Business Solicitors Ipswich – Family farming partnership case highlights the need for clear partnership arrangements

Partnerships are a popular vehicle for farming businesses to use to operate their affairs in a tax efficient way for future generations. A well run partnership should have a written partnership agreement in place to provide for what should happen if a partner wishes to leave the partnership.

Sadly relationships can break down within a partnership, whether through disputes, divorce or bankruptcy. A recent case highlighted the importance of partnership agreements including well thought out provisions for valuing the assets of the partnership if a partner wishes to leave.

A couple ran a dairy farm in partnership. Like many farming partnerships it owned valuable assets, in the form of land, livestock and machinery but had limited cash income.

In 1997 the couple invited their son to join the partnership.  A partnership agreement was prepared. The agreement permitted any partner to retire from the partnership by giving notice to the other partners. The relationship broke down within the family and the son gave notice to his parents that he wished to leave the partnership. A dispute arose in determining how the son’s share should be valued for his parents to buy him out.

The question was whether the value of the son’s share should be based on the book value of the partnership assets as set out in the annual accounts or the substantially higher market value of the assets. Unfortunately the agreement did not make this clear and so it was left to the Court to determine. The Court found that the son was entitled to his share of the higher market value of the assets. The son had not contributed any land or assets into the partnership when he joined but when he retired either his parents had to find the resources to pay his share of the market value of the partnership or assets would have to be sold to pay him.

The costs of litigating these issues are substantial and cause a great deal of anxiety. It is important to have a well thought out partnership agreement which deals with these issues. In addition to this, the case emphasises that it is crucial to ensure that each partner understands the implications of using a partnership structure, that the consequences of bringing in a new partner are carefully considered and thought is given to how a partner’s share would be valued if a partner wanted to leave.

Elaine Mann is a solicitor in the company commercial department at Barker Gotelee, Ipswich Solicitors.

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