With a general election on the horizon, and an increased need to think about long-term succession planning with the new range of environmental and stewardship agreement options available following the transition away from BPS, many farming families and businesses will be considering updating their partnership agreements or formalising any unwritten agreements. This is a sensible step and there are many key considerations to be had before putting pen to paper.
Structure and management
Thought should be had as to the general structure of the partnership, the relationship between the partners and how decisions will be made on both a day-to-day and management basis. Is there to be a senior partner who will have a casting vote or the power to veto any decisions? Will all partners have equal voting rights, or will there be a weighted structure to voting based on capital interests, or otherwise? Are there to be key decisions which should be reserved and only possible with the express agreement of all partners? How often will partners’ meetings need to take place, and how formal or informal will these be? These provisions should reflect what happens ‘on the ground’, but equally the partners can take the opportunity to improve on their current practices.
Any one partner can bind the others by their actions or conduct, and so including provisions in a written agreement specifying the partners’ duties towards each other and potentially placing limitations on their authority to carry out certain acts can be useful. For example, the partners will need to consider whether they should each have the power to make payments from the partnership account, open new bank accounts on behalf of the partnership, or enter into transactions on behalf of the partnership without reference to and consent from each other.
A partnership agreement can be drafted both to fit the current needs of the partners and to include flexibility so that it remains relevant and useful as circumstances change.
Capital/profits
The written agreement should specify the partners’ capital contributions to the business, to avoid disagreement in the future. If this is a new partnership, are these contributions to be purely monetary, or can they take other forms, such as property? Will interest be paid on the capital?
The partners will also need to consider how income and capital profits and losses are to be shared between them as without an agreement the relevant legislation will determine that they are to be shared equally, which may not reflect the partners’ intentions, especially where property has been introduced.
Should provision be made for any partner to have a first charge on the partnership profits and if so, should this be payable even in the event that the business is not profitable? The partners may also wish to prescribe with what frequency drawings may be taken.
Property
Partners may choose to introduce property into a farming partnership, which can, in certain circumstances, bring potential inheritance tax benefits, and there may already be a base from which the partnership operates (most commonly a family farm). Partners will need to consider whether any land that is introduced is to be held as part of the general capital of the partnership, or if it is to be ring-fenced in separate land capital accounts.
Where property is held in the partnership, the partners may also wish to consider how any disposals or dealings with that property are to be managed, and, whether a landowning partner will have the ability to unilaterally withdraw their property from the partnership.
Where the family farm is held within the business the partners will want to consider including duties and obligations on the partners to protect it, as far as possible, in the event of death, divorce or retirement.
The decision to introduce property to a partnership is a significant one and legal and accountancy advice should always be sought, and the partners’ Wills reviewed and updated if required.
Wills/dissolution and death
Under the general law, a partnership will dissolve on the death of any one partner. As a dissolution can have catastrophic consequences for the business and its assets (particularly where the farm is held as an asset of the partnership) this will often be a provision which the partners will want to override in their written agreement. The partners should similarly consider what happens to a partner’s interest in the business, including any property held within it, on the event that he or she leaves the partnership, whether by retirement, death, or expulsion.
Crucially, the partners should review their Wills to ensure they dovetail with the terms of the written partnership agreement.
Conclusion
A partnership agreement can be as detailed as the partners require, and the above factors are just a few that need to be considered when reviewing the terms of a partnership agreement.
Anybody who is seeking to update their partnership agreement, formalise an unwritten agreement, or establish a new partnership should contact one of our partnership experts to discuss their options and the best way to proceed.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at February 2024.