Partnership: Five reasons to get a written agreement

A significant number of farming businesses are run through a general partnership structure. Yet how many of those have partnership agreements in place? And how many of those partnership agreements are up to date and fit for purpose?

In the absence of any agreement to the contrary, farming partnerships will be governed by the Partnership Act 1890 (1890 Act); legislation that’s over 100 years old can hardly be expected to be well suited to 21st century farming businesses.

The situation isn’t much better if there is a partnership agreement, but it was drafted many moons ago and no longer reflects how the partnership is run, what the partners want or what the partnership assets are. This issue came to the fore in the 2013 case of Ham v Ham, in which the judge observed the cost – both financial and emotional – of having a poorly drafted partnership agreement in place.

Whilst in practice business arrangements are often varied by agreement as and when required, the strict legal position should not be forgotten as it is the only fall back available in the event of dispute.

Below are five key things which happen under the 1890 Act in the absence of express agreement to the contrary:

1. A partnership may exist, without anyone realising

If the definition of ‘partnership’ under the 1890 Act is met (“persons carrying on a business in common with a view to profit”), then a partnership will exist and will be governed by the 19th century legislation. This could have repercussions if the intention was in fact to create an employer/employee relationship or a contracting arrangement, for example.

2. If any one partner dies or is declared bankrupt, the partnership is automatically dissolved

How then are the animals to be fed, or the contractors paid to bring in the harvest, for example? If the business of the partnership is continued by two or more persons, a new partnership is created, and a ‘technical dissolution’ occurs. This can cause issues such as the bank freezing the old bank account or requesting repayment of outstanding loans.

The business may also be continued by a single person, acting as a sole trader. In either case, dissolution accounts will need to be prepared so that the outgoing partners’ share can be paid to them/their Estate. Until that winding up process is complete, the outgoing partner has a right to a share in the profits of the continuing business or interest on capital. In some circumstances a ‘general dissolution’ may occur, triggering a final winding up of the business. The legal starting point in that scenario is that any partner can require that all partnership assets are sold.

3. Any partner can end the partnership at any time

In a partnership at will, which is any general partnership for an indefinite term, all that needs to happen to end the partnership is for one partner to notify the other(s) that they no longer want the partnership to continue. This right is subject to any agreement to the contrary – again highlighting the importance of a written document.

4. No partner can be expelled

Unless all the partners have expressly agreed that a majority can expel a partner, for specified reasons – such as misappropriation of partnership money, obstructive behaviour or loss of capacity, no such power exists. The partnership must be dissolved, with dissolution accounts prepared and the non-continuing partner’s share in the assets (after payment of debts) paid before the business can continue.

5. Partners’ respective shares in the capital of the partnership are not determined by their contributions

The default position under the 1890 Act is that partners are entitled to share equally in the capital and profits of the partnership and must contribute equally towards losses. This might not be an issue, but if, say, one partner has contributed 90% of the capital, it may be that they expect to receive a sum on dissolution that reflects that. Only express agreement can ensure that this expectation will be met.

The best protection is to ensure that up to date written agreements are in place. We know that every farming business is different and has its own unique set of issues to consider.

This is why it’s important to involve professional advisers to document bespoke agreements which will best serve the partners and the business now and in the future.

Partnership or company documentation should be reviewed regularly, and at the very least, upon the purchase of new land or significant assets or the introduction of new partners, to ensure it still does what the partners think it does or want it to do.