Whenever farming clients ask why they need a partnership agreement my answer is simple: the best partnership agreement is one that you never have to get out of the kitchen drawer. Of course you would say that they say. But actually, it’s true!

For a family farm, a partnership agreement is essential, but you often won’t see the benefit until a life event happens – when someone dies or wishes to retire, or indeed where a dispute arises.

The Partnership Act 1890 (the Act) sets out what happens in any of those circumstances where there is no partnership agreement in place.  The Act is dated and does not always deal with matters in the most efficient way or in the manner in which clients would want matters to be addressed. It also does not specifically address circumstances surrounding a farming partnership, which means that the results are often clunky and undesirable.

Business continuity

For example, the Act states that on the death of an individual partner, the partnership is automatically dissolved. This can have catastrophic practical considerations for the farm, including freezing the bank accounts, debts demanded to be settled and forced distribution of assets between the remaining partners. Often despite a change in circumstances, clients wish for the business to continue, and so the implications of such actions can have far-reaching effects on the day to day operation of the farm, not to mention the time and resource to resolve them.

Note that banks are now far more aware of such implications, and quite often we have seen them demand for a partnership agreement to be put in place in order for lending facilities to continue, or for new lending to be approved. A review of finance facilities, or the admission of the next generation into the business, are ideal opportunities to look at putting a partnership agreement in place.

Managing change and disputes

Where a dispute between existing partners arises, a partnership agreement can often be the guiding light for resolution and reduce the likelihood for ongoing issues. It can also set out specific mechanisms for disagreements to be resolved.

A comprehensive partnership agreement should cover issues such as what happens when a partner leaves, either due to retirement or death; what happens if a partner loses capacity, as well as mechanisms for valuations, voting rights; how profits and capital are to be split; and what assets are included within the partnership itself. These provisions should also dovetail with other family legal documents, such as wills and any trust arrangements. The agreement should be specific to your business and to your family circumstances.

Many farming families are pre-occupied with running the business itself, or don’t want to incur a raft of professional fees, particularly for a document that at its best will be left in a drawer, never to be referred to again. However giving that little bit of investment in the consideration of such issues now will offer much more security in the long run.

Don’t let the ancient Act be your default setting; contact us now to discuss putting a partnership agreement in place.

Partner Susie Mortonson has particular expertise in the agriculture sector and has advised a wide range of farming businesses on many different issues that they face.

For help and advice on partnership agreements, and other related issues, please contact Susie by emailing susie.mortonson@andrewjackson.co.uk or contact (01904) 275250