The Courier & Advertiser (Fife Edition)
Key issues to consider when forming farming partnerships
It is common for farming businesses to be run as partnerships between the owners. When setting up this type of business, it’s prudent for the parties to enter into a tailored Partnership Agreement to set out the rules for the business and mitigate any risk should changes occur. Without a Partnership Agreement in place, you are subject to default (and often surprising) rules of the Partnership Act 1890 – such as the automatic dissolution of the partnership when
any partner dies.
What should a Partnership Agreement cover? Split of profits and losses
It should set out how the profits (and losses) are to be divided between the partners, how profits are extracted and when losses need to be made up. The 1890 Act provides that profits and losses are to be shared equally between the partners but that may not reflect the contributions or intentions of the parties. For
example, one partner may carry out more work so they may receive a higher split of the profits.
Decision making
It should regulate the how decisions are made within the partnership. It is usual to draw a distinction between matters that arise in the ordinary course of the business (a simple majority vote should be sufficient) and matters that are outside the ordinary course of the business or of material importance (for which a unanimous vote may be required). For example, the purchase of costly equipment may require unanimous consent whereas the purchase of cheaper equipment may only require a majority.
Assets
It is important to be clear about which assets belong to the partnership and which assets belong to the individuals. For example, farmland might be owned by the individuals even though the farm is operated by the partnership. If this is not clearly set out in the Partnership Agreement and checked with reference to the title deeds for the land, it can cause all sorts of difficulties if a dispute arises.
Fundamental Changes
Any fundamental change in the partners’ circumstances may trigger a dispute. This could include the death or retirement of a partner or a ‘falling out’ between the partners. The Partnership Agreement should set out the procedure in such events and specify terms for making payments to a departing partner. These terms can be challenging because the terms need to be fair to all parties in addition to enabling sufficient time to raise funds required to pay the departing partner. The certainty of an agreed
procedure should help reduce the stress caused and allow for business continuity.
For each individual partner, it
is important to ensure that the Partnership Agreement they are signing up to aligns with their Will. Generally speaking the contents of a partnership agreement would override the terms of an individual partner’s Will where they contradict each other.
Conclusion
A Partnership Agreement cannot guarantee business success but should help the partners take comfort from knowing their rights and responsibilities and what will happen if certain major changes take place.
We would be happy to help put in place or review Partnership Agreements for agricultural businesses. We recommend a review every 3-5 years to ensure the documentation reflects how the partnership is operating in practice. For more information about how our corporate team can assist your rural business visit https://www.raeburns.co.uk/services/commercial-law/corporatebusiness-law/.
Alasdair Smith alasdair.smith@raeburns.co.uk, tel. 01224 332400