Farm Partnerships: Agreements and avoiding disputes

In this blog we talk about farm partnerships, why it is important to put in place a partnership agreement and how to avoid disputes.

Traditionally, farms have been family affairs, started many years ago, by great great grandfather, and continued down the generations.

In the past, it might have seemed disloyal or suggest a lack of trust to insist that the farming business arrangements were set out in a legal document, but in the modern age, it is not only common place, but essential to have a written agreement between the individuals owning and operating the farm.

Farm partnerships

Focusing here on family farms, it is important to have a short but flexible agreement in place to reflect the long-term interests of the farming family and document how the business is to be passed on through the generations. It is highly likely that the document will be formalising an existing informal partnership.

Using a partnership structure to run a business is quite outdated and is generally only seen in professional practices or farms. But wherever two or more people carry on business together with a view to making a profit, they will be operating in partnership, if there is no other legal structure put in place, and without a written agreement, their relationship will be governed by the Partnership Act 1890!

Unlike a limited company or a limited liability partnership, there is no separate legal entity to a partnership and partners can be bound by what other partners do which is just one of the many reasons that a partnership agreement is the best option.

Farm partnerships have to deal with a number of unique issues, such as the treatment of valuable assets, land ownership and succession planning.

Disputes can arise when farmers either fail to obtain any advice or fail to get good advice or fail to get their advisors to work together.

Ideally, the solicitor should work in tandem with the farm’s accountant and land agent to make sure that issues of land, taxation, accounts and succession planning are all dealt with properly.

Potential farm partnership issues to be considered

Just some of the farming partnership issues that need to be considered are:

• What happens if a family member dies, is incapacitated, wants to retire or gets divorced?
• Will the partnership continue?
• How will the interest of the partner be valued?
• Can new partners join the partnership?
• How will the former partner be paid out?
• How are disputes to be dealt with?

Disputes can arise in relation to property, capital contributions, profit shares, employees, confidentiality and competition, succession planning and expulsion of unwanted partners.

If there is no agreement, on the face of it partners are to share profits equally, and when issues like the above arise the partnership will have to fall back on the 1890 Partnership Act or look at the previous history and accounts of the partnership.

It is also important to document how often meetings take place, to make sure they are minuted, and to keep accounts, to specify when partners are allowed to withdraw profits (“drawings“) and if disputes do arise, how those disputes will be dealt with.

Resorting to court action is not always advisable; it can be costly, it can result in loss of income and productivity on the farm, it creates family turmoil, and emotional distress, and even loss of reputation in the industry.

There are other options to consider such as arbitration, mediation or expert determination. My article in Hampshire Biz News on dispute resolution talks through these options.

Above all, whatever the size and type of the farming operation, and the roles of the different family members and their contributions, it is vital to keep communication going and that will be helped significantly by having a formal document, a partnership agreement to refer to.

If you would like to discuss farm partnerships, whether it’s to create one for your business or you have an issue that has arisen within your partnership please do get in touch with Helen Brown. You can also visit our Agricultural Land, Farms & Estates web page to find out more about all the services we can help you with.