Posted on 13th November 2013

The Dangers of Farmers Operating without a Partnership Agreement

Anne Elliott, Partner & Agricultural Law Specialist

Many farming families do not have existing partnership or shareholder agreement in place which can be problematic if there is a dispute or a partner or shareholder leaves, wants to retire or dies. He and his immediate family often have no idea where they stand and uncertainty can lead to insecurity. This can affect not only the business - and potentially its viability - but also family relationships.

Increased asset values, particularly land values, and trading profits will exacerbate what is potentially an already difficult position. It is vital that families analyse where they are in terms of asset ownership and where they want to be in the future, particularly with regard to the younger generations.

A number of members of one family may well need to be accommodated - in residential terms - on the farm. Tenancies may be held by certain individual partners but the land within the tenancy may be used for the benefit of the partnership as a whole.

Even if families do have partnership agreements in place they may have been signed twenty or thirty years ago and will no longer be appropriate those agreements need to be revised.

Partnership agreements will inevitably link to the wills of the individual partners. Wills that have already been made may also be twenty or thirty years old and may need to be reviewed and updated.

An analysis of the use and ownership of the assets of the partners or the partnership should also be undertaken to establish whether the conditions and the criteria for Agricultural and Business Property Reliefs (for Inheritance Tax purposes) can be met. Increasing land values make securing these reliefs not only valuable, but crucial.

In terms of retirement provisions, it is important that these are relevant and appropriate to the size of the business and the size of the individuals capital accounts. If a partner is to retire, what impact is that going to have on the business in the context of the business or remaining partners being able to afford to pay out a retiring partners capital?

With partnership agreements it is never a case of "one size fits all. Each business is unique and will have its own particular issues whether in relation to personalities, the ownership of assets, the age profile of partners or the objectives of the partners and their families. It is important that these issues are addressed.

At Latimer Hinks we have a checklist intended to help clients and potential clients compile an accurate and comprehensive summary of their requirements which is essential before any farming partnership agreement can be prepared. This checklist is available at no charge, simply follow the link below