Farming Partnership News –
As legal practitioners in the rural environment of North Norfolk, we are surrounded by farms. Commonly, these farms are run under partnership agreements or as limited companies, and occasionally by sole traders. Each structure can offer both benefits and drawbacks.
Our farming clients often come to us to discuss their farming partnerships, which are often managed either informally or under old and outdated partnership agreements. We always advise that farming families’ wills and partnership agreements are reviewed regularly and updated where necessary. This is crucial both for practical managerial reasons affecting the operation of the business and the division of income, but also in relation to succession planning, particularly in regard to the treatment of the assets and capital on the death or retirement of a partner. With the changes in the law stated in the recent budget, succession planning is more important than ever to ensure the farm remains intact.
The recent case of Procter v Procter [2024] highlights the importance of a well drafted partnership agreement, particular in relation to retirement from the Partnership. The Proctors ran a family farming business in Yorkshire, which was governed by a Partnership Agreement dated 1980 and which did not give the partners the right to retire from the partnership. Upon the retirement of one of the partners, she claimed she was entitled to her proportionate share of the partnership’s income and assets (in this case, a quarter of the partnerships assets of a farm of 600 acres of arable land, four farmhouses, various agricultural buildings and a golf course). The remaining partners disagreed, claiming the retiring partner gave up her share in the partnership assets upon retirement, as there was no express or implied entitlement to a share of the partnership assets.
The claim reached the Court of Appeal, who referred to section 42 of the Partnership Act 1890, whereby when partners retires and the other partners continue the business of the firm with no agreement to the contrary or re-evaluation of assets, the outgoing partner is entitled to the share of partnership profits as attributable to their use of the partnership’s assets. In this case, the judge ruled that the continuing partners must be liable to account to the outgoing partner for the assets she would have received if the partnership had been wound up at the point of retirement.
A well drafted partnership agreement containing clear provisions regarding payment to outgoing partners would likely have significantly benefited both the family relationship (and finances!) and would have consideration to the potentially conflicting interests of those wishing to continue the partnership and those wishing to retire.
When drafting the Partnership Agreement, our team works closely with the client’s accountants to ensure that the partnership will continue to thrive in the changing and challenging environment in which we find ourselves.
