Why farming partnership agreements are important

Farming partnerships must surely be one of the earliest forms of business arrangements. Barring the introduction of the limited liability partnership – something relatively rare in farming – the legislation governing them has barely changed since the introduction of the Partnership Act in 1890.

Anyone in the business of farming together will, on the face of it and without an alternative agreement in place, be in partnership for the purposes of the Act. And unless a written partnership deed has been signed up, or the parties have clearly agreed an alternative arrangement, the provisions of the Act will apply.

What this means is that, should a partner die, the partnership is considered dissolved. If the remaining partners carry on business as usual – without recourse to a partnership deed – then they are considered to have formed a new partnership.

This can be fine when everyone is getting along, the trouble starts when people fall out or behave in a way not expected by the other partners.

Case study 1: the Barley brothers

The three Barley brothers ran the family arable business in partnership with their respective wives. While there was no written deed of partnership, it was understood that, should one of them die, their share of the partnership would be left to their spouse.

When Bob Barley died in 2008, however, it was discovered that he had left his share of the partnership to his daughter. Attempts to bring her into the business failed and eventually she decided she wanted her share out of the business. In the meantime, her mother had decided to retire and she also wanted to take her share from the business.

This case raises important issues. Firstly, there is no mechanism in the Act by which a partner can be required to leave their share of the partnership assets to the remaining partners, or even to give the remaining partners the option to buy their share or to pay out their share of assets in instalments.

Secondly, valuation of the partnership is not straightforward. In this case, while Bob’s widow and his daughter expected to each receive one-sixth of the asset value, in reality when Bob died, the existing partnership dissolved and a new one came into existence so, from 2008, the widow had one-fifth of the new partnership. In this scenario, the daughter’s one-sixth share was valued retrospectively to 2008, and the widow’s was valued at its current value.

It’s not just death that ends a partnership not protected by written deed. Retirement, divorce, bankruptcy or just a plain old dispute can all have the same effect and bring other issues swimming to the surface.

Case study 2: the Lamb sisters

The two Lamb sisters ran the family sheep business in partnership until they fell out. When it came to dividing the assets, which included two farms, Lillian Lamb claimed one of the farms had been bought by her as an individual and as such was not a partnership asset, despite the fact the farm had been worked by both sisters in partnership.

When Lydia Lamb disputed this, it was discovered the paperwork did indeed list her sister as the owner, despite a verbal agreement that the farm was actually a partnership asset.

Here, Lydia does have some recourse to the law as verbal agreements do carry some weight, but a court’s starting question will always be: “What is in writing?” Lydia will have to rely on standing up in court and convincing a judge that her version of events is the true one. Whatever the outcome, there will be huge amounts of cost and anguish.

This can be especially acute if the warring partners are unable to negotiate a partition of assets or find a means of paying a partner out. In this situation, the court can force the entire holding to be sold and the cash proceeds divided.

The only way to avoid these situations is to have a written deed of partnership. No matter what length of time the partnership has been in existence, it’s too late to put something in writing when things go wrong. Putting it off because of fears it would “rock the boat” or implies a lack of trust could well lead to a good deal of heartache later on.