intricacies of a complex partnership between individuals who will all have different priorities and different concerns as to risk. The Act is archaic and rigid, which is why you need to plan for the future with a partnership agreement.
Partnership agreements allow the partners to jointly consider legal, commercial and practical matters relating to the business and define the outcome in a legally binding agreement. They are able to factor in their circumstances relating to finances, risk and address specific scenarios, which the Act does not allow for. This provides reassurance to the partners and security for the future for the farm. It can also be relied upon to show a partner’s true intentions in relation to a partnership related dispute, should one arise.
Typically the points mentioned below are clarified and accurately defined in a partnership agreement however a partnership agreement can be tailored to your specific needs.
Whilst the area of property may seem reasonably straight forward, this is not always the case. Broadly speaking, partnership property is usually any property brought into the partnership or any property acquired during the partnership. However by clarifying the position in an agreement the partners are clarifying exactly who (all partners or an individual partner) owns the land, machinery and equipment. It is important to clarify who owns what property to enable the partners to resolve any potential future disputes, which will in turn save costs in legal fees. It is not unusual for farmland to be owned by individuals but farmed by the partnership.
Profit and losses
It is not unusual for partners to agree an unequal distribution of the farms profits. This could reflect the amount of work which is done by the partners or how long they have been in the partnership. Without a written partnership agreement, the profits are always distributed equally as dictated by the Act, which can seem unfair in some partnerships.
Management and decision making
Every partnership is run differently. It might be the case that one partner is less involved in managing the partnership than another or that the partners feel that the partner who put the most capital into the partnership should have more weight when voting. These are all points which should be clarified in the partnership agreement because the Act dictates that every partner should take part in the management of the partnership. It also dictates that each partner has equal voting power, not share weighted. Again this may not be the way that you want to run your farm.
Time devotion of partners
The Act does not state how much time the partners are required to devote to the partnership however the amount of time and attention required can be defined in a partnership agreement. It can also define the extent to which a partner can carry on a competing business outside of the partnership and how much of those profits, if any, must be distributed to the other partners.
Retirement, death and bankruptcy – dissolution and winding up
How the partnership comes to an end is something that can be clarified in a partnership agreement. Under the Act, when a partner gives notice that they want to leave the partnership, retire, or if a partner dies or becomes bankrupt, the partnership will come to an end. This may have drastic implications and may not reflect the true intentions of the parties; a partnership agreement would allow the partners to define what will happen in these situations.
Wills and partnership agreements
A partnership agreement is capable of defining what happens to your entitlement under the partnership in the event that you pass away. It is crucial to note that a partnership agreement takes precedent over a Will and therefore it is advisable to ensure that both documents accurately reflect what you would like to happen to your share in the partnership. If there was any inconsistency between the two, the partnership agreement would take priority.
Under the Act when a new partner joins the partnership, the old partnership ends and a new one forms. In reality, this is not practical or convenient and you may wish to define what happens when a new partner joins the partnership. The Act defines that a new partner does not take on any partnership liability prior to their addition; however, a partnership agreement can set out otherwise.
Without a partnership agreement in place, a partner cannot be expelled from the partnership, even in the event of neglecting his duties. A partnership agreement can clarify a scenario where a partner can be expelled which protects the other partners and ultimately the farming business. Common grounds for partner expulsion includes, breach of the partnership agreement, conduct which is adverse to the partnership and ceasing to hold the necessary professional qualifications.
It can be unfavourable to be governed by the provisions in the Act, which leaves your farming business at risk. A partnership agreement is crucial in preserving your family farming business for future generations, on your own terms. Lastly and most importantly, a partnership agreement is an investment. A farming dispute which ends up in litigation is expensive, time consuming and can destroy relationships that you have worked hard to build. A properly drafted, up to date and signed partnership agreement is cost effective in comparison to a protracted litigation dispute.