CHAPTER ONE – PARTNERSHIPS IN THE FARMING CONTEXT
It is a fact, universally acknowledged amongst professional advisors, that a farming business which is run as a partnership, is in want of a decent partnership agreement. That is an agreement in writing, which reflects not only the nuances of conducting an agricultural business on the land but also the circumstances, dynamics and aspirations of the current partners.
This is not always a message which is readily received by farmers, who are traditionally comfortable with conducting their businesses on a handshake. It has been estimated that 10% of all businesses are carried on by traditional partnerships, but in the farming sector that percentage is significantly higher. The concerning point is that because of the traditional way farms have conducted their businesses, those with a written partnership agreement or an up to date partnership agreement are worryingly low. Then there is the added dimension that, in most cases, the co-partners are members of the family. If you cannot trust your family who can you trust? What could possibly go wrong, after all blood is thicker than water? The answer, of course, is that it is just these types of arrangements which can go spectacularly wrong. In the last few years there have been a number of legal cases where there was either no partnership agreement or the agreement did not cover appropriately the circumstance that had arisen.
In the Court of Appeal decision of Ham v Ham (2013) EWCA Civ 1301 Lord Justice Briggs commented on the interpretation of particular clauses within a written farming partnership agreement that “it is unhappily common for this type of issue not to be clearly dealt with in partnership agreements. It is an obvious problem in relation to farming partnerships, where the land forms an asset of the firm. It is hoped that, in future, those preparing such agreements will take note of the anxiety, expense and delay which such unnecessary uncertainty can cause”. This case concerned a 178-hectare dairy farm in Frome, Somerset in which the partners consisted of Ron and Jean Ham (husband and wife), and their son, John. The business began in 1966 and John joined the partnership in 1997. The hope and intention of the parents was for John to one day inherit the farm and carry on the business. At first everyone worked well together but by 2009 it was clear that there were material differences on the strategy of the future of the farm. John wanted to drive the farm in one direction, his parents disagreed and refused to relinquish control. As a result, John resigned from the partnership citing irreconcilable differences with his parents. Under the terms of the partnership agreement, the remaining partners had an option to purchase the outgoing partner’s share. The question and difficulty in this particular case was the value to be assigned to that partner’s share. The written partnership agreement was poorly worded using the unhelpful phrase of “net value” to be agreed between the partners and, in default of agreement, by the accountants acting as experts. Ron and Jean Ham claimed that the value should be assessed on the book value of the assets as recorded in the accounts – a rather low amount as it did not take into account the rise in property values of the preceding ten years. John argued that it was the open market value of the assets at the time of his resignation. The Court of Appeal agreed with John’s interpretation on the facts of the case that the open market value should be used and not the historic costs as his parents understood.
How many poorly drafted farming partnerships are out there with such phrasing? How often does the partnership agreement not help the circumstances facing the family, or even more likely, there is no partnership agreement at all? With so much at stake why are there not more good quality agreements out there? Is it an unwillingness of the client to pay the costs or is it an unwillingness to face up to making potentially difficult decisions?
Even if the partnership agreement does contain well drafted provisions, that does not necessarily mean litigation between family members will be avoided, but it can certainly help to defend such a claim. This has been shown in the recent case of Horsford v Horsford (2020) EWHC 584 (Ch) which involved a claim by mother for payment for her share of the farming partnership upon her retirement. Mother and son had farmed in partnership since the 1980s. Initially with the son’s father but since 2012 the partners were just mother and son. They had a written partnership agreement which had taken several months of discussions and negotiations to put in place. The agreement dealt with the issues of retirement of a partner, options for the remaining partners to purchase the outgoing partner’s share and the methodology of how to calculate the value of that share. In 2016, the mother served notice to retire and the son served notice to purchase her share in accordance with the partnership agreement. As payment for the mother’s share (valued at £2.52 million) wasn’t forthcoming the mother brought proceedings to enforce payment. The son counter-claimed disputing some elements of the land valuation, the payment of expert fees and on the grounds of equity arising by proprietary estoppel.
Whilst various assurances had taken place over the years by the mother on the inheritance of the farm by the son, it was found that he had not really suffered a detriment but actually had benefitted from his parents’ generosity. Even if he had acquired any such equity, he had the right to acquire his mother’s share in the partnership pursuant to clause 19 of the partnership agreement. The agreement also provided that its terms were “deemed to have governed the affairs and operation of the partnership” and that it constituted “the whole of the agreement between the partners as to the business”. The partnership agreement was therefore intended to record all of the parties’ rights and obligations and so any rights inconsistent with the rights as recorded were extinguished. This is particularly true in a case such as this, where the partnership agreement was prepared over several months and both parties were clear on the rights and responsibilities under it. As a consequence the case was found in favour of the mother.
1.2 The Holistic Approach
In the past preparation of a farming partnership was traditionally dealt with by the corporate commercial team within a legal practice. Often this is still the case but there is a recent trend for private client practitioners also to be intrinsically involved. The reason for this is simple. The primary motivations for farming businesses putting in place an up to date partnership agreement include a drive to undertake succession planning and/or capital taxation mitigation strategies. It is not just the lawyers who should, or need to be, involved in advising the farmer client on the creation and running of the farming partnership business; the accountant and land agent also have skills and the expertise to add value to the proceedings. All good advice is achieved when an holistic approach is adopted; drawing in the specialisms of the accountant, lawyer and land agent. No one professional could or indeed should be working in silo. Still, if you strip the task at hand back to basics, this is a legal document and as such it will be the lawyer who will be required to take the lead role calling on the expertise of the other professionals.
There is also the temptation to put to one side those elements which need addressing but due to circumstances, indecision or lack of communication between partners end up in the “too difficult to think about” category. Those inexperienced in dealing with this or in an effort just to get the matter over the line, may therefore not address these points adequately in the partnership agreement. Such points as:
How will the sweat equity of the younger generation be rewarded?
What happens on the death of a partner?
How will the value of an outgoing partner be valued?
How will non-farming partners be recompensed?
What happens if a partner losses mental capacity?
What would happen in the event of a dispute between partners?
The temptation by both the client and the professional to place some or all of these questions in the “too difficult to think about” category should be resisted. Whilst it may seem expedient to do so in the short term, and often with the intention to revisit, human nature such as it is, the chances are you may never get around to doing it until it is too late. As we shall see, it is questions around these issues which has become the subject of litigation between partners and that cannot be in the interests of any client.
1.3 General Characteristics
Section 1(1) of the Partnership Act, 1890 is remarkable in the simplicity of a definition of a partnership as a “relation which subsists between persons carrying on a business with a view to profit”. The definition contains three key ingredients for a partnership but the key word is “relation”. It is all about relationships. A relationship between the partners themselves. A contract between individuals, similar to a marriage. All marriages have ups and downs and it is only when the marriage goes wrong does anyone look at any pre-nuptial or post-nuptial agreement. The same applies with a partnership agreement and that is why the partnership agreement is vital. Nobody looks at the legal documentation when things are going well, but it will be scrutinised carefully when the relationship breaks down. As well as the governance of the internal relationships between partners, there is also a relationship and interaction with the outside world and the legislation and the partnership agreement has to govern those relationships as well as the internal ones.
All partnerships, whether farming or not, have three main characteristics and when preparing a new partnership agreement or advising on partners’ rights and obligations, it is always worth having these fundamental characteristics in mind. The first characteristic is that a partnership is a contract upon which the law implies certain terms and obligations towards third parties. Some of these terms may be varied by express agreement by the partners (for those terms which govern the relationship between those co-partners) and by express agreement by the third party (for those terms which govern the relation between that third party). The key point here is that it is an express variation. The second characteristic is that there is an obligation of good faith between partners. This may seem quite a basic point in that if partners do not trust each other not to work against the interests of the partnership, then is there really a partnership at all? As has already been stated, a partnership is a relationship between individuals and for it to succeed it must be based on mutual confidence and trust between the partners. You do not have to like your fellow partners. Partnerships can work just as effectively without the partners liking each other but even in these cases each partner must be just and faithful in his or her dealings with the partnership business. This brings us neatly to the third characteristic. A partnership is a commercial undertaking; it is a business and the motivation behind entering into a partnership is to make a profit, otherwise what is the point. Granted, you may not always do so and in farming that is often the case, but the reason for going into a partnership and staying in a partnership is with the aspiration that a profit from the farming business will be forthcoming.
1.4 The issue of legal personality
Unlike Scottish partnerships, partnerships governed by the law of England and Wales do not have a legal personality. They only have relationships between partners and third parties. The agreement and statute governs those relationships. This presents a certain amount of confusion because they look like a corporate entity. The trading name is often something like J Bloggs & Son; they can sue and be sued in the name of the partnership; and tax assessments are raised in the name of the firm. Section 4(1) of the Partnership Act, 1890 even refers to a partnership by the common shorthand of a “firm”. Yet despite this, the fundamentals of partnerships are based on contract law and the relationship between one partner and his or her fellow partners as well as the partnership’s relationship with the outside world.
1.5 Choice of Partnership
There are three types of partnerships which tend to be found in an agricultural context.
1.5.1 General Partnerships
By far the most common type of farming partnership is the general partnership, governed by the Partnership Act, 1890. About 90% of farm partnerships you will come across fall into this category. The fact that the principle governing statute is 130 years old can sometimes present problems if the partnership agreement has not dealt with the issue.
The Act itself, was and is, largely declaratory of the law containing a number of default rules as well as a number of mandatory ones. It is not a codifying or a consolidating Act in that section 46 of the Partnership Act, 1890 preserves all equitable and common law rules applicable to partnerships “except so far as they are inconsistent with the express provisions of this Act”. It is a short Act with only fifty sections. The default provisions (governing the mutual rights and duties between the partners) can be excluded or amended by the partnership agreement; the mandatory ones (which centre around third party rights) cannot. This demonstrates the contractual relationship of a partnership. The Act covers three main areas; the relations between those third-party rights; the relations between the partners themselves and thirdly the dissolution and winding up of the partnership.
As well as the partners being able to vary their mutual rights and duties as laid down in the Partnership Act, 1890 by express consent, they can also be varied through implied consent by their actions. In the absence of a partnership agreement this course of dealing could be evidenced by the annual accounts and that is why a good set of accounts, which accords with the terms of the partnership agreement, and what is happening on the ground is vital. In the case of Ham v Bell (2016) EWHC 1791 (Ch) (a case we will look at in greater detail in this book) the role the accounts and the accountant played helped to illuminate the implied terms of the partnership.
1.5.2 Limited Partnerships
Whilst there are approximately 23,000 Limited Partnerships in the UK, until very recently these partnerships were rarely seen in the farming partnership context. They have gained popularity as the entity used to deal with instances where professionals (most commonly as trustees) also need to be partners in the farming business. Suppose a farmer wishes to bring his children into the farming business after his death but is concerned that if he dies in the next few years they would be too young and inexperienced to take on, the full mantle of responsibility. In the light of this he decides in his Will to have a discretionary trust and to appoint his accountant and his lawyer (as the family’s trusted advisors) as trustees. His primary wish in the letter of wishes, which accompanies his Will, is for the farming business to continue with his children involved but also for the trustees to have a guiding hand. One way to perhaps achieve this is through a Limited Partnership, where the trustees’ liability would be limited to the value of the partnership assets. It is, of course, important that the trustees have the relevant powers under the trust deed or Will.
The other main use of Limited Partners in a farming context is to involve non-farming members in the farming business, particularly if they have an interest in the underlying land. Take the example of Pippa, Tom and Daniel. Following the death of their father, Harry, the family farm was left in equal shares to his three children. The siblings get on well together but it is only Daniel who is actively interested in farming. Are they storing up trouble for the future if there is no agreement to regulate their arrangements? Both Pippa and Tom have careers away from the farm but they still wish to feel involved in the farm and to protect their inheritance tax position on their respective deaths. A Limited Partnership allows Pippa and Tom to be limited partners in the partnership and so feel involved as stakeholders but they are not involved with the day to day management of the farm. This is left to Daniel as the unlimited partner. This arrangement meets Daniel’s wishes to be left alone to farm and also Pippa’s and Tom’s wishes to maximise the Agricultural Property Relief and Business Property Relief position in the event of their deaths. Effectively, Pippa and Tom as stakeholders would be sleeping partners and allow Daniel to manage and run the farm.
The Limited Partnership works in very much the same ways as a traditional partnership. The difference is that it is possible for one or more partners to join into the partnership but their liability is only limited to the capital they have actually introduced. There has to be one or more general partners (in the above example it was Daniel) who has unlimited liability and it is the unlimited partners who have the management of the partnership.
The other difference with a Limited Partnership is that it has to be registered at Companies House. Details include the name, nature of business, place of business, name of each partner, commencement date, statement that this is a limited partnership and particulars of each limited partner, but importantly not the annual accounts. It therefore has more confidentiality than a Limited Liability Partnership and appeals to many farmers who do not wish their profits or losses to be made public knowledge.
The Limited Partnership is still governed by the Partnerships Act, 1890 but as modified by the Limited Partnerships Act, 1907 and supplemented by the Limited Partnerships (Forms) Rules, 2009.
1.5.3 Limited Liability Partnerships
Probably the most familiar type of partnerships for professionals (because most professional service partnerships are them) are Limited Liability Partnerships. There are 59,000 registered Limited Liability Partnerships in the UK but ironically there are far less common for our agricultural clients. Technically they are not even a partnership in the truest sense but a body corporate with members instead of partners. A sort of hybrid between a company and a partnership. Section 1(5) of the Limited Liability Partnership Act, 2000 expressly excludes most partnership law from applying and so Limited Liability Partnerships have more in common with Company Law then Partnership Law. The Partnership Act, 1890 does not apply to Limited Liability Partnerships. In other words, the approach is devised from applied company law with distinct partnership elements. Unlike a company, however, there are no directors, shareholders or share capital. In general terms a member of the Limited Liability Partnership is liable only to the extent of the capital introduced and undrawn profits. Where they arise in an agricultural context is where the business, in whole or in part, has an element of high risk and the client wishes to limit the risk to the assets within the partnership. A good example of this in a landed estate context would be the running of an aerodrome, which potentially has a high risk of liability if things go wrong.
Unlike General Partnerships and Limited Partnerships, the Limited Liability Partnership is governed by the Limited Liability Partnership Act 2000 which sets out the framework of an LLP. The detailed governing regulations are contained in the Limited Liability Partnerships Regulations, 2001 (SI 2001/1090) as amended by the Limited Liability Partnerships (Application of Companies Act, 2006) Regulations, 2009.
Where Limited Liability Partnerships can add value and flexibility in terms of funding is that Limited Liability Partnerships can offer the security of a floating charge which a General or Limited Partnership cannot. Thereby offering better security for lenders.
1.6 The role of the professional
Time spent considering and preparing a partnership agreement is time worth spending. There is a tendency for clients to think that these agreements are straightforward and, since it is family, any issues (if they ever arose) would be dealt with by discussions around the kitchen table. Yet often they are not straightforward and part of the role of the professional is to challenge this view and get the family to consider scenarios that they may not have thought of, or have considered, would arise. It is essential for existing partners and new partners coming into the farming business to agree how decisions are to be made and what will happen if one of them leaves or dies. Most importantly the vision for the future of the farming business needs to be discussed so that the partners are clear on everyone’s intentions. This very point was demonstrated in the Ham v Ham and Horsford v Horsford cases where it did not happen. Like most disputes it is the lack of communication and misunderstandings which are at the root cause. A classic example of this, and one seen in many cases where the relationship has broken down, is where the senior partners (the ones who have been farming the land for many years) have perhaps a more traditional farming policy whilst the more junior partners may wish to take the business in a new innovative direction. The root cause of Ham v Ham is just this type of disagreement. It is only with a challenging and searching approach that these potential future flash points become apparent.
Striking the right balance between the interests and views of the more elderly partners and the interests of the junior partners requires open communication and in some cases diplomacy. The issue of conflicts of interest and whether one faction should be separately represented should be at the forefront of the professional’s mind. This is particularly relevant where you have farming and non-farming members of the family perhaps with the non-farming members getting those assets outside of the farming business. For good sound reasons the profits from the farming business could be reinvested into the business but if that is to the detriment of investing that money in non-farming investments which would benefit the non-farming members of the family in the future and it was done on the back of the advice from the professional, is there not a potential risk of a claim by the non-farming members of the family in the future who have lost out as a result?
The creation of a new partnership agreement needs to be an informed process where each person is fully aware of the rights and obligations that they are entering into. No matter how well the partnership agreement has been drafted if the parties do not understand what they are entering into then it has the potential to fail.
1.7 Negligence claims and risk
Land values over the last twenty years have risen significantly. With such high values and the increasing specialism of farming professional advice, there are risks for those generalists straying into advising farmers on an ad hoc basis. The chances of getting it wrong significantly increase. Whatever the motivation for creating a partnership or adapting one already in existence, it is important to record on the file the intentions from the client, clear notes of any meetings and any advice on risk. Particularly important when advising on family partnerships is to step back and assess who your client actually is. Is it all of the partners or just some of them, say, the senior generation? Is there a need for the new partners to seek their own independent legal advice?
There is no harm in seeking specialist advice on aspects of your work for a client. In fact, in the case of Mehjoo v Harben Barker (a firm) (2014) EWCA Civ 358 it was emphasised that there exists a duty of care to refer clients to specialists where the need arises. Farming Partnerships are one area where there can be clear examples of the need to obtain specialist advice if appropriate. Examples could include assessing whether the land is owned by individual partners or as partnership property or the treatment of the partnership assets on the death of a partner. Otherwise there is a risk of straying into unfamiliar territory and providing inaccurate advice.
Whilst the family may have the right intentions in the event of a disagreement, it is not until the partnership agreement is actually signed and completed that those terms which you laboured over are able to bind the partners. This may seem a crazy point to raise but it can happen that the partnership agreement is created but the farming family never get around to signing it and the professionals do not chase it up. Such a fact arose in the proprietary estoppel case of Davies v Davies (2014) EXCA Civ 568 where the partnership agreement remained unsigned even though the parties had, by conduct, followed its terms. It is beholden on all professionals to ensure these documents are in place and have been signed. Accountants especially, are uniquely placed to assist as they have the advantage of having regular meetings with the clients to sign accounts and tax returns. This is a great opportunity whilst everyone is together and focussed to raise the need to complete any outstanding documentation which affords good legal protection for the entire family.