Farm partnership case shows how clear records are key

The importance of a well-drafted partnership agreement and a clear record of how assets are owned is highlighted by a divorce case in which four adult children in a farming family intervened.

The case involved a farming partnership near Sheffield, on the South Yorkshire/Derbyshire border.

Issues included confusing records, contradictions in the partnership agreement and a lack of documentation in certain areas relating to the farming property assets.

See also: Farming partnership retirement appeal case highlights dispute consequences

By 2020 there were six equal members of the partnership – Alex Merryman, his wife Julie, and Alex’s children Elizabeth, Katie, Scott and Robert.

All six worked on the farm, with the children having devoted their working lives to the development of the business without payment from the time they each left agricultural college or university.

None of the partners took a salary, with the business funding their day-to-day needs and “modest drawings” shown in the 2022 accounts.

When Alex and Julie divorced, a financial settlement had to be worked out.

Alex’s four children intervened in the proceedings, on the grounds that they considered they were each entitled to a one-sixth share in four properties, by virtue of them being partnership property, alternatively through a proprietary estoppel claim.

The four properties were two farms, a student buy-to-let and a further residential property. All four were included in the partnership accounts. None of the annual accounts had been signed by all partners.

Inheritance promises

Proprietary estoppel cases are increasingly common, involving a claim that a promise has been made about inheritance and that someone relied on that promise to their detriment, often by working for little money and forgoing other opportunities.

By the time the case came to court, the four children had collectively clocked up an estimated 77 years’ work in the farming business, which had only one bank account, with all transactions relating to the farm and the properties going through that account.

The judge had first to decide whether any of the properties were partnership assets – and if any were not partnership assets, whether proprietary estoppel prevented the father Alex and stepmother Julie from relying on their rights to those non-partnership properties.

All the children were party to an agricultural charge against the farming properties for borrowings.

The judge found that there was a common understanding that the two farming properties were partnership assets and that the four children were each entitled to a one-sixth share in those two properties.

He also agreed with the intervenors’ claim based on proprietary estoppel, saying that both Alex and Julie had made sufficiently clear promises in respect of the farm properties.

In the judgment, His Honour Judge Baddeley said:

“I find that the intervenors each relied on these promises when committing their working lives to the farm. Their evidence on this issue was compelling.

“They each said in their own way that they would have been foolish to put in all that effort for a share in the farm income alone. In my judgment, the evidence of the intervenors’ reliance on those assurances is overwhelming.

“It makes little sense for them to have done this if they were not to be owners of the farm property, which is where the [sic] much of the value created by their hard work would be.”

The case was complicated by a poorly-drafted and inconsistent partnership agreement.

“The partnership deed should have clearly defined the partnership property. Had it done so, the need for this expensive and stressful litigation could probably have been avoided,” said the judgment.

Property disputes

Stephanie Butler is a senior associate in the property disputes team at law firm Birketts, with a specialism in complex ownership arrangements.

Her work includes divorce and separation cases where third parties intervene, as in the Merryman case, and she expects to see more proprietary estoppel claims.

“Where a marriage involving a farming partnership breaks down, disputes about who owns what can become especially complicated – particularly when third parties such as adult children claim a stake in the farm,” says Stephanie.

Issues in such disputes often involve questions as to what is a partnership asset, how clearly a partnership agreement (if indeed there is a written agreement) sets out ownership, whether promises were made – and relied on – by third parties and the nature and extent of each person’s work or financial contribution in the business.

While the Merryman case may seem unusual, third-party interventions in divorce proceedings are not uncommon, says Stephanie.

Intervenors often advance alternative arguments.

Faced with the risk of losing a stake in a property they have contributed to for years, they may argue that it’s a partnership asset, or that proprietary estoppel applies, or that a constructive or resulting trust has arisen, or that relevant property deeds are invalid due to mistake or undue influence.

“These are all ways someone who is not on the legal title can argue that nevertheless they have a right to a share of the equity. Often these things are mixed together.

These arguments reflect the reality that, without formal documentation, hard-earned interests can be lost to legal technicalities.” 

The case of Merryman reinforces the need for clear drafting of the partnership agreement, she says, and poor drafting is quite common.

“In this case, it wasn’t just that the drafting hadn’t been done well.

There were clearly things that anyone who had taken the time to read it through would realise were mistakes, things that were clearly incompatible, perhaps resulting from using a template where some options had not been struck through.

“Looking at the bigger picture, it’s very hard often to predict what conclusion a judge will reach when they are just trying to decide what the reasonable person would think.

“That uncertainty increases the likelihood that there will be no resolution outside of court and so that racks up costs for everyone and often the costs of these sorts of proceedings can become disproportionate to the value of the assets that are in dispute.

“Quite often people assume that everything will work out.

“They might recognise that people will fall out but they don’t necessarily act on that possibility because everything could come crashing down – even discussing shares of assets openly might make everyone realise they are not all on the same page and so cause difficulty, so people keep schtum and hope for the best.

“It can all seem too much to deal with.”

The need for clear records

Stephanie advises all parties to keep clear financial records.

She has advised intervenors, or third parties, in divorce cases where receipts and invoices would have been helpful, for example where a family member has contributed to property improvements or to payments towards a mortgage or other borrowing, always assuming they would get a share of that property because they may have built and extension, or improved land.

“Another example of the need to keep clear records is where money may be transferred to someone else. It’s useful to have the correct reference in the bank statements – often people just put things like ‘rent’ and if you’re trying to establish an entitlement to a share of the equity, the word ‘rent’ is not consistent with that – rent implies you’re just there as a tenant, rather than potentially building a stake.

So think carefully about the references in your transactions. It’s not conclusive but helpful.

“The court takes oral testimony with a big pinch of salt. Not every judge is the same but in general, a court is more likely to put more weight on contemporaneous documentation than oral testimony.

“Diary notes from the time a conversation at the time it was held would be helpful, although not as good as an exchange of text messages or letters, for example, in relation to promises.”