Partnership property disputes – when things go wrong

Unlike a limited liability partnership, a general partnership has no separate legal personality, which means that it cannot own property in its own name. As a result, business or partnership property is normally purchased in the names of the individual partners. This arrangement can however create difficulties if there is subsequently a dispute between the partners.

Let us, for example, consider a property bought in the names of three individuals in partnership together, used by the partnership for business purposes (perhaps, a doctor’s practice). Do the owners hold the property on trust for the partnership, or do they hold it on trust for themselves as individuals? If one of the partners retires from the partnership, what happens to their share in the property? If one of the partners dies, does their share in the property pass to their Estate, or does it pass to their fellow partners? Is the purpose of the trust to generate income for and provide an investment for the co-owners, or are the co-owners ‘custodians’ who hold the property for the benefit of the partnership and the partners from time to time? The answers to these questions are not always straightforward.

Partnership property

It is up to the partners to agree between themselves what assets are to be treated as partnership property. In the absence of a written agreement confirming the position, the court can look to other factors to ascertain the parties’ common intention for the property. The relevant considerations will generally be:

• the circumstances of the acquisition, with particular reference to the source from which it was financed
• the purpose of the acquisition
• the manner in which the asset has subsequently been dealt with.

If a property is purchased with partnership money, there is a statutory presumption that the property is partnership property and so held on trust for the partners to be applied exclusively for the purposes of the partnership. It is also presumed that the partners hold the equity in the property as tenants in common with no right of survivorship. This is because of an old legal maxim that ‘the right of survivorship has no place among merchants’.

The effect of this is that, if one partners dies, their share in the property passes to their Estate, not to their fellow partners. Like all presumptions however, these presumptions can be displaced if there is evidence of a contrary intention.

For instance, it is possible for partners to buy partnership property and declare that they hold the equity as joint tenants with a right of survivorship, so that the property passes to the survivor upon the death of the first to die. In that case, the property would remain partnership property, but subject to an express agreement and declaration of trust to the effect that the property would accrue to the survivor. That would not mean that the property would cease to be partnership property: it would still be available, even after the death of one of the partners, to the creditors of the partnership on its dissolution. But as between the partners there would be an agreement, ousting the usual rules of partnership, that that property would accrue to the survivor.

Non-partnership property

If the property is not partnership property but rather held on trust by the legal owners for themselves (whether as joint tenants or tenants in common), it might still be used for the purposes of the partnership. It might, for example, be let to the partnership under a tenancy agreement. As partners come and go from the partnership, the identity of the partners and the owners of the property may begin to diverge. Let us assume, for instance, that our three individuals in partnership together running a doctor’s practice buy a property which they hold for themselves in their own right as tenants in common in equal shares. They decide to run their surgery from the property and grant a lease to the partnership. After a few years, the parties fall out and one of the partners is expelled from the partnership. The expelled partner still remains on the legal title to the property and is still entitled to a one-third share in the equity. When the partnership’s lease comes up for renewal, the three parties cannot agree on the lease terms to be offered to the partnership: the ousted partner wants to maximise the rent and insists on personal guarantees from the current partners; the other owners (who are effectively wearing the hats of both landlord and tenant) want to offer the partnership more favourable terms.

If the owners of the property cannot agree, any of them may apply to the court for an order specifying what should happen to the property, such as what terms should be offered to the tenant, or whether the property should be sold and, if so, to whom and at what price. Such applications are made under the Trusts of Land and Appointment of Trustees Act 1996 (TOLATA). Applications for sale, in particular, can present a number of further issues. For example, in our above scenario, the current partners of the doctor’s practice may wish to seek an order that the property be sold, with a right for them to buy it at a price to be determined by the court, prior to being marketed for sale on the open market (effectively, a right of pre-emption which enables them to buy-out their former partner). However, determining the price to be paid is not as simple as you might think. For instance, the parties might disagree on whether the lease to the partnership (and any ‘security of tenure’) should be taken into account when valuing the property, or whether the property should be valued on the basis of vacant possession. Furthermore, a right of pre-emption can never be guaranteed, as arguably the ‘usual’ order for the court to make is an order for sale on the open market with any of the parties entitled to bid for it along with members of the public. It is therefore preferable to reach an agreed resolution where possible, to avoid the risks of losing the property and the potential cost consequences of losing at court.

The above illustrates how quickly these situations can become complicated and unclear. If you find yourself in a similar conundrum and would like to know more about how we can help, please contact Laura Tanguay on 01473 299188 or [email protected].