When we speak to farming and agricultural businesses, we are often asked "What is the point in having a Partnership Agreement?" These businesses have often been run perfectly well in the past, and so we can understand why they might think that this is unnecessary. Understandably, people may be reluctant to have potentially difficult discussions and make decisions about the operation of the business and its transition to the next generation.
Succession is one of the most fundamental challenges that a family farming business will ever face, particularly if it takes place unexpectedly due to ill health or death. Having a formal written Partnership Agreement in place removes this uncertainty and provides a clear plan for partners to resolve difficult situations in times of need. It may also be crucial to the Partners' individual inheritance tax planning and the ability to obtain Agricultural and/or Business Property Relief.
Where there is no agreement in place, the Partners are left to resolve issues without a clear rule-book, which can often lead to disputes and far greater costs and expenses than the original Partnership Agreement would have cost at the outset. The Partnership Act 1890 ("the Act"), a long-standing piece of legislation passed during the reign of Queen Victoria, will automatically apply to the partnership business but may lead to unexpected and unintended adverse outcomes:
- Finance - Under the Act, all Partners automatically share equally in the profits and losses of the Partnership, which may not be appropriate for all farming businesses. A Partnership Agreement should specify whether Partners are required to provide any financial input in relation to the business, and also the correct split of profit and loss between the family members.
- Entry and Exit Plans - The default position under the Act is that no person may be introduced as a Partner unless there is unanimous agreement between the other members of the Partnership. In addition, the Act makes it extremely difficult to remove a Partner unless “a power to do so has been conferred by express agreement between the Partners”. To avoid a situation, however unlikely, where a disruptive family member cannot be removed from the Partnership, tailored rules should be drafted into a Partnership Agreement.
- Partnership Property - Recent cases such as Ham v Bell  have highlighted the difficulties of trying to retrospectively establish whether farm property and equipment belongs to the Partnership or an individual Partner. Clearly setting out this information in a Partnership Agreement will give clarity to the Partners, and will also ensure the most tax efficient treatment of the property. For example, agricultural land that is classed as partnership property should be eligible for Business Property Relief.
- Dissolution - Under the Act, a Partnership will be automatically dissolved following the death or bankruptcy of any Partner. The Act also states that a Partnership may be dissolved by any Partner giving a dissolution notice to the other family members. To enable any farming business to continue for the foreseeable future, restrictions should be put in place in a Partnership Agreement to ensure that the Act's limiting clauses do not prematurely end the business.
- Decision Making - The Act states that Partnership decisions will be by simple majority, with the exceptions that decisions relating to changing the nature of the business or introducing a new Partner will require unanimous agreement. It is highly likely that each individual farming business would prefer to create individual rules in relation to decision making, which can easily be incorporated into a written Partnership Agreement.
At best, a Partnership Agreement will plot a clear course through a challenging time of change and avoid potentially expensive family disputes. At minimum, a Partnership Agreement will provide the peace of mind that you need to focus on the business.
For further information contact Dominic Ring.