The agricultural partnership is a common and often effective legal business structure that can be used by families to run their farm.
Despite being popular in farming communities they can cause confusion, especially when life muddles the situation. So, what should people consider when joining or creating an agricultural partnership?
The importance of a clear partnership agreement
Agricultural partnerships, just like any partnership, carry both successes and liabilities and anyone considering entering into one must keep this in mind.
Partnerships require ‘utmost good faith’ from the partners.
One of the most serious problems, which is often not dealt with, concerns ownership of farm assets - and the farm freehold in particular. This is a technical area, but of great significance in practice if a partner needs paying out for his or her share. This can happen on the death or retirement of a partner, or on the divorce of a partner.
Firstly, a partnership agreement should state whether the farm is a partnership asset or held outside the partnership. Secondly, it should say which partners have a share in the farm, and how any gain in value should be allocated between them. Farms have increased in value hugely over the last 20 years and several cases have come to court because there was no clarity about this issue.
Although these things seem simple, they are often neglected.
Contracts can also be used to manage the termination process. Often, clauses state that a partner leaving the partnership can be paid out over a number of years, so as to enable the remaining partners to re-trench.
Using partnership agreements to support the family
For many generations, farming families have used partnerships as a way to bring the younger generation into the business. Bringing younger family members into the partnership can aid development and provide next generation farmers with life experience, income, and a stake in the family business.
The key point here is to get clarity on partnership rights, including ownership of assets while there are no significant family tensions. Once a dispute has started, it is too late.
Hopefully there never will be a ‘bust-up’, but if there is, the well-drafted agreement will save much stress and money. However, it is very helpful for a family to agree what their rights and duties are, so that there are no surprises down the line. Therefore, if a partner leaves the partnership in happy circumstances, there should be little reason for dispute about what they are entitled to from the partnership.
Some partnership agreements sometimes require pre-nuptial agreements from newly married partners to protect the farm assets should a divorce take place.
It is also common to stipulate what happens when a party is no longer of sound body or mind, so putting in place a lasting power of attorney and will, and updating them as needed, is also something that should be strongly considered.
Ensure your accountant and solicitor sing from the same hymn sheet
It is essential that your partnership agreement ‘agrees’ with your farm accounts. This is where many arrangements fall down - and court cases follow. However, the remedy to this is simple – ensure your solicitor communicates with your accountant so that you end up in a joined-up and consistent position.
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It can be easy to get carried away by the excitement of beginning a new chapter for the family farm, but people must consider partnership agreements carefully, with the business’ best interests in mind. Having a clear agreement that covers all eventualities will ensure that the partnership brings security and prosperity to the farming community.
For more information, advice or support please contact Peter Snodgrass or Jennie Wheildon in our dedicated agriculture team.
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