Any important event in farming family life can prompt a hunt for the partnership agreement. It may be a marriage or a death, but is more likely to be a disagreement over policy or money.
Issues of control, profit shares and the direction the business should take are common triggers for disputes, highlighting the need for a well drafted agreement in the first place, says Angus Williams, head of agriculture and rural property at south-west law firm Withy King.
A partnership agreement can be altered at any time provided the parties involved agree, but once there is a dispute, that agreement can be elusive. So, partnership documents need to be reviewed periodically while relations and communications are good.
Annual reviews are ideal, especially if any partner is elderly, but reviews should happen at the least every three to five years, says Mr Williams. Partners should make wills and review them on the same basis, remembering that a marriage revokes an existing will unless it was made in anticipation of the marriage. Divorce may also affect the distribution of an estate.
Key areas for review include:
| The type of partnership – is a general partnership or a limited liability partnership best?
| What is the business of the partnership? Consider whether it might be better for diversification ventures to be outside the partnership
| Are current profit and loss allocations appropriate and should interest be paid on undrawn profits?
| How will capital contributions be decided?
| Is it clear what are partnership assets and what is held individually by partners, and on what terms?
| Ensure that the partnership deed, as well as title documents where appropriate, reflect these arrangements
| How are voting rights allocated?
| When and how should drawings be made? Will this be agreed in advance or as and when necessary, what is the basis for agreement?
| Who has authority to operate partnership bank accounts and at what levels?
| Check that appropriate insurance policies are in the partnership name and not under individual partners’ names
| How much time will partners devote to partnership business?
| Are they allowed to be involved in other business interests?
| How are responsibilities shared between partners?
| Should the authority of partners be limited?
| How will decisions be made and issues resolved – for example, whether to sell land or change the direction of the business
| Should some issues require unanimous agreement, for example, the introduction of a new partner or altering profit shares?
| Are there any decisions on which a partner will not be entitled to vote?
| How often will meetings be held?
| What will voting procedures be and will the appointment of proxies be allowed?
| Should there be provision for automatic termination of the partnership, for example on a partner being declared bankrupt?
| Are there circumstances in which a partner may terminate the partnership, for example following a breach by another partner?
| Should partners be able to expel or suspend a partner, for example on grounds of bankruptcy, mental incapacity, breach of partnership agreement? How would this be done?
•In what circumstances can the partnership be dissolved?
•Will death, bankruptcy, retirement or expulsion of a partner lead to dissolution or will the partnership continue despite such events?
•If the partnership is dissolved how will the assets be distributed?
•Are there provisions for resolving disputes – should arbitration be used?
Three events are common in many farming partnerships: Bringing in a new partner and the retirement or death of an existing partner.
The introduction of a new partner can usually be dealt with through an addition to the existing agreement. Do not wait too long to bring in the next generation, or to give up some control of the business, warns Mr Williams. “To introduce a partner who has no say can quickly lead to frustration and potentially to a dispute.”
However, a new partner should only be admitted if you are sure that person is mature enough and existing partners are genuinely willing to let go so that the newcomer can take a share of responsibility.
Bringing in a new partner will take between three and six months if properly planned and considered, longer if there are complicated tax, land ownership or security issues, says Mr Williams.
If you are sure that family circumstances are right for a new partner, check the implications with an accountant, then the bank and solicitor, he says. Tenancy terms should also be checked for rights to share occupation (mainly Farm Business Tenancies). For traditional tenancies look at succession rights and whether those you are bringing in will meet the requirements.
If capital gifts are made, these need to be formally recorded and recognised in the partnership agreement. However, land and property may not be owned by the partnership and becoming a partner does not automatically entitle a person to an interest in partnership property. New partners are not necessarily expected to bring capital to the partnership on entry but may build up a partnership base by restricting the amount they draw from their profit share.
HM Revenue & Customs must be notified when a new partner joins and certain tax elections need to be considered. The whole process can cost anything from £1000 to over £20,000 if valuations, re-mortgages, a complicated agreement or tax advice are needed, or a new tenancy agreement and land registration.
More recent partnership agreements tend to deal with provisions for retiring partners.
“It’s important to address this and by doing so in good time, tenancies can be arranged so that the partnership continues but the outgoing tenant may have an income from renting the land to the partnership, for example,” says Mr Williams.
“It is often important in farming partnerships to ensure that those remaining have the chance to buy the outgoing partner’s share.” However, there may be tax consequences if they are obliged to buy it, he warns.
Other related issues which the agreement should consider include:
| How and when payments to the outgoing partner will be calculated
| Provision for revaluation of assets
| How repayment of capital will be financed
| What will happen to the outgoing partner’s interest in the partnership? Will it accrue automatically to the continuing partners or will they be obliged to buy it or have an option to buy it?
| Can partners retire early? If so, what would the procedure be and how might an income or pension be provided?
Death of a partner
For all partners, it is important that their wills are written with the partnership agreement in mind, and vice versa, so that there is no contradiction between the two sets of documents.
Where there are only two partners, the death of one usually brings the partnership to an end. Provided two or more partners survive, then the partnership may be able to continue. As with retirement, the partnership agreement may dictate what should happen to the deceased partner’s share in the partnership and often it will provide for those remaining to buy that share. How this is to be valued may also be set out in the agreement and any transfers properly documented and recorded.
“It is important to follow what is set out in the partnership agreement,” says Mr Williams. “However if the partnership agreement is silent on this, the family would fall back on the terms of the will to decide what happens to that share. There is also the opportunity for a deed of family arrangement which would allow the terms of the will to be varied provided all beneficiaries are in agreement.”
Case study: The Parsons partnership
William Parsons joined his parents Patrick and Nicky as a partner at Langford Green Farm near Bristol in 2002 when he was just 22.
The move was made after he returned home from a degree course at Seale Hayne and it was clear that dairy farming was definitely what he wanted to do, despite his mother’s efforts to persuade him away from it. Gaining wider experience working in New Zealand and on other farms in the UK was invaluable, says William.
He was given responsibility from the outset and has steered changes which might not have happened, or perhaps not happened so quickly, if he had not become more involved in the business decisions.
These include almost doubling cow numbers to 140 head, new cow housing and changes to cubicle management. Giving William the responsibility of becoming a partner has cemented his commitment and allowed his drive and enthusiasm to benefit the business, say his parents.
The Parsons had a written partnership agreement before William joined but rarely need to refer to it. The three partners meet for breakfast every day so both large and small issues can be discussed. This regular, open communication along with trust and shared ambitions are key elements in making the partnership work.